20060626Comments.pdf

McDevitt & Miller LLP
Lawyers
[phone]
[phone] (Fax)
420 W. Bannock Street
O. Box 2564-83701
Boise, Idaho 83702
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Chas. F. McDevitt
Dean 1. (Joe) