20041213Petition for Reconsideration of Energy Vision.pdf

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Glenn Ikemoto
Energy Vision, LLC
672 Blair Avenue
Piedmont, California 94611
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glenni~acbell.net
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UTILITIES CiJ !SSIOf"~
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
S. GEOTHERMAL, INC. AN IDAHO
CORPORATION,
Complainant
IDAHO POWER COMPANY, AN IDAHO
CORPORATION,
Respondent
BOB LEWANDOWSKI and MARK
SCHROEDER,
Complainant
IDAHO POWER COMPANY, AN IDAHO
CORPORATION,
Respondent
CASE NO. IPC-E-O4-8
CASE NO. IPC-E-O4-
PETITION FOR
RECONSIDERATION BY
ENERGY VISION, LLC
INTRODUCTION AND BACKGROUND
Energy Vision, LLC ("EnVision ) develops, finances and invests in renewable
energy projects throughout the world. Our present interest in the USA is to develop
small renewable energy projects with high levels of local and landowner participation.
We are also presently very active in Europe. The members of EnVision and our partners
have developed , acquired and/or arranged for the financing of over $1 billion of wind
Petition of Energy Vision, LLC - 1 -
solar, demand-side management, biomass and cogeneration facilities in the USA and
internationally.
We have followed the progress of the above captioned matters closely, as we
have traditionally viewed the Idaho approach to implementation of PURPA to be quite
progressive and balanced. Unfortunately, we recognized that the contract forms being
offered by the utilities were un-financable due to the issues addressed in the subject
proceedings. As a result of the progress being made in those proceedings, we began
working with several Idaho farmers to help them realize the commercial potential of their
wind resources. We are also interested in developing biogas projects in the state.
Although we did not participate in the underlying complaint action, we are directly
impacted by the Commission s ruling in that we believe that, as a result of that ruling, the
projects we are working on will remain unachievable.
We understand that the Commission s rules provide that any person may
petition for reconsideration on the grounds that the Commission decision is
unreasonable, unlawful, erroneous or not in conformity with the law.The
Commission rules also provide that a petition for reconsideration must contain a
statement "of the nature and quantity of evidence or argument the petitioner will offer if
reconsideration is granted." See Idaho Commission Rules of Procedure at Rule No.
331 .01 .
For the following reasons, EnVision respectfully petitions for reconsideration
on the basis that the Commission s ruling is unreasonable and not in conformity with the
PURPA requirement that states actively encourage the development of OF power
furtherance of the Federal Government's goal of promoting energy independence.
reconsideration is granted EnVision will provide evidence and argument based on the
following petition.
1. Incentives Are Reversed
In its decision , the Commission has expressed its desire to improve the
reliability of OF delivery forecasts. However, the mechanism it has created provides
incentives which are the opposite of what they should be. There are two fact
circumstances here: market prices are higher than published prices, or they are lower.
When market prices are higher, the OF faces no penalty because it will
receive published prices anyway. It has no incentive to forecast more accurately or
Petition of Energy Vision, LLC - 2-
make extraordinary efforts to meet its forecast. However, this is just when the
ratepayers would want more OF energy since it is cheaper.
When market prices are lower, the OF faces a potentially severe penalty and
would act to increase production, if possible. However, this is exactly when ratepayers
would prefer to reduce OF deliveries, because it is more expensive. So we have a
situation where the OF has an incentive is to increase deliveries only when the
ratepayers would want them reduced. Such faulty price signals always lead to faulty
economic decisions.
2. Risk Considerations
In this proceeding, the utilities make the point that many OFs do not have the
same operational flexibility as conventional utility resources. Therefore , some
adjustment should be made to either avoided costs or the FESA (Firm Energy Sales
Agreement) to account for this. Essentially, the utilities say that uncertainty ultimately
equals cost. This is in fact correct, as is clearly demonstrated in virtually all markets. All
mechanisms that reduce risk (hedging) have a premium. Simply put, reducing risk is
worth something.
However, it is unfair to focus only on risks where the OFs are disadvantaged.
