20040609Runyan Direct.pdf

ECE!VED
ILEOConley E. Ward (ISB No. 1683)
GIVENS PURSLEY LLP
601 W. Bannock Street
O. Box 2720
Boise, ID 83701-2720
Telephone: [phone]
Fax: [phone]
cew~givenspursley .com
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Attorneys for U. S. Geothermal, Inc.
S:\CLIENTS\6667\2\Runyan Testimony,DOC
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
S. GEOTHERMAL, INC., an Idaho
corporation Case No. IPC-04-
Complainant
vs.
IDAHO POWER COMPANY, an Idaho
corporation
Respondent.
BOB LEWANDOWSKI ~d MARK
SCHROEDER Case No. IPC-04-
Complainants
vs.
IDAHO POWER COMPANY, an Idaho
corporation
Respondent.
DIRECT TESTIMONY OF KIP W. RUNYAN
ON BEHALF OF U.S. GEOTHERMAL, INC.
June 9, 2004
reiL~j
"'-.-.;I
ORIGINAL
PLEASE STATE YOUR NAME AND ADDRESS FOR THE RECORD.
My name is Kip W. Runyan. My business address is 2233 Spring Mountain Drive
Boise, Idaho.
BY WHOM ARE YOU EMPLOYED AND IN WHAT CAPACITY?
I am a self-employed consult~t in the independent energy business. My services include
assistance in the development, contracting, financing, and operation of independent
power facilities.
PLEASE PROVIDE YOUR BACKGROUND AND EXPERIENCE.
I am a licensed Professional Civil Engineer in the state of Idaho and have twenty six
years of experience in the electrical energy industry. I have held a variety of positions
within the industry, including President and CEO of Ida-West Energy Company, an
independent power producer, and Senior Vice President of the Delivery Business Unit of
Idaho Power Company. A complete resume, including my educational background and
employment history, is presented as Exhibit No.
MR. RUNYAN , ON WHOSE BEHALF ARE YOU APPEARING IN THIS
PROCEEDING?
My testimony is presented on behalf ofU. S. Geothermal, Inc. U. S. Geothermal retained
me on October 8, 2003 to assist in the negotiation of a Firm Energy Sales Agreement
Agreement") with Idaho Power Company. The Agreement was to be consistent with
contracts approved by the Commission pursuant to the State of Idaho s PURP A program
for qualifying facilities. Recently, as a result of the inability of Idaho Power and U.
Geothermal to reach agreement on the terms and conditions of the Agreement, I was
asked to provide testimony discussing those disagreements in this case.
DIRECT TESTIMONY OF KIP W. RUNYAN -
IPUC Case Nos. IPC-O4-08 and IPC-O4-
MR. RUNYAN, WHAT IS THE PURPOSE OF YOUR TESTIMONY?
My testimony will describe the negotiations leading up to the filing of the Complaint in
this case and the proposed terms and conditions in three areas in the Agreement that the
parties have been unable to resolve. Finally, I will explain what I believe to be the
appropriate resolution of each of the three disputed issues.
PLEASE DESCRIBE HOW YOUR TESTIMONY IS ORGANIZED.
My testimony will discuss, in the following order, (i) the factual background of the
negotiations, (ii) the definition of a 10 MW facility and how it affects the provisions
contained in the Agreement, (iii) Idaho Power s attempt to include provisions that
penalize U.S. Geothermal if the output of the Project in any month falls below 90% or
above 110% of the Project's estimated monthly output, (iv) Idaho Power s demand to
include a provision that allows Idaho Power to terminate the Contract if certain
deregulation activities and regulatory actions occur in the State of Idaho, and (v) what I
believe to be the appropriate resolution of the contested issues.
PLEASE PROVIDE A HISTORY OF THE NEGOTIATIONS BETWEEN U.
GEOTHERMAL INC. AND IDAHO POWER LEADING UP TO THE FILING OF THE
COMPLAINT IN THIS CASE.
Prior to my employment by U.S. Geothermal, U.S. Geothermal contacted Idaho Power in
early 2003 and was sent several standard form PURP A agreements by Idaho Power
Company. The form agreements differed primarily depending upon whether the
payments under the agreement were levelized over the contract period or non-Ievelized
(escalating over the contract term). As I stated previously, I was retained by U.
Geothermal on October 8, 2003, to assist in the negotiation and finalization of a Firm
DIRECT TESTIMONY OF KIP W. RUNYAN -
IPUC Case Nos. IPC-O4-08 and IPC-O4-
Energy Sales Agreement with Idaho Power Comp~y. The following is a brief history of
the major negotiation events:
(1 )On October 24, 2003 , U.S. Geothermal submitted to Idaho Power Company a
mark-up" of the previously provided agreement for a non-Ievelized contract.
The "mark-up" was generally consistent with Firm Energy Sales Agreements that
Idaho Power had entered into over the last decade and which were approved by
the Idaho Public Utilities Commission. The major changes from the draft
agreement provided by Idaho Power Company specifically addressed the three
contract provisions contested in this case.
(2)On November 20 2003, Idaho Power submitted to U.S. Geothermal a new draft
of the Firm Energy Sales Agreement. The draft did not include any of the
changes proposed by U.S. Geothermal in its "mark-up" of October 24 2003.
