20050715Sterling Direct.pdf

BEFORE THE
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IDAHO PUBLIC UTiliTIES COMMISSI~iTIES COr1HfSS10N
IN THE MATTER OF THE PETITION OF
IDAHO POWER COMPANY FORAN
ORDER TEMPORARilY SUSPENDING
IDAHO POWER'S PURPA OBLIGATION TO
ENTER INTO CONTRACTS TO PURCHASE
ENERGY GENERATED BY WIND-
POWERED SMAll POWER PRODUCTION
FACiliTIES.
) CASE NO. IPC-05-
DIRECT TESTIMONY OF RICK STERLING
IDAHO PUBLIC UTiliTIES COMMISSION
JULY 15,2005
Please state your name and business address for
the record.
My name is Rick Sterling.My business address
is 472 West Washington Street , Boise, Idaho.
By whom are you employed and in what capacity?
I am employed by the Idaho Public Utilities
Commission as a Staff engineer.
What is your educational and professional
background?
I received a Bachelor of Science degree in Civil
Engineering from the University of Idaho in 1981 and a
Master of Science degree in Civil Engineering from the
University of Idaho in 1983.I worked for the Idaho
Department of Water Resources from 1983 to 1994.In 1988,
I became licensed in Idaho as a registered professional
Civil Engineer.I began working at the Idaho Public
Utilities Commission in 1994.My duties at the Commission
include analysis of utility applications and customer
petitions.
What is the purpose of your testimony in this
proceeding?
The purpose of my testimony is to address Idaho
Power Company s request for temporary suspension of its
obligation to purchase energy from small wind-powered
generation proj ects.My testimony will provide
CASE NO. IPC-E- 05 -
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STERLING , R. (Di)
STAFF
recommendations regarding the Company s request and
describe the relevant factors that I believe the
Commission should consider in making its decision.
Please summarize your testimony.
I believe there are currently four critical
factors that create sufficient cost uncertainty to justify
temporarily limiting Idaho Power s obligation to purchase
intermittent wind generation.The four factors are:
1) the application of a firm energy price to intermittent
wind generation; 2) the large number of wind generation
contracts at the published rate that are either signed or
in process; 3) a published avoided cost rate for
Qualifying Facilities (QFs) that is based upon a high cost
resource not in Idaho Power s IRP (Integrated Resource
Plan) resource portfolio, and 4) an Idaho Power wind RFP
(Request for Proposals) that may have attracted proposals
with bid prices influenced by the published QF rates.
The purpose of limiting the Company s purchase
obligation is to pause long enough to gather information
and to assess whether published rates are reasonable under
current circumstances and in the best interest of Idaho
ratepayers.I suggest that the public interest will be
well served if the Company s obligation to purchase
intermittent wind generation is temporarily modified.
recommend that the Commission set a proj ect size cap of
CASE NO. IPC-E- 05 -07/15/05
STERLING, R. (Di)
STAFF
100 kW for published rate eligibility for intermittent
generation.I believe that uncertainty about the
reasonableness of the price Idaho Power is obligated to
pay to purchase wind generation, combined with the number
and size of wind proj ects seeking contracts, warrants such
action until more information can be gathered and studies
completed.I recommend that proposed wind proj ect s wi th
contracts already signed or ready to be signed by the
developers be exempt from the limitation.I recommend
that wind proj ects offered as firmed be exempt from the
proposed restriction.I recommend that the change in
published rate eligibility commence immediately, apply to
all three electric utilities, and remain in place until
more information can be gathered and studies completed
that will allow the Commission to determine how to wisely
proceed further.
What is your recommendation regarding Idaho
Power s request for a temporary suspenslon of its
obligation to offer to purchase power from qualifying
facilities (QFs) at published avoided cost rates?
Rather than suspension, I recommend that the
eligibility cap for published avoided cost rates for
intermittent generation projects without firming be
temporarily reduced to 100 kW.FERC's rules implementing
PURPA (USC ~ 292.304 (c) (1)) require that states have
CASE NO. IPC-E- 05 -07/15/05
STERLING, R. (Di)
STAFF
standard rates available for proj ects wi th a design
capacity of 100 kW or less.I would require individual
negotiation of contract rates for wind proj ects greater
than 100 kW using an IRP-based methodology that is proj ect
specific.