Compared to utility owned generation or the surrogate avoided resource (SAR), OFs
have many risk advantages. None of these has been accounted for in the published
rates. For example:
1. Fuel Costs The published prices are completely fixed while the
ratepayers are exposed to the risk that natural gas for the SAR will cost
something other than the forecast. As we have seen , natural gas prices
are extremely volatile. The forecast of gas prices do not consider the cost
of achieving price certainty. They simply forecast short term market
prices. A simple corollary is a fixed interest rate loan. The fixed rates are
determined by adding a premium to a forecast of short term rates.
2. Construction Costs.Cost overruns and excess inflation are also not
explicitly accounted for in the SAR. Do utilities guarantee the final costs
or only prudence?
3. Requlatorv Risks. The SAR will be exposed to a number of regulatory
risks during its life. It produces a toxic product. The history of such
products like tobacco, are that societal costs are increasingly
incorporated into the direct costs of the product through regulation, taxes
fees or litigation settlements. Over such a long operating horizon , the
plant will undoubtedly be exposed to potential additional costs for new
Petition of Energy Vision, LLC - 3-
greenhouse gas regulations, increased air or water pollution controls or
other environmental oversight. These risks are clear and belong to the
ratepayers, but they are not included in avoided cost calculations.
4. Resource Diversity There is always a benefit from diversification
whether it is a financial portfolio or a generation mix. OFs receive no
credit for this portfolio effect.
If we are to account for risk, it should be all risks. The long term and planning
risks far outweigh the operational risks addressed by the 90/110 band. In short, if we
account for avoided risks (as well as avoided costs), the published prices are very low.
If we ignore long term risks, it seems reasonable to ignore the much smaller operational
risk of production variances. Of all risks, the ultimate cost of fossil fuels is by far the
largest. It swamps all other considerations. While it is implicitly assumed that the SAR'
fuel forecast is fair (500/0 chance of being too high or too low) this is not the same as
price certainty. Risk is generally considered to be the variance of a particular result from
the average. The price variance of the FESA is zero. The variance of the fuel price
forecast is huge. This dwarfs the production variance that the 90/110 rule tries to
address.
In addition , the production risk is unbalanced for OFs. The risk of having
revenues go to zero cannot be fully offset by higher than planned revenues because of
the absolute 10 MW cap on paid deliveries and the "lesser of' pricing mechanism.
3. The Cure is Worse.
In its order, the Commission rightfully recognized that Idaho Power
proposed penalty could result in OFs delivering the bulk of their commitment and still
owe the utility money. This mechanism is simply un-financable and resulted in the
subject proceeding.
Unfortunately the Commission s approach , which fixes the problem of wiping
out revenue, introduces uncapped market risk. This is also un-financable. PURPA was
specifically enacted to counteract the market power of utilities. In competitive markets
suppliers have a number of mechanisms available to offset unanticipated production
shortfalls. These include insurance, backup agreements, alternate buyers and hedging
strategies. Such tools do not fully exist in regulated markets. The Commission s order
inadvertently exposes OFs to the full force of the utilities' market power with no way of
protecting themselves. Under such circumstances, banks will not lend. To a certain
Petition of Energy Vision , LLC - 4-
extent, the Commission s approach extends the "perceived penalty" from the shortfall in
energy to all of the energy produced - at least in the minds of bankers.
A fundamental bank analysis is the downside study. In such a study, the
bank assumes a project will only produce 70010 - 80% of its planned output. They want to
be certain the bank will recover its loan under such a scenario and is one of the key
factors in making a lending commitment. Under the Commission s decision, such an
analysis would result in 1000/0 market risk, rendering the project un-financable. This is
true even if the project can re-forecast its deliveries more frequently, because each
month'variability can exceed 100/0 even if the average is less than 100/0. Equity
investors accept average risks while lenders assume downside risks. Replacing debt
funds with equity will destroy a project's economics.
4. Fairness
A classic measure of fairness is whether one party would take the deal being
offered to the other. No utility would take this performance deal. Let us use the
example of a utility owned hydro project versus a wind project. Would a utility accept
any penalties for making less than 900/0 of its planned monthly energy deliveries from its
hydro projects (especially if they could not fully recover the penalties in a wet year)?
