20061212Decision memo.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
CO MMISSI 0 NER SMITH
COMMISSIONER HANSEN
COMMISSION SECRETARY
COMMISSION STAFF
LEGAL
FROM:SCOTT WOODBURY
DATE:DECEMBER 12, 2006
SUBJECT:CASE NO. IPC-06-26 (Idaho Power)
FIRM ENERGY SALES AGREEMENT - MAGIC WIND PARK LLC
On October 27 , 2006, Idaho Power Company (Idaho Power; Company) filed an
Application with the Idaho Public Utilities Commission (Commission) requesting approval of a
20-year Firm Energy Sales Agreement between Idaho Power and Magic Wind Park LLC (Magic
Wind) dated October 11 , 2006 (Agreement).
Background
On August 4, 2005 , the Idaho Public Utilities Commission (Commission) in Case
No. IPC-05-, Order No. 29839, reduced the eligibility cap for avoided cost published rates
for non-firm wind projects from 10 aMW to 100 kW, required individual negotiation for larger
wind qualifying facilities (QFs), and established criteria for assessing QF contract entitlement.
Reference Public Utility Regulatory Policies Act of 1978 (PURP A). By Commission Order No.
29872 the date for grandfathering eligibility was changed from July 1 , 2004, the Notice of
Petition date, to August 2005 the date oflnterlocutory Order No. 29839.
On October 20, 2005, Magic Wind in Case No. IPC-05-34 filed a Motion to
Determine Exemption Status seeking a Commission determination that Magic Wind was exempt
from the rate eligibility cap established in Commission Order No. 29839. On August 15 , 2006
the Commission in Order No. 30109 determined that Magic Wind was entitled to an exemption.
The Commission further declared that Magic Wind was not entitled to receive from Idaho Power
a PURP A QF Purchase Power Agreement that established fixed prices for surplus energy outside
DECISION MEMORANDUM
the 90/110 performance band using the "Modified PacifiCorp Method.Reference Order No.
30000 Case No. PAC-05-
Agreement
The Magic Wind facility will be located in Sections 1 , 2 and 11 , Township 9 S
Range 13 E, Boise Meridian, Twin Falls County, Idaho. Magic Wind warrants that the facility
will be a qualified small power production facility (QF) under the applicable provisions of the
Public Utility Regulatory Policies Act of 1978 (PURP A). The facility will consist of eight
clipper wind turbines with individual nameplate ratings of 2.5 MW for each unit. The nameplate
capacity of the facility will be 20 MW. The Agreement contains the non-Ievelized, published
avoided cost rates set forth in Order No. 29391. Under normal and/or average operating
conditions, Magic Wind will not generate more than 10 aMW on a monthly basis. Energy
delivered in excess of this monthly amount is Inadvertent Energy. Idaho Power will accept
Inadvertent Energy that does not exceed the Maximum Capacity Amount (20 MW) but will not
purchase or pay for Inadvertent Energy. Agreement ~ 7.
As reflected in the Application, following issuance of Commission exemption Order
No. 30109 , Magic Wind inquired ofldaho Power as to whether it would be possible to utilize the
methodology for computing shortfall energy payments the Commission approved in the Firm
Energy Sales Agreement between Idaho Power and Fossil Gulch Wind Park LLC (Case No. IPC-
04-, Order No. 29630) rather than the methodology for determining shortfall energy
payments established by Commission Order No. 29632 in Case No. IPC-04-, the u.s.
Geothermal case. Under the Fossil Gulch Method if the QF delivers less than 90% of the
scheduled "net energy" amount (for reasons other than forced outage or force majeure events)
the shortfall energy is priced at 85% of the market price, less the contract rate, the difference
capped at 150% of contract rate. In the u.s. Geothermal case the Commission expressed a
concern that under certain conditions use of the Fossil Gulch methodology could have adverse
results for QFs. (Order No. 29632, p. 20.) Magic Wind has voluntarily selected the Fossil Gulch
method. Agreement ~~ 7.5. Use of the Fossil Gulch methodology is a negotiated term ofthe
Agreement and is mutually acceptable to Idaho Power and Magic Wind.
As reflected in the Application and Appendix B to the Agreement, Magic Wind is
one of the generating resources that may be affected by the outcome of the Cassia Wind
complaint, Case No. IPC-06-, a dispute regarding cost responsibility for funding upgrades to
DECISION MEMORANDUM
Idaho Power s transmission system. Magic Wind has selected July 31 , 2007 as the Scheduled
First Energy Date and December 31 , 2007 as the Scheduled Operation Date for the facility.
These dates are subject to revision.
Section 24 of the Agreement provides that the Agreement will not become effective
until the Commission has approved all of the Agreement's terms and conditions and declared
that all payments Idaho Power makes to Magic Wind for purchases of energy will be allowed as
prudently incurred expenses for ratemaking purposes.
On November 8 , 2006, the Commission issued Notices of Application and Modified
Procedure in Case No. IPC-06-26. The deadline for filing written comments was December 7
2006. Comments were received from Commission Staff, State Representative Sharon Block and
many supporters of wind and renewable energy. Representative Block and all public comments
support the proposed Agreement and recommend approval.