(3)On November 21 2003 , Idaho Power and U.S. Geothermal met to discuss each of
the proposed agreements. Although significant progress was made in "tidying-
" a number of non-controversial issues, no progress was made on resolution of
the three major contested issues.
(4)On December 5 , 2003, Idaho Power submitted a new draft of the Agreement
incorporating many of the changes the parties had previously agreed to, but still
containing the three contested issues, albeit in a slightly modified form.
(5)On February 20, 2004, U.S. Geothermal submitted a new draft of the Agreement
that incorporated terms and conditions agreed to by the parties, as well as
reflecting its position on the three contested issues. This draft of the Agreement is
DIRECT TESTIMONY OF KIP W. RUNYAN - 4
IPUC Case Nos. IPC-O4-08 and IPC-O4-
attached as Exhibit A and Exhibit B (red-lined) to the Complaint filed on March
, 2004.
(6)On March 4, 2004, Idaho Power delivered a new draft of the Agreement, attached
as Exhibit C to the Complaint. Although the draft contained several areas
different than the U.S. Geothermal draft of February 20, 2004, from a materiality
standpoint, the three contested issues remained the only issues that were not
resolved or resolvable.
(7)On March 5 , 2004, I had a phone discussion with Randy Allphin of Idaho Power
Company regarding the latest drafts of each of the parties. I asked Mr. Allphin if
there was any way that Idaho Power would materially modify its position relating
to the three contested issues. His response was that although Idaho Power was
always ready to discuss some form of modification, it would not consider
materially changing its position on the three contested issues.
(8)On March 25 2004, U.S. Geothermal filed its Complaint with the Idaho Public
Utilities Commission.
MR. RUNYAN, CAN YOU PLEASE DESCRIBE THE GENERAL BACKGROUND
THAT FORMED THE UNDERLYING BASIS FOR THE NEGOTIATIONS?
In 2002 the Commission issued a series of Orders (No. 29029, No. 29069 and No. 29124)
that made significant changes in the terms and conditions under which a PURP A project
could expect to enter into a st~dard form contract eligible for published avoided cost
rates in the State of Idaho. The major changes included: (i) an increase in the eligible
project size to 10 megawatts, (ii) increase in the contract length available to projects to
a twenty-year term, ~d (iii) a recalculation of the avoided cost available to eligible
DIRECT TESTIMONY OF KIP W. RUNYAN -
IPUC Case Nos. IPC-O4-08 and IPC-O4-
qualifying facilities. The changes the Commission initiated in these Orders resulted in a
general revitalization of the independent power industry in the State of Idaho and, in
particular, provided U.S. Geothermal an avenue to develop its facility at Raft River.
CAN YOU PLEASE RELATE THE CONTRACTING ACTIVITY THAT HAS
OCCURRED SINCE THE ISSUANCE OF THE COMMISSION ORDERS IN 2002.
Since the Orders were issued, I am aware of three contracts that have been submitted to
and approved by, the Commission. The contracts are for the Tiber Montana hydroelectric
facility, the Renewable Energy wood waste facility at Emmett, Idaho and the United
Materials wind facility in Great Falls, Montana. In both the Tiber and Renewable Energy
contracts, Idaho Power will pay published rates for the first 10 megawatts of "Net
Energy" delivered in any hour and market-based rates for deliveries in excess of 1 0
megawatts in any hour. In addition, all three contracts include the contested issue relative
to the 90%/110% output banding and the contract termination provisions relative to
certain deregulation scenarios in the State of Idaho. The Commission approved each of
the contracts, although it consistently stated that it considered the provisions establishing
actual generation rather than nameplate generation to meet the 10 megawatt classification
and the 90%/110% banding to establish "firmness" as "significant changes from prior
Idaho Power QF contracts." Order No. 29232 at 6. The Commission further noted that
our decision in this case sets no precedent for our future regulation of such Agreements
and should not be viewed as precluding negotiating parties from challenging the
reasonableness of such terms for inclusion in any future QF contracts.Id.
MR. RUNYAN, CAN YOU PLEASE EXPLAIN THE DISPUTE BETWEEN
THE PARTIES RELATIVE TO THE PROJECT CAPACITY?
DIRECT TESTIMONY OF KIP W. RUNYAN -
IPUC Case Nos. IPC-O4-08 and IPC-O4-
An independent power project in the State of Idaho that is a qualifying facility ("QF"
under PURP A, is eligible to receive rates published by the Idaho Public Utilities
Commission for the sale of its energy. Eligibility for those published rates is restricted by
the Idaho Public Utilities Commission to projects of 10 megawatts or less, with a contract
term of no more than twenty years. Idaho Power contends that the Commission s intent
was to limit deliveries from the project to no more than 10 megawatts in any hour during
the agreement's term. U. S. Geothermal believes the Commission s intent was to offer the
published rates to agreements for ten average megawatts or less. Stated another way, the
question is whether the Commission s 10 megawatt criteria for published rates refers to
peak capacity or total energy. Under U. S. Geothermal's proposal, output would exceed
10 megawatts during favorable ambient conditions (winter months) and would be less
than 10 megawatts during unfavorable periods of the year (summer months), but would in
total for the year average less than 10 megawatts. U. S. Geothermal believes such a
proj ect is, in fact, a 10 megawatt facility under
~y
normal rating criteria and meets the
intent of the Commission in establishing the 10 megawatt cap.
WHY DO YOU BELIEVE U. S. GEOTHERMAL'S POSITION IS CONSISTENT
WITH THE COMMISSION'S INTENT?
U. S. Geothermal will sell only the project output, defined as "Net Energy" in the
Agreement, that is qualified to receive the published QF rates. Unlike the Tiber and
Renewable Energy facilities, Idaho Power is not obligated to purchase any energy that
exceeds "Net Energy" amounts in
~y
hour. In fact, the Agreement specifically disallows
the delivery of any energy in excess of the "Maximum Capacity Amount." The
DIRECT TESTIMONY OF KIP W. RUNYAN -
IPUC Case Nos. IPC-O4-08 and IPC-O4-
Agreement proposed by U. S. Geothermal is only for the sale of energy produced by a 10
megawatt facility as defined in the Agreement.
SHOULD THE FACT THAT THE RAFT RIVER FACILITY WILL HAVE
CAP ACITY IN EXCESS OF IOMEGA WATTS MAKE IT INELIGIBLE FOR
PUBLISHED RATES?
, and Idaho Power has not previously taken the position that it should. QF Contracts
approved since 2002 have applied the published rates to the first 10 megawatts in any
hour for facilities with a capacity in excess of 10 megawatts. The record also shows that
during the course of negotiations the parties were never in disagreement on the
applicability of the published rates up to the first 10 megawatts of output.
This is not to say that the facility s ultimate capacity will not someday grow
beyond 10 megawatts, but this potential growth will depend on several factors. The first
is the ability to contract at rates that support the construction of each stage of the Project
and the second is the determination of the availability of geothermal water and the cost to
produce the supply of geothermal water for each incremental addition. I understand the
construction of these types of facilities to be modular in nature. It is reasonable to
assume that as market pricing for energy changes over time, additional wells and new
generating modules may become possible. For a number of reasons, including
permitting, common facilities utilization and overall efficiencies, it is obvious that any
growth in the electrical output of this geothermal resource would most likely be sited at
or near the currently proposed facility. In any event, U. S. Geothermal will presumably
enter into new contracts of some sort to sell any increased production that proves
economically and technically feasible. But the potential for further growth and additional
DIRECT TESTIMONY OF KIP W. RUNYAN -
IPUC Case Nos. IPC-O4-08 and IPC-O4-
sales should not be relevant in this proceeding. I see no reason why it either benefits, or
damages, the customers of Idaho Power ifU. S. Geothermal is allowed to utilize the
facility site to add incremental modules in the future for sale under separate energy
agreements if market conditions allow expansion.
IF THE COMMISSION WERE TO RULE THAT PROJECTS WITH CAPACITIES
GREATER THAN IOMEGA WATTS ARE NOT ELIGIBLE FOR PUBLISHED
RATES, WHAT WOULD BE THE LIKELY RESULT?
One possibility is that U. S. Geothermal, and possibly other developers facing similar
situations, would simply construct a series of 9.9 megawatt plants.
IS THIS IN ANYONE'S BEST INTERESTS?
I don t believe so. Nor is it consistent with what I take to be the Commission s intent to
assure that only 10 megawatts of energy from a facility is eligible for published rates.
do not believe the economic inefficiencies resulting from siting multiple 9.9 megawatt
facilities serves the interest of any of the parties in this proceeding.
HAS ANYTHING RECENTLY OCCURRED THAT CHANGES THE PARAMETERS
OF THE DISPUTE?
Yes. Idaho Power recently wrote U. S. Geothermal a letter, dated May 21 , 2004, that for
the first time claims the Project "is not entitled to published rates for QF projects smaller
th~ 10 MW" as a result of deliveries in excess of 1 0 megawatts in certain hours.
Although the letter is somewhat unclear, it appears that the intent of Idaho Power is to
change the position it has consistently taken in other agreements since 2002 and during
the course of negotiations with this Project over the last year, to now disallow published
rates for the delivery of the first 10 megawatts of output to Idaho Power. Such a change
DIRECT TESTIMONY OF KIP W. RUNYAN -
IPUC Case Nos. IPC-O4-08 and IPC-O4-
in Idaho Power s basic contracting philosophy at this late date in the negotiations will
have a substantial impact on the ability ofU. S. Geothermal to develop its Project. It
should be understood that U. S. Geothermal has proceeded over the last year, with the
expenditure of substantial investment and effort, on the basis of Idaho Power s previous
position and the Commission s treatment of facilities with a total capacity in excess of 10
megawatts.
DO YOU KNOW WHY IDAHO POWER HAS SUDDENLY CHANGED ITS
POSITION?
I don t know all the reasons, but I suspect it may be due in part to the Commission
recent criticism of Idaho Power in the Renewable Energy case, Case No. IPC-04-
IS THE RENEWABLE ENERGY DECISION APPLICABLE TO THIS CASE?
I don t believe it is. The Commission criticized Idaho Power in that case because it
bought the first ten megawatts from a 1 7 megawatt facility at posted rates, and the
balance at negotiated rates. The Commission Staff said that the price for energy in excess
of 10 megawatts lacked justification. The Commission pointed out that projects in excess
of ten megawatts are supposed to be offered rates derived from Idaho Power s IRP and
the AURORA model. In the present case, we are only proposing to sell Idaho Power ten
megawatts. There are no excess generation sales, ~d we have repeatedly pointed that
fact out to Idaho Power.
ARE THERE ANY ASPECTS OF THE RENEWABLE ENERGY DECISION THAT
ARE APPLICABLE TO THIS CASE?
Yes. The Commission ultimately approved the contract in that case primarily because the
developer was innocently ensnared by reli~ce on Idaho Power s negotiating position.
DIRECT TESTIMONY OF KIP W. RUNYAN -
IPUC Case Nos. IPC-04-08 and IPC-04-
The same innocent reliance exists in this case. U. S. Geothermal has spent substantial
amounts of money as a result of negotiations that focused solely on published rates.
should be noted that in the Renewable Energy Case, the Commission Staff filed its
testimony on April 6, 2004, and the Commission Order was issued May 5, 2004. Both
events were after the filing of the Complaint. Although I believe the U. S. Geothermal
project meets the 10 megawatt maximum criteria for published rates, if the Commission
were to rule otherwise I believe it would be appropriate to grandfather the U. S.
Geothermal Project in regard to the availability of the published rates. A major change
and the inevitable delay it would cause, in contracting at this late stage in U. S.
Geothermal Project's development would simply be unfair and unnecessary.
ARE THERE OTHER FACTORS THE COMMISSION SHOULD CONSIDER IN
RESOLVING THIS DISPUTE?
Yes. I believe acceptance of Idaho Power s position would create an unintended bias
against thermal generation projects. For example, in the case of a hydroelectric or wind
generation facility, the facility would be capable of generating the same amount of
capacity at any time during the year, subject only to the availability of motive force
adequate to meet its design capacity. In the case of thermal projects in general, ~d the
U. S. Geothermal project in particular, the project's output in any hour is limited by the
ambient temperature in existence at any specific time during the year. If the Idaho Power
interpretation of the Commission s intent on the 10 megawatt capacity limitation were
deemed appropriate, the U. S. Geothermal facility would in fact have to be designed for
an output at average ambient conditions of significantly less than 10 megawatts in order
to generate no more than 10 megawatts during the coldest hour in any year. This
DIRECT TESTIMONY OF KIP W. RUNYAN -
IPUC Case Nos. IPC-04-08 and IPC-04-
interpretation is clearly biased against thermal projects in general. You would have to
read the Commission s intent as a limitation of capacity to 10 megawatts for technologies
that are capable of relatively steady state operation, and signific~tly less than
megawatts for projects that are sensitive to actual ambient changes during the course of
the year. The net result would be that thermal projects under that interpretation would
generate signific~tly less annual energy than non-thermal projects. Such a bias
specifically against one technology, does not appear to meet the intent of the Commission
to limit the total amount of energy purchased under published rates to a level it felt was
appropriate.
DO THE TERMS AND CONDITIONS PROPOSED BY U. S. GEOTHERMAL BOTH
RECOGNIZE THE HOURLY IMP ACT OF AMBIENT CONDITIONS AS WELL AS
THE COMMISSION'S INTENT TO LIMIT THE ANNUAL ENERGY SUBJECT TO
THE PUBLISHED RATES?
Yes. In U. S. Geothermal's last draft of the Firm Energy Sales Agreement (included as
Exhibits A and B to the Complaint), U. S. Geothermal proposed that the "Maximum
Capacity Amount" (Section 1.8) be defined as 12.7 megawatts in any hour. In addition
in Article VI of the Agreement, U.S. Geothermal introduces the concept of "Maximum
Monthly Energy Amounts." This concept limits the maximum energy deliveries in any
month to a specified amount. The total of all 12 months
' "
Maximum Monthly Energy
amounts is 87 661 megawatt hours, or an average output of 10 megawatts (multiplied by
766 hours in an average year). U.S. Geothermal has gone the extra step in its proposal
to assure that the facility output delivered pursuant to this Agreement is in fact from a
megawatt facility, by contractually limiting the maximum deliveries in any month to
DIRECT TESTIMONY OF KIP W. RUNYAN -
IPUC Case Nos. IPC-04-08 and IPC-04-
those expected of a 10 megawatt geothermal facility subject to the normal influences of
its environment.
DO ES THE FACT THAT U. S GEOTHERMAL V ARIES THE "MAXIMUM
MONTHL Y ENERGY" AMOUNTS CREATE ANY UNINTENDED
CONSEQUENCES AS A RESULT OF THE SEASONAL V ARIA TION IN ENERGY
PRICES UNDER THE CONTRACT?
No. In fact, payments under the proposed contract are slightly less than payments would
be for a project that delivered 10 megawatts in every hour of the year. U.S. Geothermal'
proposal simply addresses the variance caused by actual ambient conditions, and does it
in a manner that is consistent with the Commission s intent to limit the published rates to
10 megawatt contracts.
COULD YOU PLEASE BRIEFLY EXPLAIN THE DISPUTED 90%/110% OUTPUT
PENALTY?
