20070223Decision memo.pdf

DECISION MEMORANDUM
TO:CO MMISSI 0 NER KJELLAND ER
CO MMISSI 0 NER SMITH
COMMISSIONER REDFORD
COMMISSION SECRETARY
COMMISSION STAFF
LEGAL
FROM:DONOVAN E. WALKER
DATE:FEBRUARY 23, 2007
SUBJECT:IDAHO POWER'S APPLICATION FOR APPROVAL OF A POWER
PURCHASE AGREEMENT WITH TELOCASET WIND POWER
PARTNERS, LLC - CASE NO. IPC-06-
On December 15, 2006, Idaho Power Company (Idaho Power, Company) filed an
Application seeking approval of a Power Purchase Agreement (PP A) with Telocaset Wind
Power Partners, LLC (Telocaset). Idaho Power asked that the expenses associated with the
purchase of capacity and energy from the PP A be included in the Company s annual Power Cost
Adjustment (PCA).
On December 27, 2006, the Commission issued a Notice of Application and set a
deadline of January 10 2007 , for interested parties to petition for intervention. Order No. 30209.
No petitions for intervention were filed. On January 26, 2007, the Commission issued a Notice
of Modified Procedure, setting a comment/protest deadline of February 22, 2007. Order No.
30230. Comments were filed by Commission Staff, the Idaho Farm Energy Association, the NW
Energy Coalition and the Renewable Northwest Project, and one member of the public.
THE APPLICATION
Idaho Power seeks approval of its PP with Telocaset, and inclusion of the
associated expenses for the purchase of capacity and energy in the Company s annual Power
Cost Adjustment (PCA). This PPA is the result ofIdaho Power s Request for Proposals for 200
MW of wind-powered generation that originated with the Company s 2004 Integrated Resource
Plan (IRP). Application at 2. The Company issued an RFP for 200 MW of wind-powered
generation on January 13, 2005. Id. In September 2005, the RFP was revised to ask for 100
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, instead of the 200 MW, because of the quantity of wind the Company anticipated receiving
from PURPA qualifying facilities (QFs). Application at 3. In June 2006, Telocaset Wind Power
Partners of Houston, Texas was selected as the preferred bidder of the 2005 Wind RFP process.
Id.
Idaho Power and Telocaset concluded negotiations of the PP A in December 2006.
Application at 4. The PP A guarantees an output of 196 000 MWh (annually) has a planned
capacity of 100.65 MW. Id. The term ofthe PP A is 20 years, with an option for Idaho Power to
extend the term ofthe Agreement an additional 10 years. Id. If Telocaset should wish to sell the
facility, the PP A provides Idaho Power with a first right of refusal. Id.
The wind project is located in eastern Oregon, and would deliver its energy to a point
on the LaGrande-Brownlee 230 kV transmission line. Application at 4. The project is expected
to have an output profile with higher output coinciding with the summer and winter peak
demand. Id.
Prices under the PP A adjust seasonally and start at a base rate of $48.00/MWh with
an annual escalation rate of 3%. Application at 4. No payment is required for energy deliveries
of the maximum contract amount and Idaho Power will retain all green energy tags from the
project. Id. The PP also provides that Telocaset will deliver detailed forecasting data
including wind velocity and duration, to Idaho Power. Id. The data will include real time access
to the forecasting service used by the project, including forecasts of energy to be delivered
during the next hour, next day, and next week. Id. This is expected to assist Idaho Power when
integrating the wind generation into the Company s resource supply mix. Application at 5.
The PP A contains provisions, similar to the 90%/110% deli very provisions contained
in Idaho Power s QF contracts, which would provide for damages and caps. Application at 5.
The PP A also contains penalties should the project fail to deliver the guaranteed annual output of
196 000 MWh. Id. Additionally, the obligations of the project will be secured by a guaranty
issued by Goldman Sachs. Id. Should the credit rating of Goldman Sachs fall below a
predetermined level, Goldman Sachs will be required to post a liquid form of performance
assurance. Id. The obligations ofIdaho Power will be secured by Idaho Power s balance sheet.
Id. The PP A also provided for certain "bridge" financing to Telocaset by Idaho Power to cover
Telocaset's cost exposure to acquire certain long lead-time items, such as a transformer and
certain engineering and design expenditures while the Commission is considering this
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Application. Application at 5-6. Idaho Power states it will establish a reserve account and fund
the cost to enable Telocaset to proceed prior to approval ofthe Application. Id. at 6.
Idaho Power requests that the Commission issue an Order finding that the PP A is
prudent and approving inclusion of the prudently incurred power purchase expenses associated
with the PPA in the Company s annual PCA. Id. The Company requested that its Application
be processed by Modified Procedure. Id.
COMMENTS
1. Northwest Energy Coalition and Renewable Northwest Project. Joint comments
were filed by the NW Energy Coalition (NWEC) and the Renewable Northwest Project (RNP).
The comments supported approval of the PP A and requested that the docket be processed in an
expedited fashion. NWEC and RNP stated that the PP A will be beneficial to both utility
ratepayers and the furtherance of renewable energy in Idaho Power s portfolio. They stated that
the price of $48/MWh and its 3% escalation rate will make this resource one of the most cost-
effective of all generation resources identified in Idaho Power s 2006 IRP. NWEC and RNP also
stated that they were "enthusiastic" about provisions in the PP A that commit Telocaset to
provide Idaho Power with detailed, real-time wind forecasting data. Their comments stated that
the combination of enhanced forecasting along with the geographic diversity offered by this
project could only serve to make the number of pending Idaho based wind projects more
attractive to Idaho Power.
2. Idaho Farm Energy Association. The Idaho Farm Energy Association stated that
the Horizon contract is a wise investment for the ratepayers, and that it supports this project and
further development of wind energy along with other renewables for the benefit of the citizens of
Idaho and the ratepayers. However, the organization also stated that the difference in price in the
PP A as compared to PURP A rates was entirely offset by the difference in the 90/110
mechanisms between the two contracts, and that the Horizon project and PURP A projects have
essentially the same cost to the ratepayer. It stated that this project represents a $160 million
investment in a rural Oregon county while the energy will be paid for by Idaho customers. Idaho
Farm Energy Association states that a project of this size typically generates over $1 million per
year in local economic benefits, and that those benefits are desperately needed in rural Idaho.
3. Larry Zirker. Mr. Zirker filed comments stating that this Agreement is "very bad
for Idaho." He stated that approving the 100 MW Agreement would essentially be stopping four
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small QFs from being built. He states that it would reduce the tax base on $120 000 000 of small
wind farms from supporting Idaho, and that many good paying jobs would be lost. He also
commented that this would take 100 MW from the queue that Idaho Power will allow according
to its IRP.
4. Commission Staff. Staff filed comments recommending that the Commission:
(1) find the PP A to be prudent; and (2) approve inclusion of the prudently incurred power
purchase expenses in the Company s PCA. Staffs comments reviewed the need for power, the
request for proposals (RFP) process, the PP A terms and conditions (including a price assessment
and transmission costs), as well as the requested ratemaking treatment of the expenses associated
with the contract.
Staff concluded that a need for wind generation was demonstrated by both the 2004
and 2006 IRPs. Idaho Power s need for new generating resources was recently debated in Case
No. IPC-06-09 seeking Commission approval for the construction of the Evander Andrews
170 MW gas-fired peaking plant. Staff points out that the Commission found in that case that
the need for future power to meet the projected peak loads of Idaho Power was supported by
substantial and competent evidence. Staff states that unlike the need for peaking generation
filled by the Evander Andrews plant, that wind generation is primarily intended to meet the
Company s need for energy. However, just as the IRP's demonstrated a need for capacity, they
also convincingly demonstrate a need for new energy resources.
Staff reviewed the 2005 Wind RFP process and concludes that the methodology used
as well as the process was fair, reasonable, and resulted in the best proposal being selected.
Horizon Wind Energy s Telocaset project scored the highest in all three major scoring
categories, and was clearly the best proposal submitted in the RFP process.
