20060710Reply comments.pdf

IDAHO POWER COMPANY
O. BOX 70
BOISE, IDAHO B3707
RECEIVED
200& JUL I 0 PH~:
BARTON L. KLINE
Senior Attorney
An IDACORP Company
IDAHO PUBLIC
UTILITIES COMMISSION
July 10, 2006
Jean Jewell , Secretary
Idaho Public Utilities Commission
472 West Washington Street
P. O. Box 83720
Boise, Idaho 83720-0074
Re:Case No. IPC-O5-
Idaho Power Company s Reply Comments
Dear Ms. Jewell:
Please find enclosed for filing with the Commission an original and seven
(7) copies of Idaho Power Company s Reply Comments regarding the above-referenced
case.
I would appreciate it if you would return a stamped copy of this letter to me
in the enclosed self-addressed envelope.
Very truly yours
Bart~n L. Kline
BLK/sh
Enclosures
Telephone [phone] Fax [phone], E-mail BKline(g)idahopower.com
BARTON L. KLINE ISB #1526
MONICA MOEN ISB #5734
Idaho Power Company
P. O. Box 70
Boise, Idaho 83707
Telephone: [phone]
FAX Telephone: [phone]
E-mail: bkline ~ idahopower.com
E-mail: mmoen ~ idahopower.com
RECEIVED
200G JUl \ 0 PM 4: 5 ,
IDAHO PU8UC
UTiLITIES COMMISSION
Attorneys for Idaho Power Company
Street Address for Express Mail
1221 West Idaho Street
Boise , Idaho 83702
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE PETITION OF) CASE NO. IPC-05-
MAGIC WIND LLC TO DETERMINEEXEMPTION STATUS IDAHO POWER COMPANY'
) REPLY COMMENTS
First, in responding to the Comments of the Commission Staff, Magic
Wind , LLC ("Magic Wind") and Intervenors , Renewable Northwest Project and
Northwest Energy Coalition (collectively "Northwest Parties ) and Energy Vision , Idaho
Power will direct the majority of its response to common themes contained in more than
one set of Comments.
Second , consistent with its Initial Comments Idaho Power will refer to the
remedy for nonperformance advocated by Magic Wind as the "Schwendiman Remedy
and Idaho Power s preferred remedy as the "S. Geothermal Remedy
IDAHO POWER COMPANY'S REPLY COMMENTS Page
The U.S. Geothermal Remedy has not discouraged robust
development of OF resources.
Both Magic Wind and Northwest Parties argue that continued use of the
remedy for OF nonperformance that the Commission adopted in the U.S. Geothermal
case will discourage the development of OF resources, and in particular discourage the
development of wind OFs. This is the same argument that OF developers and their
financiers made at the time the Commission issued its U.S. Geothermal Orders (Order
Nos. 29632 and 29682). Actual experience shows that these dire predictions are not
credible.
Since the U.S. Geothermal decision, Idaho Power has signed , and the
Commission has approved 22 contracts totaling 229 MW of OF capacity. Of that total
14 contracts totaling 187 MW are with wind gener8:tion projects. Each of those 14 Wind
OF contracts contains the U.S. Geothermal Remedy. In addition , as this Commission
well knows , were it not for the Commission s decision in Case No. IPC-05-22 to
reduce the eligibility cap for avoided cost published rates for non-firm wind projects
even more wind OF contracts containing the U.S. Geothermal Remedy would have
been signed and presented to the Commission for approval.
The argument that the U.S. Geothermal Remedy will discourage OF wind
development is further rebutted by the fact that prior to April 5 , 2006 Magic Wind was
urging this Commission to require Idaho Power to enter into a contract that contained
the U.S. Geothermal Remedy.
IDAHO POWER COMPANY'S REPLY COMMENTS Page 2
In the final analysis it is unlikely that continued use of the U.S. Geothermal
Remedy or substitution of the Schwendiman Remedy will have a material affect on the
demand by OF developers for new wind OF contracts.
The remedy for failure to deliver the agreed-upon monthly
amounts of energy is a means to recover damages. not an alternative avoided
costs computation.