Like hydro, wind resources run in cycles. There are years with wind droughts and years
with abundance. Unlike the utility, the wind projects will face penalties during droughts
and cannot recover them during times of abundance because of the 10 MW limit and the
lesser of' pricing mechanism.
As mentioned earlier, the production variance is nothing compared to price
variance. No utility would build the SAR if they would be penalized for month-to-month
variances between their actual fuel costs and their projections. However, the effect on
the ratepayer is the same, whether the variance is caused by production or fuel price.
The risks of monthly production and price variances always remain with the
ratepayer because they are the only party with enough credit capacity. These variances
can be hedged at a cost, and that cost is not included in published rates. In fact, that
cost is so large, that utilities, in agreement with their commissions, don t even try. It isn
worth it. So why burden OFs with this requirement? Variations in generation and
customer demand are part of the utilities' business environment. Balancing loads and
resources, which both have probabilistic characteristics, is part of their job.
Petition of Energy Vision, LLC - 5-
5. Facts Not In Evidence
As noted above, selecting a penalty linked solely to market prices raises
important and complex issues. These issues were not specifically addressed in the
subject proceedings. Consequently, the record in those proceedings is inadequate for
assessing the impacts of such a policy. As it stands , the decision will negate the
Commission s goal of increasing the development of cost-effective renewable energy in
Idaho. Power contracts can either be financed or not. Under the current decision , the
new contracts will be just as ineffective as the contested versions. Surely, such a dire
outcome merits a more fully developed record upon which the Commission can base its
decision.
In our opinion, this is the last contractual issue, at least for wind energy, that
needs to be fixed (assuming utilities don t start using transmission access as an
obstruction). It is the last institutional barrier blocking otherwise good projects. From
here, renewable projects must still have economic merit, environmental acceptability and
community support in order to be realized. But at least they won t be denied a fair
chance because of an artificial barrier-to-entry created by monopolies. The benefits of
renewable energy, even at avoided cost, far outweigh the potential cost of delivery
variances. This issue simply can t be sufficient reason for stopping any OF's
development.
6. Alternatives
Staff testified that OFs are already meeting 71 % of their commitments without
penalties. The goal of introducing penalties is to increase this to 900/0. Can this extra
200/0 possibly be worth crippling renewable energy development in Idaho? As stated
previously, the impact of monthly production risk is miniscule compared to the risks that
are avoided by purchasing OF energy.
Given the highly favorable risk tradeoff, we believe the fairest solution is to
eliminate the 90/110 band. However, if the Commission wishes to proceed with
penalties, there are a number of alternatives that can accomplish the Commission
goals more effectively.
1. Forecastinq Fees. Producing a monthly forecast of wind output with
900/0 accuracy is an expensive undertaking. It would be prohibitively
Petition of Energy Vision, LLC - 6-
expensive for small projects. However, developing wind energy is an
important economic option for Idaho s farmers and ranchers. OFs
should be given an option of having a small per kWh fee deducted
from their payments in order to fund the development of centralized
utility forecasting tools and utility generated projections. These tools
would probably utilize existing load forecasting techniques and data
sources. By paying this fee, the projects would be exempt from the
90/110 requirement. This approach has the benefit of developing the
forecasting expertise at the real end user, the utility. This mechanism
also has the logic that the value of forecast accuracy increases as the
amount of energy increases.
2. Published Price Penalty. The real problem with the Commission
approach is that it introduces market risks in an uncompetitive market.
If there must be a penalty, it is far better to link it solely to the
published rates. For example, if a project failed to meet it's 900/0
threshold, it would only receive 980/0 of it's published prices for that
month. In using a penalty mechanism, it is important to provide caps.
For example, the penalty should only be allowed in a limited number
of critical months. There should also be an annual per kW cap
reflecting the fact that the information really isn t that valuable.