In its price assessment Staff reports that the price in the PP A begins at $48/MWh in
2007 and escalates 3% annually. The levelized cost of the 20-year contract is estimated at
$62.38/MWh. Idaho Power is not required to pay for anything else other than the energy
delivered. Staff states that the price compares favorably to the avoided cost rates for PURP
QFs. The price from the PP A is approximately 2.3% below PURP A rates, when compared to a
20-year levelized PURP A rate, which is $63.84. Staff cautions that, while it is encouraging that
the purchase price in the PP A is below PURP A rates, that it is very important to recognize that
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price alone should not be the only factor considered, and that the Telocaset project and the PP
is different from a PURPA QF and a PURPA contract.
The estimated cost for the necessary transmission upgrades and interconnection of
the project is $3.6 million. Of that amount, $2.3 million will be considered interconnection
costs, which Telocaset will be required to pay without refund, and the remaining $1.3 million
will be considered "network upgrades" which under FERC's Large Generator Interconnection
rules is eligible for 100 percent refund. This provides firm transmission for 66 MW of the
projects 100 MW capacity. The remaining 34 MW is interruptible and subject to possible
curtailment by Idaho Power according to the terms of the PP
Staff discusses many of the numerous provisions designed to protect Idaho Power in
the event Telocaset is unable to perform in accordance with the requirements of the PP A. These
include provisions for damages if the project fails to deliver its guaranteed annual output, delay
damages if the project does not become operational by the guaranteed in-service date of March
, 2008 , and a performance assurance of $1 million prior to the in-service date, and $10 million
after the in-service date. If Telocaset fails to provide timely and reliable wind forecast data, the
PP A contains a provision that allows the Company to implement 90%/110% performance band
provisions as have been included in typical PURP A wind contracts. The obligations of Telocaset
under the PPA will be secured by a guaranty issued by Goldman Sachs, Horizon s parent
company. If the credit rating of Goldman Sachs falls below a predetermined level , it will be
required to post a liquid form of performance assurance.
Staff agrees with the proposed accounting treatment of the costs associated with the
PP A. The Company proposed that the costs of the PP A be recovered in a manner similar to non-
QF expenses, with 90% of variations captured through the Company s PCA mechanism until the
next general rate case, at which time the Company be allowed to include the costs of the PP A in
base rates. Staff recommends that any expenses related to the "bridge" financing be considered
for approval in a future proceeding, and that the Company keep track of the PP A as a separate
line item in the PCA until it is included in base rates in the next rate case.
Staff states that although many of the principal provisions of the PP A are similar to
provIsIOns contained in the Company s existing PURP A contracts, there are many key
differences that should be noted, such as: (1) PURP A contracts are considered firm energy
agreements, implying that firm transmission capacity is available for the QFs entire output, while
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the PP A only provides firm transmission capacity for 66 of the 100 MW output for Telocaset;
(2) the PP A contains more stringent performance requirements, and has performance assurances
secured by Goldman Sachs guarantees; (3) green tags are provided to Idaho Power at no
additional cost under the PP A, whereas, the project developer under PURP A contracts retains
them; and (4) Idaho Power also gains real-time access to the wind forecasting service used by the
project providing next hour, next day, and next week forecasts of delivered energy.
Staff stresses that judgment as to the reasonableness of the PP A must be based on the
PP A in its entirety. Although Staff feels that specific provisions in the PP A could have been
stronger, it recognizes that all provisions were negotiated as part of a package. On the whole
Staff believes that the PP A is more attractive than if the project had contracted with Idaho Power
as a PURPA QF. If approved, Staff believes that the Telocaset Agreement will become a
valuable piece ofthe Company s resource portfolio.
Staff recommends that the Commission find the PP A to be prudent and approve
inclusion of the associated expenses in the PCA as requested.
COMMISSION DECISION
Does the Commission wish to approve the Purchased Power Agreement between
Idaho Power Company and Telocaset Wind Power Partners, LLC? If so, does the Commission
wish to authorize inclusion of the associated expenses in Idaho Power s annual Power Cost
Adjustment?
~Pu/
Donovan E. Walker
M:IPC-O6-31 dw3
DECISION MEMORANDUM