The comments of Magic Wind , Northwest Parties and Envision indicate a
fundamental misunderstanding of what the Commission was trying to accomplish when
it first established a remedy for failure to deliver energy within the 90%/110%
performance band in the U.S. Geothermal case. The comments of Northwest Parties
provide the clearest example of this confusion. In their comments Northwest Parties
argue that the U.S. Geothermal Remedy is a violation of PURPA because it does not
comply with the OF's right to have avoided costs calculated on a "projected" basis. On
page 3 of their comments Northwest Parties state:
The requirement that out-of-band deliveries in a certain
month be priced at the discounted Mid-C Non-Firm monthly
average price is a clear example of "avoided costs
calculated at the time of delivery," as provided in Section
292.304(d)(2)(i) of the FERC's rules , rather than a
projected" avoided cost, pursuant to Section
292.304(d)(2)(ii). Yet deliveries within the 90/110 band
priced at the published rates, are a clear example of a
projected" avoided cost.
Northwest Parties argue that the published rates are based on avoided costs calculated
at the time the obligation is incurred and therefore using current market prices as a
measure of cost is a violation of the OF's option to be paid on a "projected" basis.
(Northwest Parties Comment p. 3-) The critical point that Northwest Parties miss is
IDAHO POWER COMPANY'S REPLY COMMENTS Page 3
that the remedy at issue in this proceeding is not a computation of avoided cost. It is a
means to recover the additional costs the utility and its customers are likely to incur as a
result of the OF's failure to deliver within the performance band. It is a measurement of
damages. If the OF performs as agreed , it receives published rates based on
projected" avoided costs. It is only when the OF fails to perform that the remedy is
invoked. The Commission understood this distinction and described it in the U.
Geothermal case. In the U.S. Geothermal case the Commission acknowledged that if
the OF fails to deliver within the performance band, the purchasing utility and its
customers will incur additional costs.
As reflected in our 10 MW cap discussion , the Commission
finds that a legally enforceable obligation translates into
contractual obligations of both parties. For a OF it translates
into an obligation or commitment to deliver its monthly
estimated production. Idaho Power proposes that this
delivery of committed energy fall within a 90/110 band. Staff
proposes that the band be expanded to 80/120. we find
90/110 to be reasonable. The Commission recognizes that
excess energy is not accepted by the Company without
consequence. If unplanned for and not easily integrated, the
energy may, as suggested by the Company, have to be sold
in the surplus market or other more economic resources of
the Company backed down. (Emphasis added.
(Order No. 29632 p. 20). Additional costs will also be incurred when under-deliveries
occur. Again the Commission understood that logic and addressed it in the U.
Geothermal Order:
Idaho Power proposes that if the OF delivers less than 90%
of the scheduled "net energy" amount (for reasons other
than forced outage or forced majeure events) that the
shortfall energy be priced at 85% of the market price , less
the contract rate, the difference capped at 150% of contract
rate. The Commission believes that such a shortfall energy
pricing method might have the potential of exacting too
heavy a price. We instead find it reasonable when the OF
IDAHO POWER COMPANY'S REPLY COMMENTS Page 4
fails to deliver 90% of the monthly commitment amount to
price all delivered energy at 85% of the market price , or the
contract rate, whichever is less.
The remedy the Commission fashioned in the U.S. Geothermal case was tied to market
prices because current market prices are the best yardstick for measuring the costs the
utility is likely to incur if a OF fails to deliver the amounts of energy it agreed to provide.
By disconnecting from current market prices, the Schwendiman Remedy moves away
from a contemporaneous measurement of the actual costs Idaho Power may incur
when a OF fails to perform.
Magic Wind also misapprehends the purpose of including a remedy when
the OF fails to perform. In its comments Magic Wind argues that the Schwendiman
Remedy, which it refers to as the Modified PacifiCorp Method , is consistent with and is
derived from the surrogate avoided resource (SAR) avoided cost calculation
methodology because it utilizes simple cycle combustion turbine (SCCT) costs to
develop the rates it is asking the Commission to require Idaho Power to pay OFs when
their performance falls outside of the 90%/110% performance band. On page 5 of its
comments Magic Wind states "It (the Schwendiman Remedy) is thus consistent with the
current avoided cost methodology which bases avoided costs on an SCCT as the
surrogate avoided resource." (Parenthetical added). In Idaho, the surrogate avoided
resource is not an SCCT. It is a combined cycle combustion turbine (CCCT). The only
time a SCCT has ever played a role in establishing purchase price for OF resources
was when Schwendiman and PacifiCorp negotiated the Schwendiman Contract. In the
past PacifiCorp has recommended that the Commission use the SCCT methodology
that PacifiCorp has implemented in Utah to set avoided costs in Idaho. To date this
IDAHO POWER COMPANY'S REPLY COMMENTS Page 5
Commission has declined to do so. Idaho Power believes this is further evidence that
the contract Schwendiman and PacifiCorp negotiated must be viewed as a stand-alone
arrangement. As the Company noted in its comments in the Schwendiman case , Idaho
Power has no objection to PacifiCorp s use of the Schwendiman methodology because
that method is consistent with the way PacifiCorp computes avoided costs in Oregon
and Utah. But it is not equivalent to the SAR methodology used in Idaho and Idaho
Power should not be required to apply the methodology to its contracts.