What standard do you believe should be applied
by the Commission in determining whether a temporary
change in published rate eligibility should be granted?
At this initial stage of the proceeding,
believe the Commission only needs to decide whether to
temporarily limit the obligation to purchase the output
from intermittent generating resources such as wind.
Consequently, I believe that the proper standard is to
determine whether there may be a problem developing and
whether that problem is serious enough to justify
immediately limiting published rate availability.I do
not believe that Idaho Power at this stage needs to make a
convincing case that a problem has already occurred or
that harm has already been done to Idaho Power or its
ratepayers.The purpose of restricting published rates
to pause long enough to gather information and to assess
whether Idaho is headed in the right direction before
proceeding further on the current path.If the Commission
agrees, I would not view that as a judgment on the prlce,
the quanti ty, or the prudence of acquiring wind
CASE NO. IPC-E- 05 -07/15/05 STERLING, R. (Di)
STAFF
generation, but instead as a "timeout" while we evaluate
our position and determine a future direction that is in
the best interests of Idaho s ratepayers.
Why do you believe a change in published rate
eligibility for intermittent wind generation is warranted
at this time?
There are four primary reasons:
1 .Wind generation is intermittent, yet the
applicable published avoided cost rates reflect firm
energy prlces.
2 .The large number of wind generation
contracts at the published rates that are either signed or
in progress magnify the impact if avoided cost rates are
set too high.
3 .Published QF avoided cost rates are based
upon a high cost resource that is not in Idaho Power s IRP
resource portfolio.
4 .Idaho Power s wind RFP may have attracted
proposals with prices influenced by the published QF
avoided cost rates.
I will discuss each of these reasons in more
detail later in my testimony.
In termi t tency
In Case No. IPC-04-8/10, the combined case
involving u. S. Geothermal and wind developers Lewandowski
CASE NO. IPC-05-07/15/05 STERLING, R. (Di)
STAFF
and Schroeder which was concluded seven months ago
culminating in Order No.2 9632 , the Commission imposed a
90-110% performance band to address firm vs. non-firm
resources.Doesn t the performance band adequately
address the intermittent nature of wind generation?
I believe that the decision of the Commission to
lmpose a performance band to address the intermittency of
wind resources was a reasonable compromise at the time.
However, Slnce that Order was issued, Idaho Power s IRP
has been accepted for filing, raising questions over the
appropriateness of a high cost SAR resource not included
in the IRP being used as a surrogate for calculating the
Company s avoided cost.Meanwhile, more PURPA contract
capaci ty has been added in the past eight months than any
other time in the history of PURPA in Idaho.I believe
that wind integration costs cited by the Company are real
but at this point still very uncertain.The performance
band establishing firm monthly generation as opposed to
- hourly firm generation could result in significant
additional costs when applied to a large number of
intermi t tent wind proj ects While the performance band
partially addresses the intermittency of wind generation
it may not produce fair and accurate rates for wind
generation given the integration requirements and
operational demands placed on the Company s system by
CASE NO. IPC-05-
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STAFF
wind.
Are there other cost factors unique to
intermittent generation that should be considered?
Yes, there are.Wind integration costs can
an important factor to consider, especially as greater
amounts of wind are added to a utility s system.
Utilities must provide long and short-term reserve
capaci ty, and maintain abili ty to provide load following
and other ancillary services.Each utili ty, because of
its existing resource mix and load requirements, will have
different abilities and costs to accommodate wind on its
system.To my knowledge, Idaho Power has not conducted
any studies or analysis to determine whether intermittent
generation presents additional costs not captured in the
simple application of the SAR avoided cost methodology.
Large Number of Contracts
PURPA has been implemented in Idaho for over
years.Why is potential overpayment for PURPA resources
such a critical lssue now?
PURPA has a long history in Idaho and many
contracts have been signed between regulated utilities and
small power producers.However , until the past year,
almost no contracts had been executed for intermittent
generation such as wind.Previously, the few intermittent
generation projects sold power under non-firm tariffs
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STERLING, R. (Di)
STAFF
rather than long-term contracts.Since the U. S.
