20050624Decision Memo.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
COMMISSIONER SMITH
COMMISSIONER HANSEN
COMMISSION SECRETARY
COMMISSION STAFF
LEG AL
FROM:SCOTT WOODBURY
DA TE:JUNE 24, 2005
SUBJECT:CASE NO. IPC-05-22 (Idaho Power)
PETITION FOR TEMPORARY SUSPENSION OF PURP
CONTRACT OBLIGATION FOR WIND QFS
PETITION
On June 17, 2005 , Idaho Power Company (Idaho Power; Company) filed a
Petition with the Idaho Public Utilities Commission (Commission) requesting a temporary
suspension of the Company s obligation under Sections 201 and 210 of the Public Utility
Regulatory Policies Act of 1978 (PURP A) and various Commission orders, to enter into new
contracts to purchase energy generated by qualifying wind-powered small power production
facilities (QFs). The requested suspension would not affect new contracts with QFs utilizing
other generating technologies.
Idaho Power requests that the proposed temporary suspension remain in effect for a
period of time sufficient to allow the Commission to investigate the impacts on Idaho Power
customers arising out of the addition of substantial amounts of wind-powered generation
projects. Such a Commission investigation, the Company contends, would consider: (1) the
impact of intermittent wind resources on the Company s total cost of power supply, (2) the
impact of intermittent wind resources on the reliability of electric service to customers, (3)
whether the current avoided cost methodology correctly measures the power supply costs the
Company can actually avoid by adding intermittent wind generating resources, and (4) such
other matters as the Commission deems appropriate.
DECISION MEMORANDUM
BACKGROUND
Published Rates PURP A QFs
Idaho Power notes that in accordance with Commission Order No. 29646 issued on
December 1 , 2004, the current average levelized "published rates" for 20-year QF contracts are
approximately $61 per MW hour. Since Order No. 29646 was issued, Idaho Power has received
approval from the Commission for QF contracts with a total nameplate capacity of 71.5 MW
with wind powered QFs making up 61.5 MW of that total. Idaho Power notes that it currently
has pending before the Commission applications for approval of additional wind-powered QF
contracts in the amount of 21 MW. Additionally, the Company contends that it has received
contacts from developers intending to pursue new QF projects with a nameplate capacity of
267.5 MW including 193 MW of new wind-powered QFs. Prior to the issuance of Order No.
29646, the Company notes that it had less than 1 MW of QF wind-powered generation under
contract.
Federal/State Tax Incentives
In addition to the avoided cost rates established by the Commission, the Company
contends that wind-powered QF development has also been stimulated by multiple federal and
state tax incentives. Just prior to the issuance of Order No. 29646, the federal government
reinstated an expired production tax credit equal to $18 per MW hour. Also present at the
federal level are accelerated depreciation rules and other tax incentives. At the state level, the
Idaho Legislature recently enacted a sales tax exemption to encourage the development of
altematiye generating resources. (Idaho Code 9 63-3622 QQ).
2005 RFP 200 MWof Wind-Powered Resource
On April 22, 2005, the Commission accepted Idaho Power s 2004 Integrated
Resource Plan (IRP). Reference Order No. 29762. In the IRP, the Company, in consultation
with the Integrated Resource Plan Advisory Council, considered and evaluated a full range of
resource options, including wind generation. Based on those consultations, the Company used
an average price of $43 MW hour for assessing the cost of wind resources. Using the $43 per
MW price assumption, the 2004 IRP called for 350 MW of wind-powered resource to be
acquired in the near term. Idaho Power s 2004 IRP described the Company s intention to issued
competitive requests for proposals (RFPs) for 200 MW of wind-powered resource in 2005 in its
DECISION MEMORANDUM
near-term action plan. The Company s 2005 RFP was issued on January 13 , 2005. The IRP also
calls for an RFP for an additional 150 MW of wind-powered resources in 2008.
In deciding to move forward with an RFP program to competitively acquire wind
resources, the Company in its Petition states that it was hopeful that a bidding process would
allow the Company to take advantage of competition and the economies of scale associated with
larger size wind generation projects. It was the Company s hope that this strategy would
moderate the total cost of wind energy acquired by averaging the higher cost of small QF wind
projects acquired at the avoided cost rate with the presumably lower cost of wind acquired by
competitive RFPs. The Company states that its expectations have not been realized.
Idaho Power reports it has recently reviewed the bid responses received in its 2005
RFP. The bids received, on average, propose purchase rates of approximately $55 per MW hour.
The Company believes that the bids the Company has received in the 2005 RFP are not
reflective of market prices for wind generation and are being unduly influenced by the current
published avoided cost rates. The Company cites also recent announcements by other regional
utilities of power purchase agreements with wind resource developers with substantially lower
pricing structures. For example, it states that in the State of Montana, North Western Energy
recently received Montana Commission approval 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 MW
hour. Reference Montana PSC Order No. 6633b issued March 31 , 2005.
In light of the large number of MWs of QF wind resources already acquired and
proposed and the high bid prices received in the 2005 RFP, the Company states that it is likely
that it will be required to reduce the amount of wind generation acquired through the 2005 RFP
and also defer or perhaps eliminate its proposed 2008 RFP.