Idaho Power is requiring the inclusion of terms and conditions within the Agreement that
it believes add to the "firmness" of the energy it will receive pursuant to the Agreement.
The Provisions limit the payment of published avoided cost rates for energy produced by
the Project up to 110% of the monthly "Net Energy Amounts" specified in the
Agreement. Energy in any month which exceeds 110% of the monthly "Net Energy
Amount" is to be paid the current month's "Market Energy Cost" or the published
avoided cost rate in effect, whichever is lower.
In addition, Idaho Power insists on the introduction of the concept of "Shortfall
Energy" and an associated "Shortfall Energy Payment." In this case, if the Project does
not deliver at least 90% of the monthly "Net Energy Amount" specified in the
DIRECT TESTIMONY OF KIP W. RUNYAN -
IPUC Case Nos. IPC-04-08 and IPC-04-
Agreement, the Project is required to pay any resulting "Shortfall Energy Payment." The
Shortfall Energy Payment" is calculated by subtracting actual monthly deliveries from
90% of the monthly "Net Energy Amount" in the Agreement and multiplying by the
amount, if any, that that month's "Market Energy Cost" exceeds the published avoided
cost rate in effect in the Agreement.
U. S. Geothermal disagrees with the inclusion of these provisions, and proposes
that the Agreement contain the standard terms and conditions that have been used for
PURP A projects in the State of Idaho over the last decade. Those terms and conditions
rely on the fact a QF is paid only for energy actually delivered, without
~y
compensation
for capacity, to assure that the QF receives payment consistent with the published
avoided cost.
DO YOU BELIEVE THAT THE PUBLISHED RATES F AIRL Y COMPENSATE
PURP A PROJECTS FOR THE "FIRMNESS PENALTIES" IDAHO POWER IS
PRO PO SIN G?
No. The 90%/110% provisions clearly add to the value Idaho Power receives as result of
paying Agreement rates for only a relatively narrow range of Project output. In addition
Idaho Power has mitigated its potential expense if it has to purchase replacement energy
in the case of deliveries below the 90% threshold. The problem I have with these terms
and conditions is that the value added for the purchaser has not been reflected in the value
of the energy sold by the Project. The published avoided cost rates reflect the avoid~ce
of the least cost avoided utility asset. The value of these "firming" characteristics has not
been included in the calculation of the value of the avoided resource, and it is not
included in the published rates.
DIRECT TESTIMONY OF KIP W. RUNYAN -
IPUC Case Nos. IPC-04-08 and IPC-04-
HOW CAN YOU BE SURE THE VALUE OF THESE PROVISIONS HAS NOT BEEN
INCLUDED IN THE PUBLISHED AVOIDED COST?
The cost saved by avoiding the construction and operation of the next lowest cost
resource option for a utility is utilized to calculate avoided costs. In Idaho Power s case
the Commission has determined that a utility constructed ~d owned combined cycle
natural gas fired project is the so-called Surrogate Avoided Resource ("SAR"). This
determination was the result of an extensive and time-consuming process open to the
industry as a whole. The result of this effort was to establish a cost that the utility would
avoid if an independent generator provided an equivalent amount of energy in lieu of the
avoided resource. In the case of the SAR, the facility presumably owned by a utility
would recover its investment and operating expenses in the same manner as other
regulated assets. The concept of avoided pricing is designed to leave the consumer
unaffected - that is, the consumer would see the same cost regardless of whether the
resource was supplied by the utility or by an independent generator.
DO UTILITY ASSETS, AND SPECIFICALLY THE SURROGATE AVOIDED
RESOURCE, HAVE COST RECOVERY CLAUSES SIMILAR TO THOSE
FIRMING" PROVISIONS BEING PROPOSED BY IDAHO POWER?
No. The current regulatory process allows for those costs and expenses, prudently
incurred, to be recovered through the rates for sales to utility customers. I am not aware
of any process that builds in an adjustment similar to the 90%/110% provisions proposed
by Idaho Power in the recovery of investments in regulated assets.
In fact, Idaho Power currently adjusts rates on an annual basis through the Power
Cost Adjustment (PCA), subject to Commission approval, to assure it recovers its
DIRECT TESTIMONY OF KIP W. RUNYAN -
IPUC Case Nos. IPC-04-08 and IPC-04-
investment in generation even when production is signific~tly more or less than the
average production anticipated. The PCA is, at least in the case of lower than anticipated
production, the exact opposite of the treatment proposed in the "firming" concept. Under
Idaho Power s proposal, the PURP A resource doesn t get paid for its capital and
operating costs if it doesn t generate, ~d it also gets hit with a potentially enormous
penalty for potential market costs for replacement power purchases. An Idaho Power
SAR, on the other hand, recovers its capital and operating costs even if it doesn
generate, and it also recovers through the PCA, in all cases except imprudency, 90% of
any market costs incurred for replacement power.
It is very difficult for me to underst~d why the avoided utility resource and the
project under a QF contract should receive such diverse, ~d in fact opposite, recovery
treatment. Again, if those "firming" provisions are truly desired by the purchaser, the
value and cost of those characteristics should be included in the avoided cost.
ARE YOU PROPOSING THAT THE QUALIFYING FACILITY SHOULD RECEIVE
TREATMENT EXACTLY LIKE THE AVOIDED UTILITY RESOURCE?