Representative Block, Chairman of the Health and Welfare Committee, has been
studying energy issues in Idaho during the past year and has attended all of the Interim Energy
meetings at which the proposal for Idaho s Energy Plan was developed. The Interim Energy
Committee, she states , has placed renewable resources as a top priority. She notes that the
objectives of the Energy Plan state the importance of protecting Idaho s public health, safety and
natural environment, as well promoting sustainable economic growth, job creation, and rural
economic development.The development of wind energy, she states, meets all of these
objectives. On behalf of the economics, health, safety, and well-being of the people of Idaho
Representative Block recommends approval of the Magic Wind contract.
Staff notes that the Magic Wind Agreement contains all of the current rates, terms
and conditions contained in other recently approved Idaho Power PURP A contracts, but with one
notable exception relating to pricing for energy deliveries that fall short of the 901110 percent
performance band " a provision that defines the range of predictability required for published
rate eligibility, i., shortfall energy. In this Agreement, Magic Wind and Idaho Power are
seeking to adopt terms first introduced in the Fossil Gulch Agreement, rather than terms used by
all other subsequent Idaho Power contracts approved following Commission decisions in the
S. Geothermal case (IPC-04-8110).
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Staff notes that generally, the Commission s past practice has been to allow
negotiated terms and conditions in PURP A contracts as long as those terms and conditions do
not violate prior Commission Orders, do not adversely affect ratepayers, and as long as the QFs
and utilities are in mutual agreement. The Commission has rejected contracts in which these
standards have not been met. Staff notes, however, that negotiated terms and conditions in the
past have not generally included pricing issues.
In the case of the Magic Wind Agreement, Staff notes that clearly the parties are in
mutual agreement. In addition, Staff does not believe that the negotiated terms of the Agreement
violate any prior Commission Order. Terms in the U.S. Geothermal case relating to pricing
shortfall energy, it states, were established at least in part because of U.S. Geothermal'
objection to the terms proposed by Idaho Power that had been included in the Fossil Gulch
contract signed previously. Furthermore, because the Commission allowed a deviation from the
S. Geothermal terms in the Schwendiman case, it is Staffs belief that if the Commission did
not intend for the u.S. Geothermal terms to become the standard to which all future contracts
must adhere. Staff believes that the Fossil Gulch, Schwendiman, and u.s. Geothermal methods
all present reasonable alternatives for pricing of shortfall energy.
Staff expresses it concern, however, that price related items in PURP A contracts not
become completely subject to negotiation between the parties. The Fossil Gulch, Schwendiman
and U.S. Geothermal contracts reflect three different methods for pricing shortfall energy. Fair
pricing of shortfall energy is a particularly important, Staff contends, for wind projects because
Staff believes it is likely that they will frequently have shortfall energy do to the difficulty in
predicting intermittent generation in advance.While the utilities are responsible for
administering contracts, administration in the future, Staff contends, becomes much more
difficult for both utilities and for the Commission Staff as more pricing variations are adopted.
Staff cautions against creating a smorgasbord of different pricing options from which QFs can
choose. Staff believes that three pricing options provide a reasonable and sufficient set of
choices for future contracts.
With regard to whether the Fossil Gulch method of the U.S. Geothermal method
offers greater protection to the utility and its ratepayers, Staff contends that it is impossible to
determine. Under some combinations of shortfall generation and market prices, one method
results in a higher payment to the QF, but under other combinations the other method produces a
DECISION MEMORANDUM
higher payment. Because future market prices are unknown, neither method can be judged
superIor.
Both the Fossil Gulch and U.S. Geothermal methods are based on sound, yet
different logic, Staff contends. Under the Fossil Gulch method, a shortfall energy penalty is
assessed whenever market prices (85% of Mid-C) are higher than the contract price. There is no
penalty when market prices are less than the contract price. This method is based on the logic
that in the event of a shortfall in generation, Idaho Power would have to pay more if it purchased
replacement energy from the market at prices higher than specified in the contract. Under the
S. Geothermal method, market prices are paid for shortfall energy whenever market prices are
less than the contract rate. This method is based on the logic that market prices reflect non-firm
energy rates, and non-firm rates are what should be paid for shortfall energy. Despite the
differences in the two methods, Staff contends that both represent reasonable attempts to fairly
price shortfall energy. Because both methods have been used in prior contracts, Staff is not
opposed to allowing QFs and utilities to make a choice based on their own assessment of
perceived risks, expected market prices, and expected wind project performance. Consequently,
Staff has no objection to the inclusion of the Fossil Gulch method in the Agreement, rather than
the u.s. Geothermal method.
Staff recommends approval of all of the Agreement's terms and conditions and
recommends that the Commission declare that all payments Idaho Power makes to Magic Wind
for purchases of energy be allowed as prudently incurred expenses for ratemaking purposes.
COMMISSION DECISION
Submitted for Commission review is a Firm Energy Sales Agreement between Idaho
Power Company and Magic Wind Park LLC. The Agreement terms are standard save for
inclusion of the Fossil Gulch method for pricing shortfall energy. All parties recommend
approval of the Agreement. Does the Commission continue to find it reasonable to process this
case under Modified Procedure?Does the Commission find the Magic Wind Agreement
including the Fossil Gulch shortfall energy methodology to be acceptable?
Scott Woodbury
bls/M:IPC-O6-26 sw2
DECISION MEMORANDUM