Without a temporary suspension of QF purchases, the Company speculates that
unsuccessful wind developers bidding in the 2005 RFP may decide to reconfigure their wind
projects to qualify for the PURP A mandatory purchase obligation at published QF rates. If that
occurs, the Company contends that it will be presented with an unmanageable influx of
intermittent generation. The Company believes that the only way to allow careful consideration
of the issues raised by its Petition and to assure that customers are not locked into long-term
contracts at above market prices is for the Commission to permit the Company to temporarily
suspend its obligation to purchase energy from new wind-powered QF projects.
DECISION MEMORANDUM
Intermittent Wind Resources System Reliability
Idaho Power in its Petition contends that the potential addition of large amounts of
QF wind generation could adversely affect system reliability. To assure system reliability, the
Company states that intermittent wind resources must be "firmed" by ancillary services. This
firming can be provided by the purchase of load-following services and reserves from a third
party supplier if the ancillary services and transmission are available on a firm, long-term basis
or self-provided by the utility primarily through the acquisition of peaking resources, such as
gas- fired combustion turbines, that the utility can dispatch.
In its 2004 IRP, the Company performed an analysis of the costs and risks associated
with a resource portfolio consisting of 1 000 MW of wind. That analysis concluded that in order
to safely integrate 1 000 MW of intermittent wind generation, it would be necessary to
contemporaneously add 640 MW of combustion turbines to provide capacity when the
intermittent wind resources were not operating. Adding intermittent resources without also
adding ancillary firming capacity, the Company contends, adversely affects system reliability.
When the Commission in Order No. 29124 adopted the combined cycle combustion
turbine as the surrogate avoided resource for setting avoided costs , the Company states that
neither the Commission nor Idaho Power had much experience with wind resources. The cost
associated with the ancillary services needed to integrate intermittent wind resources onto the
utility's system was acknowledged but was not a factor included in avoided cost calculations.
Idaho Power contends that the time has come, perhaps in conjunction with an
independent third party consultant, to undertake a thorough analysis of the amount of
intermittent resources that can be added to the Company s system without jeopardizing system
reliability. In addition, the cost of acquiring ancillary services such as combustion turbine
peaking capacity in conjunction with adding intermittent QF wind resources, the Company
contends, must be considered in determining the costs the Company can avoid by purchasing QF
wind resources. An analysis of this type, the Company states, has not been performed looking
specifically at Idaho Power s system. A thorough analysis, it states, will require time and
considerable effort.
Wind-Specific A voided Cost Rates
Idaho Power notes that the Company and the Commission have generally resisted
developing avoided cost rates specifically targeted. to individual QF generating technologies.
DECISION MEMORANDUM
However, in light of the large number of actual and potential QF wind resources seeking PURP
contracts, it has become apparent to Idaho Power that a reassessment of how avoided costs
should be computed for intermittent wind generating resources should be undertaken. Such an
analysis would, for the first time, consider the above-described costs of firming and integrating
intermittent QF wind resources into the Company s system.
Proposed Suspension of Mandatory Purchase Obligation for Wind QFs
It is Idaho Power s believe that the Commission cannot conduct a review of system
reliability issues and wind-specific avoided costs without first instituting a temporary suspension
of the PURP A mandatory purchase obligation for new wind QF projects.Unless the
Commission orders a temporary suspension of the mandatory contract obligation under PURP A
the Company is concerned that wind QF developers will inundate Idaho Power with requests for
contracts and file complaints, meritorious or otherwise, in order to position themselves for an
entitlement to be "grandfathered" to the existing published avoided cost rates.
During the proposed period of suspension, Idaho Power commits to undertake the
following:
(1) The Company will retain an independent third party consultant to assist
the Company in preparing an analysis which will assess the total amount
of additional wind resources the Company system can absorb without
adversely affecting the Company overall power supply costs and
system reliability. The results of this analysis will be presented to the
Commission for its consideration.
(2) The Company will prepare and file with the Commission a proposal for
computing avoided costs specifically tailored to the attributes of
intermittent wind-powered resources, including the additional costs
attributable to peaking resources to integrate significant amounts of wind
generation.
(3) Idaho Power will prepare and present to the Commission a report
describing possible steps that could be taken to increase the likelihood
that further 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 projects. This analysis will include a review
of the pros and cons of the utility including an ownership option for wind
resources as a way of providing pricing discipline within the RFP
process.
DECISION MEMORANDUM
Procedurally should the Commission determine it to be in the public interest to
consider the issues raised by Idaho Power in its Petition, the Company suggests that the
Commission first issue its order granting the temporary suspension. Secondly, the Company
proposes that the Commission expeditiously convene a pre-hearing conference to define the
issues to be addressed and to establish a schedule for processing and considering the issues
raised by its Petition. The Company anticipates that the pre-hearing conference order would
include a schedule for Idaho Power to present the reports it has committed to prepare.
COMMISSION DECISION
Idaho Power requests a Commission order temporarily suspending the Company
obligation under Sections 201 and 210 of PURP A to enter into new contracts to purchase energy
generated by wind powered QFs. Idaho Power further requests that a pre-hearing conference be
convened to define issues and to establish a schedule for processing and considering the issues
raised in its Petition. How does the Commission wish to proceed?
Scott D. Woodbury
j oIM: IPCEO517 - IPCEO518 - sw
DECISION MEMORANDUM