No. I am not advocating that qualifying facilities should receive an equivalent to the
PCA or that there should be modifications to the recovery mechanisms the Commission
has established. But by the same token, QFs should not be held to a performance
standard that has not been required of the SAR. The QF contract payment terms and
conditions that have become standard in agreements over the last decade, which are
utilized in the U. S. Geothermal draft of the Agreement, were arrived at after many years
of significant consideration and hearings conducted by the Commission. The
Commission had to weigh many signific~t issues, including security provisions for
DIRECT TESTIMONY OF KIP W. RUNYAN -
IPUC Case Nos. IPC-04-08 and IPC-04-
perform~ce ~d assurances that the consumer was in fact not impacted by the supply of
the avoided energy at the avoided cost. What I am suggesting is that the unilateral
inclusion of the "firming" provisions by Idaho Power Company would dramatically alter
the balance achieved by the Commission.
IS THE 90%/110% BANDING CONCEPT CONSISTENT WITH OTHER
CONTRACTS IN TODA Y'S MARKETPLACE?
Other power purchase contracts in the marketplace today may have terms and conditions
similar to those proposed. But the issue in our case is whether the benefit and value
obtained by the purchaser in the Agreement has been properly priced into the purchase
price for the Project's output. For example , if Idaho Power were to request supply
proposals subject to these "firming" requirements, I can assure you that the bid price
proposed by prospective sellers would reflect the cost of providing a product reflecting
this "firmness.Similarly, it would not be unreasonable for Idaho Power to request in a
system sale agreement that a specified capacity be delivered in every hour over a specific
period of time with penalties and consequences if such terms were not met. It would also
be true that the cost of providing such a product would be reflected in its price. It is
totally incorrect to assume that a facility output contract should be expected to deliver
under the same terms and conditions as a system sale without appropriate adjustment in
the price of the energy delivered.
CAN YOU PLEASE CLARIFY HOW THE TRANSACTION CONTEMPLATED BY
THIS AGREEMENT V ARIES FROM YOUR EXAMPLE OF A SYSTEM SALE?
In the case of a system sale, or for that matter the calculation of an electric utility
generating capabilities, the fact that the utility s generation assets are comprised of a
DIRECT TESTIMONY OF KIP W. RUNYAN -
IPUC Case Nos. IPC-04-08 and IPC-04-
number of distinct and separate generating facilities creates a "firmness" to the overall
capacity. Even though one facility may not be able to generate for any number of
reasons, the system as a whole, in fact, has a reliable firm capacity because of the
redund~cy created by numerous independent generation sources. This is why utility
system reserve margins can be a relatively small percentage of total system capacity,
while still assuring the firm delivery of energy to utility customers. This is clearly a case
where the strength and characteristics of the whole are far superior to the sum of the
individual parts.
Similarly, in the case of the more than 60 PURP A qualifying facilities now
providing energy to Idaho Power, even though each individual facility may not be
considered "firm " the group as whole in fact delivers the benefit of a firm resource to
Idaho Power and its customers. If in fact the "firming" terms and conditions proposed by
Idaho Power were appropriate and commonplace for all individual generating assets, then
a radical recalculation of the appropriate reserve requirements for utilities should be
undertaken. In short, Idaho Power is trying to force attributes associated with systems
and tailored sales into a contract that is intended to represent avoided utility rate based
project.
DO YOU BELIEVE THAT IDAHO POWER SHOULD BE PRECLUDED FROM
CHANGING THE ESTABLISHED TERMS AND CONDITIONS OF PURP
CONTRACTS?
No. If Idaho Power believes the terms and conditions need revision, then I believe the
Commission hearing process, open to all interested parties, should be utilized to
investigate the worthiness and potential impacts of those changes. What I do believe is
DIRECT TESTIMONY OF KIP W. RUNYAN -
IPUC Case Nos. IPC-04-08 and IPC-04-
inappropriate is for Idaho Power to unilaterally force those ch~ges on individual
developers in the contracting process. The monetary and technical capabilities of Idaho
Power, in comparison to the individual developer, hardly make for a fair and productive
negotiation. Such a practice also results in the exclusion of other parties with a vested
interest in the issues from participating in the achievement of a balanced and
comprehensive solution.
COULD YOU PLEASE BRIEFLY EXPLAIN THE DISPUTED CONTRACT
TERMINATION ISSUE?
Article XXIII, Section 23., of the Agreement presented in Idaho Power s latest draft
provides that if "(1) existing Idaho Law is modified to allow persons or entities other than
Idaho Power to sell electric capacity or energy at retail in Idaho Power s exclusive
service territory, and (2) such change in law results in Idaho Power being unable to fully
recover all costs associated with this Agreement " Idaho Power may terminate this
Agreement on sixty days prior written notice.
WHAT CONCERNS DOES THIS PROVISION PRESENT TO U.S. GEOTHERMAL?
There are several issues of concern. The first is that the Agreement provides that it will
not take effect until the Commission has approved the Agreement and declared that
payments made pursuant to the Agreement shall be allowed as prudently incurred
expenses for ratemaking purposes. U. S. Geothermal has no problem accepting the
Commission s approval as a precedent to the effectiveness of the Agreement.