Geothermal case was concluded seven months ago, eight out
of the nine contracts that have been signed by Idaho Power
and approved by the Commission have been with wind
genera t ion proj ect s Furthermore, all but one of the
contracts signed during this short period have been for
the maximum 10 aMW size.In addi t ion , three geothermal
contracts (two have yet to be sent to the Commission for
approval), and one 2. 5 MW hydro contract (now pending
before the Commission) have also been signed.
Collectively, the generation added in the past year alone
represents about a 50 percent increase in Idaho Power
PURPA generating capacity since PURPA's implementation in
Idaho 25 years ago.This pace of development, in terms of
number of contracts and especially in terms of size, far
exceeds that during any time in the history of PURPA in
Idaho.As a resul t, the consequences of maintaining
potentially inaccurate, obligatory rates for PURPA
proj ects are greater than ever before.
SAR Methodology
Is it still reasonable to continue to use a gas-
fired CCCT as the surrogate resource for establishing a
price for intermittent resources like wind?
While the SAR method that has been used in Idaho
for many years lS a relatively simple and straightforward
CASE NO. IPC-05-07/15/05
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STAFF
method for establishing avoided cost rates, it has become
a somewhat poor match for the types of generation proj ects
seeking power sales contracts in recent years.The SAR
method is based on the premise that the SAR represents a
reasonable proxy for the type of resource a utility would
build if it were to construct a plant to supply its needs.
In the early years of PURPA implementation in Idaho, a
coal plant was used as the surrogate avoided resource.
more recent years, a gas-fired combined cycle plant (CCCT)
has been used as the surrogate.Both surrogates have been
considered base load plants.PURPA resources, on the
other hand, especially the predominance of wind proj ects
experienced in the past year , are radically different than
the CCCT surrogate.Using a highly dispatchable base load
plant as the basis for establishing rates for an
intermittent wind generator is awkward at best.Because
wind generation has such unique characteristics, perhaps a
different method for establishing avoided cost rates for
wind would be warranted.At this point in time, published
rates reflect the costs of a CCCT at very high gas prlces.
Utilities may be able to acquire comparable or superlor
energy products at lower costs.Ironically, Idaho Power
has for the first time included wind as a key element
its preferred resource portfolio, yet we are continuing to
use a gas fired CCCT - a resource no longer part of the
CASE NO. IPC-E- 05 -
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STERLING , R. (Di)
STAFF
Company s IRP resource portfolio - as the basis for
establishing avoided cost rates for new QF resources that
are primarily wind.
RFP Resul ts & Prices
Why is there any relationship between wind
generation acquired by Idaho Power as PURPA QFs and wind
the Company is seeking to acquire through an RFP?
Wind proj ects are unique because they consist of
multiple individual wind turbines , each usually with a
capaci ty of about 1.5 MW, spread over many acres.Because
wind is such a dispersed resource, it is possible to
configure clusters of wind generators such that they meet
both the FERC eligibility requirements of a qualifying
facility and the Commission published rate eligibility
requirements of an under 10 aMW proj ect.Large proj ect
utilizing most other types of generation resources are not
able to be configured into 10 aMW blocks to qualify for
the published avoided cost rates, nor does the
concentrated nature of other resource lend the proj ects to
being spread over a wide geographic area.As a resul t,
unlike most other types of generation, many wind proj ects
can be configured such that they are eligible to
participate in two different utility acquisition
mechanisms regardless of original proj ect size.Because
each mechanism employs completely different pricing
CASE NO. IPC-05-07/15/05
STERLING , R. (Di)
STAFF
methods, whichever prlclng mechanism produces the lowest
rates is likely to be rendered ineffective.To the extent
a developer can conf igure a proj ect to receive the
published rates, it is unlikely the developer would submi t
a lower priced proposal under a wind RFP.
Are you familiar with the RFPs which Idaho Power
has outstanding?
Yes, I am.Idaho Power issued an RFP for 200 MW
of wind generation on January 13, 2005.Bids were
submitted on March 10, 2005.The Company anticipated
acqulrlng energy from approximately 200 MW of nameplate
generation by the end of 2007, and 100 MW were to be
available no later than year-end 2006.It is my
understanding that the Company is still in the process of
evaluating the bids.
In addition, on March 30, 2005 Idaho Power
issued an RFP for 80-200 MW of peaking resources to be
online in April 2007.The peaking resources bid in this
RFP are most likely gas-fired simple cycle combustion
turbines.Bids were received by Idaho Power on June 2
2005.Bids are currently being evaluated and Idaho Power
has stated that it expects to make a selection in the fall
of 2005.