In its comments Staff acknowledges the need to consider market prices
when the OF fails to perform. But Staff responds to that concern by asserting that the
energy prices computed under the Schwendiman Remedy "are a reasonable proxy for
Mid-C market prices and a fair price to be paid for energy that cannot be delivered
predictably." (Staff Comments p. 4). Idaho Power is uncertain as to why Staff believes
it is preferable to create a proxy for Mid-C market prices when the U.S. Geothermal
Remedy utilizes actual Mid-C prices that are current and readily available.
The Schwendiman Remedy will not result in better estimates
of monthly production.
In their comments both Magic Wind and Northwest Parties refer to reply
comments filed by PacifiCorp in the Schwendiman case (PAC-05-9). In its reply
comments PacifiCorp indicated it believed that the U.S. Geothermal Remedy could
result in OFs "low-balling" their monthly energy estimates to avoid the potential impact
of low market prices. However, there is no evidence that the Schwendiman Remedy
Magic Wind favors will result in better OF estimates of monthly energy production.
IDAHO POWER COMPANY'S REPLY COMMENTS Page 6
OF developers prefer the Schwendiman Remedy because it allows them
to maximize their revenues by increasing their estimates of monthly energy production.
Whether that tendency to increase the estimates will result in better estimates of
monthly production amounts is questionable. It is equally likely that OFs will overstate
the amounts they agree to deliver each month knowing that there is a decreased risk of
adverse financial consequences if they fail to deliver the estimated amount. Of course
if OFs overestimate their monthly energy production , it is more likely that Idaho Power
will be going to the wholesale energy market to replace energy delivery shortfalls.
The 90%/110% performance band is not at issue in this proceeding.
Northwest Parties devote a considerable portion of their comments to a
critique of the 90%/110% performance band and a discussion of alternatives to the
performance band that the Northwest Parties believe would be more favorable to the
development of OF wind resources.
The scope of this proceeding is limited. Magic Wind's motion seeks a
determination that Idaho utilities should be compelled to offer a remedy of the OF's
choosing when a OF fails to deliver the amount of energy it agreed to provide within the
90%/110% band. Magic Wind has not asked the Commission to reverse its prior
decisions requiring the inclusion of the 90%/110% performance band. The Commission
should not rise to the bait offered by Northwest Parties.
Schedule 86 is not at issue in this case.
Both Magic Wind and Northwest Parties are critical of the use of Idaho
Power s Schedule 86 pricing in the U.S. Geothermal Remedy. Of course Schedule 86
pricing is not at issue in this case. Idaho Power s Schedule 86 has been in effect since
IDAHO POWER COMPANY'S REPLY COMMENTS Page 7
1981. Schedule 86 has been evaluated by the Commission several times. The last
time it was considered, the Commission recognized that paying the full Mid-C average
price for non-firm energy would leave customers holding the bag for transaction costs
associated with the unpredictable nature of non-firm deliveries. The Commission also
recognized that Schedule 86 as currently structured provides protection to customers
from overpaying for non-firm energy deliveries.
The Schedule 86 purchase price is not at issue in this case and the
Commission should ignore Magic Wind's and Northwest Parties' unsupported critique.
This case does not need to be bifurcated.
In its initial comments Idaho Power indicated that it had been unable to
replicate and verify the computation of the specific rates proposed by Magic Wind for
application to Idaho Power if the Commission ultimately determined that Idaho Power
should be required to include the Schwendiman Remedy in its contracts with OFs. In its
initial comments Idaho Power suggested that a separate proceeding would be needed
to actually set rates if the Commission required acceptance of the Schwendiman
Remedy. Since filing its initial comments, Idaho Power has been able to confirm the
derivation of the rates computed by Magic Wind and the revised rates computed by the
Commission Staff. If at the conclusion of the comment period the Commission
ultimately determines that it is in the public interest to order Idaho Power to offer the
Schwendiman Remedy in future OF contracts, the purchase rates applicable to OF
deliveries outside the 90%/110% performance band should be the rates recommended
by the Commission Staff, not the rates computed by Magic Wind.