Having received that approval, it is unfair to U.S. Geothermal, its investors, and
its lenders to provide for the termination of the Agreement as a result of actions and
negotiations that would be conducted outside the scope of this contract. In the unlikely
DIRECT TESTIMONY OF KIP W. RUNYAN -
IPUC Case Nos. IPC-04-08 and IPC-04-
event that deregulation and retail access were to occur in the State of Idaho during the life'
of this Agreement, the negotiation, settlement and balancing of assets and liabilities as
the utility moved to deregulation would be a comprehensive solution that would
undoubtedly include many offsetting compromises and valuations. Under those
circumstances, it would make no sense for Idaho Power to have the sole right to
determine whether it was allowed full recovery for this specific Agreement, and to
subsequently determine whether this Agreement should be terminated.
HAVE ANY OF THE AGREEMENTS APPROVED BY THE COMMISSION SINCE
2002 INCLUDED THIS PROVISION?
Yes, but I believe that the acceptance of those provisions by other developers has been
based on their belief in the unenforceability of such clauses. It is simply not conceivable
that sophisticated lenders and investors would submit their future contract rights and their
ability to recover their investment to a regulatory process over which they have no
control, with the final interpretation of the outcome of that very complicated process
residing solely in the hands of the purchaser under the Agreement. In effect, despite
having received a contract accepted ~d approved by both Idaho Power and the
Commission, the seller is being asked to allow the Commission and Idaho Power the
ability to terminate the Agreement as a result of actions completely unrelated to
performance pursuant to the Contract. As a businessm~, this provision simply does not
pass the smell test as a fair, or legal for that matter, provision that Idaho Power should be
allowed to unilaterally force into the Agreement.
DIRECT TESTIMONY OF KIP W. RUNYAN -
IPUC Case Nos. IPC-04-08 and IPC-04-
DO YOU BELIEVE THAT IDAHO POWER NEEDS THIS PROVISION TO
PROTECT ITS ABILITY TO FULLY RECOVER PAYMENTS MADE PURSUANT
TO THIS AGREEMENT?
, I do not. As discussed previously, the Agreement is not effective until the
Commission approves it and declares that recovery of Idaho Power s payments shall be
allowed as prudently incurred expenses. If for some reason Idaho Power felt that, in the
course of retail deregulation, it was not allowed to fully recover all costs associated with
this Agreement, its recourse should be to the Commission or ultimately to the courts, to
protect its rights. To discard that avenue of protection and default to punishing the Seller
under the Agreement through a termination is simply indefensible, and Idaho Power
demand for such a provision is, at the very least, heavy handed and unreasonable.
IF THE COMMISSION ACCEPTS U. S. GEOTHERMAL'S POSITION ON THESE
ISSUES, WHAT IS THE APPROPRIATE REMEDY?
The U. S. Geothermal draft of the Firm Energy Sales Agreement included as Exhibit A
and B to the Complaint is consistent with past agreements approved by this Commission.
The terms and conditions of that Agreement are consistent with historical practices
address in a fair and consistent manner the Commission s intent to limit the published
rates to 10 megawatt facilities, ~d will enable U. S. Geothermal to obtain financial
commitments in the marketplace. I believe the Commission should order Idaho Power to
adopt the provisions ofU. S. Geothermal's draft agreement.
DO YOU EXPECT THE FINAL AGREEMENT TO BE EXACTLY IN THE FORM OF
THE DRAFT AGREEMENT INCLUDED AS EXHIBITS A AND B IN THE
COMPLAINT?
DIRECT TESTIMONY OF KIP W. RUNYAN -
IPUC Case Nos. IPC-04-08 and IPC-04-
No. The Agreement should be substantially in the form of Exhibit A and B to the
Complaint, but will need to be modified in several areas that should not be controversial
or contested. For example, since that draft of the Agreement was submitted, the
Commission has ruled on the applicability of provisions in the Agreement to address the
ownership of the Project's environmental attributes , such as Green Credits, Green Tags
Renewable Energy Credits (REC) ~d Emission Credits. The current draft of the
Agreement left the issue in limbo subject to the Commission s ruling. Consequently,
Article VIII should now be entirely deleted from the Agreement.
In addition, Idaho Power introduced in its final draft (included as Exhibit C in the
Complaint) Article XV, entitled "RELIABILITY MANAGEMENT SYSTEM." This
Article attempts to incorporate reliability criteria into the Agreement because Idaho
Power is the control area operator, even though the Project is located outside of Idaho
Power s service territory. It is necessary to bring the technical experts of Idaho Power
into the discussion to resolve several structural issues regarding implementation of the
reliability management standards and the appropriate vehicle to address the
responsibilities between U.S. Geothermal (the generator), the Bonneville Power
Administration (the wheeling entity), and Idaho Power (as the purchaser of the energy)
and Idaho Power (as the control area operator in that area of the State). Although these
issues need to be resolved, Mr. Allphin of Idaho Power and I both agree that they are
resolvable once we get the appropriate parties together. A meeting to discuss these issues
is now being scheduled, and it is my hope that resolution of appropriate provisions will
be achieved prior to the completion of this case.