Idaho Power indicated that its own IRP calls for
the addition to its portfolio of 350 MW of wind
CASE NO. IPC-05-
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STAFF
genera t ion.What plans have Avista and PacifiCorp
indicated for acquiring wind generation?
PacifiCorp s 2003 IRP called for the acquisition
of 1400 MW of renewable resources (presumably mostly wind)
through 2013.Its 2004 IRP maintains the same target.
PacifiCorp issued an RFP in February 2004 to attempt to
acquire up to 1100 MW of this total.To date, the Company
has announced only one contract under the RFP for 64.5 MW
from a proposed wind proj ect in eastern Idaho.Over 6000
MW of offers were received , of which the Company initially
believed up to 1400 MW could be cost-effective.
Avista is in the final stages of completing its
2005 IRP.The IRP is expected to be submitted in
September 2005.The preferred portfolio selected in the
plan includes approximately 650 MW of wind generation
capaci ty to be added through 2026.
Have you reviewed the bids Idaho Power received
in response to its wind RFP?
No, I have not reviewed the bids.The bids are
confidential and Idaho Power has not yet made a formal
filing with the Commission.However, Staff has met with
the Company and reviewed a summary of the bids.Based on
the information presented in Idaho Power s petition, the
bids received, on average, propose purchase rates of
approximately 55 mills/kWh ($55 per MWh)
CASE NO. IPC-05-
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STAFF
interconnection , transmission and wheeling costs are
added , the bid prices are substantially higher.
How do the bids Idaho Power received in its RFP
compare to the cost of wind assumed in its 2004 IRP?
The average $55 per MWh cost of the bids
received in the RFP is considerably higher than the $43
per MWh levelized cost that Idaho Power assumed for wind
in its 2004 IRP.Even the lowest bids were substantially
higher than the $43 per MWh price for wind assumed by
Idaho Power in its 2004 IRP.
What cost for new wind resources do PacifiCorp
and Avista assume in their IRPs?What is the Northwest
Power and Conservation Council's assumption?
PacifiCorp s 2005 IRP assumes a levelized cost
of $42-44 per MWh (2005 dollars, including integration but
not transmission) Avista s Draft 2005 IRP assumes a
levelized cost of $56-71 per MWh (2005 dollars, including
transmission and integration) The Northwest Power and
Conservation Council in its recently released Fifth Power
Plan assumes a levelized cost for new wind generation of
$33-43 per MWh (2000 dollars, includes some transmission)
All estimates depend on location.Without a more detailed
analysis, however , it is very difficult to compare these
costs directly.In order to have an "apples to apples
comparison , the assumptions used to develop the costs must
CASE NO. IPC-E- 05 - 22
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STERLING, R. (Di)
STAFF
be consistent.For example , interconnection , transmission
and integration costs must be consistently applied, and
economlc assumptions about such things as inflation rates
discount rates, ~nd whether costs are presented in real or
nominal terms must be carefully considered.More time and
analysis would be needed in order to make a fair
comparlson between the assumed wind costs of various
utilities.
Why are the cost assumptions for wind in
utilities ' IRPs relevant?Aren t the prices bid in RFPs a
better indication of the actual cost of new wind
generation?
Prices bid in RFPs should be a better indication
of the actual cost of new wind generation because
presumably, the bids are competi ti ve.However , the amount
of new wind generation that a utility plans to acquire
dependent on the cost assumptions used in the development
of the IRP.For example, if Idaho Power had assumed that
the cost of new wind generation would be $60 per MWh
instead of $43 per MWh , it may not have concluded that
should include 350 MW in its future resource portfolio.
Most likely, the preferred resource portfolio would have
included less wind generation.
Have you reviewed the bids PacifiCorp received
in response to its recent wind RFP?
CASE NO. IPC-05-07/15/05 STERLING, R. (Di)
STAFF
No, I have not.As with nearly all utility
RFPs, bids are kept confidential.Furthermore, PacifiCorp
lS still in negotiations to acquire the remaining portions
of the 1100 MW it had hoped to acquire through the RFP.
Disclosure of the bid prices or of the price already
agreed to for the 64. 5 MW it has commi t ted to in Idaho
would jeopardize its ongoing negotiations with other
bidders.