IDAHO POWER COMPANY'S REPLY COMMENTS Page 8
Conclusion.
The critical distinction between the positions taken by Magic Wind and
Intervenors and the position taken by Idaho Power is that Idaho Power believes that the
purpose of including a remedy to be applied when the OF fails to perform, is to measure
costs the utility is likely to incur. Idaho Power believes that the best measure of the
utility s potential costs is wholesale market prices prevailing at the time that the utility
must make up any shortfalls or dispose of any over-deliveries. Removing wholesale
market prices from the equation for measuring damages is counterintuitive in light of
Northwest utilities active use of the wholesale energy markets to balance loads and
resources. Removing market prices from consideration of replacement costs shifts
financial risk from OF developers to the utilities' customers.
The Commission was careful to point out in the Schwendiman case that
the bargain reached between Schwendiman and PacifiCorp was a negotiated
arrangement between those two parties. The Commission was crystal clear in its
determination that the Schwendiman contract was not intended to set precedent or to
establish a rule that would be applicable to all electric utilities subject to the
Commission s jurisdiction. The Commission should not abandon its longstanding
practice of providing utilities and OFs with the freedom to contract so long as the terms
and conditions of those contracts are not unreasonable. The U.S. Geothermal Remedy
that has been approved in 22 OF contracts is reasonable.
t 1;,DATED at Boise, Idaho, this Ii) day of July, 2006.
~~tY
c -
BARTON t. KLINE
Attorney for Idaho Power Company
IDAHO POWER COMPANY'S REPLY COMMENTS Page 9
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that on this
/(/1 day of July, 2006, I served a true
and correct copy of IDAHO POWER COMPANY'S INITIAL COMMENTS 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 W. Washington Street
O. Box 83720
Boise, ID 83720-0074
scott.woodburv~ puc.ldaho.qov
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Peter J. Richardson
Richardson & O'Leary PLLC
515 N. 27th Street
O. Box 7218
Boise , ID 83707
peter~ richardsonandolearV.com
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Richard L. Storro
Director, Power Supply
A vista Corporation
1411 E. Mission Avenue
O. Box 3727 , MSC-
Spokane , WA 99220-3727
dick.storro (Qi avistacorp.com
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R. Blair Strong
Paine, Hamblen , Coffin , Brooke & Miller
717 West Sprague Avenue , Suite 1200
Spokane , WA 99201-3505
blair.stronq ~ painehamblen.com
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Dean J. Miller
McDevitt & Miller LLP
420 W. Bannock Street
O. Box 2564
Boise, ID 83701
ioe ~ mcdevitt-miller.com
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Glenn Ikemoto
Energy Vision LLC
672 Blair Avenue
Piedmont, CA 94611
qlenni ~ pacbell.net
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CERTI FICA TE OF SERVICE Page
Bob Lively
PacifiCorp
One Utah Center, 23rd Floor
201 S. Main Street
Salt Lake City, UT 84140
bob.ivelv ~ pacificorp. com
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Dean Brockbank
Rocky Mountain Power
201 S. Main, Suite 2200
Salt Lake City, Utah 84111
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William M. Eddie
Advocates For the West
1320 W. Franklin Street
O. Box 1612
Boise, ID 83701
billeddie ~ rmci. net
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David Hawk , Director
Energy Natural Resources
R. Simplot Company
999 Main Street
O. Box 27
Boise , ID 83702
dhawk ~ simplot.com
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R. Scott Pasley
Assistant General Counsel
R. Simplot Company
999 Main Street
O. Box 27
Boise, I D 83702
spas lev ~ simplot.com
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William J. Batt
John R. Hammond , Jr.
Batt & Fisher, LLP
101 S. Capitol Blvd., Suite 500
O. Box 1308
Boise , ID 83701
wib ~ battfisher.com
irh ~ battfisher.com
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CERTIFICATE OF SERVICE Page 2
Michael Heckler
Director of Marketing & Development
Windland Incorporated
7669 W. Riverside Drive, Suite 102
Boise , ID 83714
mheckler (g) windland.com
CERTIFICATE OF SERVICE Page 3
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(J-
~ ~
B RTON L. KLINE