3. Expand Force Majeure. Like utility hydro projects, OFs are entirely
dependent on the underlying resource. Since utilities' actual delivery
performance is excused for the unavailability of resources, the same
should apply to OFs. No utility is penalized for low water conditions or
the withholding of fuel supplies. If the lack of resource is considered a
Force Majeure, then the primary measure of prudence is mechanical
availability. In this case, 90010 standard is reasonable.
7. Summary
The Commission s decision on the 90/110 band provides price signals which
are the opposite of the desired OF performance. It encourages OFs to increase
production only when ratepayers want them reduced (even considering the cost of
production variance).
Avoided costs are a function of avoided risks. Considering all risks , it is fair
to eliminate any operational performance tests. By contracting for OF energy instead of
building new power plants, the ratepayers avoid substantially more risks than they incur.
Should this trade be viewed as insufficient, there are a number of mechanisms available
for mitigating the operational risks of OFs without overly damaging project financing
options.
Petition of Energy Vision, LLC - 7-
The problem has been created by trying to quantify actual damages when
market prices exceed contract prices, while ignoring benefits during those same times
(because the projects can only receive the lesser price up to 10 MW) or when the price
situation is reversed. This introduces uncapped market risks which are not commercially
financable in a monopoly industry. The Commission s decision to shift revenues to
market rates was not anticipated during the hearing and the record has not been
adequately developed on this point. This issue is critical to OF development and merits
further consideration.
If it chooses to improve the credibility of delivery forecasts through the
imposition of penalties, the Commission must avoid foreclosing financing options by
linking penalties to market prices. In using penalties, it must also recognize the limited
value of a 200/0 improvement over the current voluntary program and provide an annual
cap. Since the published prices, by definition, represent a fair deal for ratepayers there
is no need to determine actual damages using market rates.
Other alternatives for improving forecasts are to assess a fee on the OFs to
fund utility forecasting. This charge would be in lieu of performance standards. Or, it
can design a liquidated damages mechanism based on published rates. Or
underperformance caused by the lack of natural resources can be excused, which would
convert the standard into a simple mechanical availability test.
CONCLUSION
For all of the foregoing reasons, EnVision respectfully requests the Commis-
sion to reconsider its order in the above dockets. In compliance with its Rule 331.
requiring Petitions for Reconsideration to state "whether the petitioner or cross-petitioner
requests reconsideration by evidentiary hearing, written brief comments or inter-
rogatories , EnVision asks the Commission to initiate evidentiary hearings to consider
the various methods suggested above for appropriately allocating risk and addressing
the alleged problems Idaho Power claims to have with predicting OF resources.
Submitted this day of December 2004:
Petition of Energy Vision, LLC - 8 -
CERTIFICATE OF SERVICE
I hereby certify that on day of December 2004, that I caused to be mailed,
S. Mail postage prepaid to all parties of record in the above captioned matter.
Petition of Energy Vision, LLC - 9 -
Jean Jewell
Idaho Public Utilities Commission
472 West Washington Street
Post Office Box 83720
Boise, Idaho 83720-0074
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Scott Woodbury
Deputy Attorney General
Idaho Public Utilities Commission
472 W Washington
Boise, ID 83702
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Monica B. Moen, Attorney II
Barton L. Kline, Seniior Attorney
Idaho Power Company
PO Box 70
Boise, ID 83707-0070
kIine~i dahopo wer. com
mmoen~idahopower. com
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John Prescott
Vice-President - Power Supply
Idaho Power Company
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James F. Fell
Stoel Rives LLP
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Portland Oregon 97204
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Daniel Kunz, President
S. Geothermal
1509 Tyrell Lane
Boise, Idaho 83706
dglaspey(fYus geothermal. com
Bob Lively
PacifiCorp
One Utah Center, 23rd Floor
201 S. Main Street
Salt Lake City, UT 84140
R. Blair Strong
Paine, Hamblen, Coffin, Brooke & Miller LLP
717 W. Sprague Ave, Ste 1200
Spokane WA 99201-3505
Clint Kalich
Manager of Resource Planning & Analysis
A vista Corporation MSC- 7
PO Box 3727
Spokane WA 99220-3727
Conley Ward
Givens Pursley LLP
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Boise ID 83701-2720
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