Do you believe that the prices Idaho Power
received in response to its RFP are reflective of a fair
price for wind generation in Idaho?
Until more information can be gathered
concernlng the resul ts of RFPs in other parts of the
region, it is difficult to say.It is difficult to
determine whether the bid prices may have been influenced
by the published PURPA avoided cost rate being viewed as a
defaul t rate for unsuccessful bidders.I believe further
investigation is warranted.
If the prices bid in Idaho Power s RFP are
indeed reflective of today s going rate for new wind
generation, do you believe that indicates that the
published PURPA rates are a fair price for wind
generation?
Not necessarily.Whenever there are two
different resource acquisition mechanisms for the same or
CASE NO. IPC-E- 05 -07/15/05
STERLING, R. (Di)
STAFF
similar types of resources as there are now , proj ect
developers will naturally participate in the mechanism
they believe will produce the highest prlce.In the
current situation with Idaho Power , there is little
incentive for the developer of a wind proj ect to bid a
price in the RFP that is any less than the price he could
otherwise be guaranteed as a PURPA QF as long as the
proj ect can be disaggregated into separate 10 aMW pieces,
each meeting the requirements of a QF.In fact, losing
bidders in the RFP , if they meet the requirements of a QF,
would be paid a higher rate than the "winning" bidder in
the RFP if the bid is less than the published rate.This
creates a perverse incentive that on its face could create
an absurd outcome.Only bidders in the RFP who could not
disaggregate their proj ects into 10 aMW pieces seemed to
have incentive to bid below published avoided cost rates.
In my opinion , the fact that the bids received
In response to the RFP are close to the published avoided
cost rates or substantially higher indicates ei ther of two
things: a) that bidders did view the published rates as a
default prlce and had little incentive to bid less, or
that the bids were truly honest bids that reflect the
current higher cost of wind generation.To the extent
that utilities are acquiring wind generation through RFPs,
it is important that utilities and the Commission have
CASE NO. IPC-05-07/15/05 STERLING, R. (Di)
STAFF
confidence in the true cost of wind generation.
What factors might currently be causing the cost
of wind generation to be higher than utilities have
previously assumed in their IRPs?
One factor that could be causlng higher prices
lS higher costs for wind generation equipment.Equipment
costs have reportedly increased due to increases in steel
prices.Demand for equipment is also currently high due
to the recent extension of federal production tax credits,
while availability of equipment is limited due to
manufacturers ' inabili ty to rapidly ramp up production in
response to increased demand.
What evidence is there that large blocks of wind
can be acquired at prices significantly below the
published rates?
Given the short time frame for this case so far,
I have not had time to investigate the prices that have
been paid by other utilities in the region to acquire wind
under RFPs.In its Petition, Idaho Power cites the recent
commitment by NorthWestern Energy to acquire 135-150 MW
from the Judith Gap project in Montana at a cost of $31.
per MWh.I am uncertain , however , as to what things are
included in this price.I am aware that several other
regional utilities have either recently made commitments
for new proj ects or have conducted RFPs.As I mentioned
CASE NO. IPC-05-07/15/05
STERLING, R. (Di)
STAFF
earlier , PacifiCorp is still in the process of trying to
acquire approximately 1100 MW of wind through its RFP, and
had already acquired prior to the RFP 41 MW from the
Wyoming Wind proj ect and 41 MW from the Eurus Combine
Hills proj ect.puget Sound Energy recently committed to
acquire 150 MW from the Hopkins Ridge proj ect and 230 MW
from the Wild Horse proj ect.Portland General Electric
recently announced plans to acquire 75 MW from the
Klondike II expansion proj ect.BPA is planning to acqulre
generation from five new wind proj ects.Finally, Sierra
Pacific received bids three weeks ago for up to 200 MW
through a renewables RFP.
Addi tional Recommendations
If the Commission agrees to grant a change in
published rate eligibility, do you believe that the change
should apply only to wind generation proj ects?
I believe that the change should apply to all
intermittent generation, whatever the technology employed.
For the most part, however , this would impact wind
generation projects to the extent firming is not provided.
I propose that the modified rules not apply to
intermittent generation projects that provided firming.
Do you recommend that the change commence
immediately?