DIRECT TESTIMONY OF KIP W. RUNYAN -
IPUC Case Nos. IPC-04-08 and IPC-04-
ARE THERE ANY OTHER MATTERS YOU BELIEVE THE COMMISSION
SHOULD CONSIDER IN RESOLUTION OF THE COMPLAINT?
Yes. As discussed in the factual background portion of my testimony, it appears that
Idaho Power may be changing its position on the pricing of the first 10 megawatts of
energy from a project with a capacity of more than 10 megawatts. As I discuss in that
portion of my testimony, if the Commission were to determine that none of a proj ect' s
output for a facility with a capacity in excess of 10 megawatts is eligible for the published
rates, I believe it would be appropriate to gr~dfather the U.S. Geothermal Project in
regards to the availability of published rates for the first 10 megawatts of output. A
major change in contracting for such projects at this late stage in the U.S. Geothermal
Project's development would simply be unfair and unnecessary.
DOES THIS CONCLUDE YOUR TESTIMONY?
Yes.
DIRECT TESTIMONY OF KIP W. RUNYAN -
IPUC Case Nos. IPC-04-08 and IPC-04-
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that on this day of June 2004, I caused to be served a
true and correct copy of the foregoing document by the method indicated below and addressed to
the following:
Jean Jewell
Idaho Public Utilities Secretary
472 W. Washington Street
O. Box 83720
Boise, ID 83720-0074
S. Mail
H~d Delivered
Overnight Mail
Facsimile
Barton L. Kline
Idaho Power Company
1221 W. Idaho Street
O. Box 70
Boise, ID 83707
S. Mail
Hand Delivered
Overnight Mail
Facsimile
Peter J. Richardson
Richardson & O'Leary
99 E. State Street, Ste. 200
O. Box 1849
Eagle, ID 83616
S. Mail
Hand Delivered
Overnight Mail
Facsimile
DIRECT TESTIMONY OF KIP W. RUNYAN -
IPUC Case Nos. IPC-04-08 and IPC-04-
KIP W. RUNYAN, P.
2233 Spring Mountain Drive
Boise, Idaho 83702
208-384-0960
Fax [phone]
KRunyan50~aol.com
1975-1977
EMPLOYMENT
1977-1988
1988-1989
1989-1997
1997-1999
Morrison-Knudsen Company
Provided Engineering support for bid preparations and field engineering support for several projects
including the Kahe Hawaii Cooling Water Outfall and the Prudhoe Bay power plant prefabrication.
Idaho Power Company
Participated in a variety of roles in support of permitting, design and construction of various power
plants and related projects. Major project involvement is listed in chronological order below:
...
Office Engineer and Assistant to the Project Manager during the construction of the fifth
electric generating unit (260 mw) at Idaho Power s Brownlee Reservoir.
...
Project Manager and Resident Engineer in charge of design, contracting and construction of the
Hells Canyon Fish Trap Project in support of the company s anadromous fish mitigation program.
...
Analysis of the financial and engineering feasibility of numerous small hydroelectric generating
sites. The evaluations supported corporate investigations into possible subsidiary formation.
...
Participated in various roles in support of permitting, licensing and design of the North Fork of
the Payette River Hydroelectric Project and the Snake River Wylie Hydroelectric Project.
...
Lead Engineer evaluating financial, regulatory and political influences on corporate options for
relicensing and expansion of the Swan Falls Hydroelectric Project.
General Manager, Resource Development Division, Idaho Power Company
Directed the development and/or acquisition of electrical generation projects to meet Idaho Powers
future generation resource requirements.
President, CEO and member of the Board of Directors, Ida-West Energy Company
Founding employee oflda-West Energy Company. Ida-West Energy Company is a wholly
owned subsidiary of the Idaho Power Company, organized to develop, acquire and operate independent
electrical generation resources. Responsibilities included: Corporate start-up, executive management
and the ongoing direction of development, permitting, design, power sales contracting, financing,
construction and operation activities of the corporation. During this period, Ida-West developed or
acquired interest in thirteen hydroelectric projects (72mw s) operating in the western United States.
Ida-West also developed and fully permitted the Hermiston Power Project, a 460 mw natural gas fired
project, currently under construction, located in Hermiston, Oregon. In 1997, Ida- West had interests in
over $100 000 000 in operating assets and gross sales of$II OOO OOO annually.
Senior Vice-President, Delivery, Idaho Power Company
Senior Vice-President for the ongoing strategic planning and operations ofldaho Power Company
Delivery Business Unit. The business unit included over 1 000 employees dedicated to the operation of
Idaho Powers electrical transmission and distribution systems, substations, metering, billing and
customer service. The business unit operated under a combined annual capital and operations budget of
over $160 000 000.
2001-Present Independent consultant providing engineering, financial and general business services to the
independent energy marketplace.
EDUCATION
BSCE, University of Idaho, 1975
Stanford Graduate School of Business, Stanford Executive Program, 1997
Numerous power industry related seminars and training programs
ORGANIZATIONS
Licensed Professional Engineer, State ofldaho (#4013)
Member of American Society of Civil Engineers
Former Member of American Concrete Institute
Former Member of Board of Directors of the Western System Coordinating Counsel (WSCC)
Exhibit No.
Case Nos. IPC-E-O4-O8 and IPC-E-O4-
K. Runyan, U.S. Geothermal
June 9, 2004