Yes, I do.However , there are approximately a
CASE NO. IPC-05-07/15/05
STERLING, R. (Di)
STAFF
. .
dozen wind proj ects that have been pursulng contracts wi
Idaho Power.If the Commission agrees to a change in
eligibility, it must also determine a fair disposition of
these proj ects
What do you believe is a fair disposition of
these proj ects?
. A.I believe that a fair disposition would be to
exempt all of those proj ects that have signed contracts
prior to Idaho Power s initial filing in this case.
Whether Idaho Power already had signed the contracts by
that time, or whether it has still yet to sign the
agreements, I believe is immaterial as long as the
contracts in each instance are materially the same as wind
contracts that the Commission has recently been approving.
Any proj ects for which the developer and Idaho Power can
agree had completed final negotiations and for which
contract signature was imminent should also be exempt from
any- change in published rate eligibility.proj ects that
have only entered into preliminary discussion or had not
reached agreement by the time of Idaho Power s initial
filing should be subj ect to the proposed change in
eligibility.
Should the Staff recommend that the change apply
only to Idaho Power .or should it apply to Avista and
PacifiCorp as well?
CASE NO. IPC-E- 05 -07/15/05 STERLING, R. (Di)
STAFF
I recommend that the change apply to all three
utilities.While Idaho Power appears to have the most
interest from developers, the other two utilities may have
some as well.Furthermore, if published rate eligibility
rules were modified only for Idaho Power, developers could
shift to ei ther of the other two utili ties seeking higher
priced contracts.
How long do you believe that the eligibility
change should remain in place?
I believe that the change should remaln in place
for whatever length of time is necessary in order to
gather information on reasonable wind costs, conduct wind
integration studies to determine both the amounts and cost
to integrate wind into each utili ty ' s system, and to
develop, if the Commission ultimately believes it is
necessary, al ternati ve pricing mechanisms for wind
generation.Idaho Power witness Gale states in testimony
that the Company believes 6-9 months would be needed in
order to conduct the necessary acti vi ties and analysis.
agree that this approximate time frame seems reasonable
but I also agree that consideration of ending or extending
a suspension could be made earlier if studies could be
completed sooner.
What harm would be done if the Commission does
not agree to Idaho Power s request for a suspension or
CASE NO. IPC-E- 05 -07/15/05
STERLING, R. (Di)
STAFF
other changes recommended by Staff?
If the Commission does not agree to impose a
suspension or other changes recommended by Staff , Idaho
Power would continue its ongoing obligation to offer to
purchase a substantial quantity of intermittent wind
generation at the published avoided cost rates.While the
amount of wind generation currently seeking a power sales
agreement may not be problematic by itself , paying a rate
that is higher than the rates being paid in other areas of
the region for such a substantial amount of wind greatly
magnifies the effect on Idaho Power and its ratepayers.
Idaho Power passes all of its PURPA contract costs at 100
percent through its annual PCA.The effects of overpriced
contracts are thus fully borne by ratepayers.Staff
believes that it must be an advocate for ratepayers and
seek to insure that the prices utili ties are obligated to
pay for purchase from QFs are fair and reasonable.
Does this conclude your direct testimony in this
proceeding?
Yes, it does.
CASE NO. IPC-E- 05 -07/15/05
STERLING, R. (Di)
STAFF
CERTIFICA TE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS 15TH DAY OF mLY 2005
SERVED THE FOREGOING DIRECT TESTIMONY OF RICK STERLING, IN CASE
NO. IPC-05-, BY MAILING A COpy THEREOF POSTAGE PREPAID, TO THE
FOLLOWING:
BARTON L KLINE
MONICA MOEN
IDAHO POWER COMPANY
PO BOX 70
BOISE ID 83707-0070
PETER J. RICHARDSON
RICHARDSON & O'LEARY, PLLC
515N 27TH STREET
BOISE ID 83702
RICHARD L STORRO
DIRECTOR, POWER SUPPLY
1411 EMISSION AVE
PO BOX 3727, MSC-
SPOKANE WA 99220-3727
R. BLAIR STRONG
PAINE, HAMBLEN, COFFIN
BROOKE & MILLER, LLP
717 W. SPRAGUE AVE, SUITE 1200
SPOKANE WA 99201-3505
CERTIFICATE OF SERVICE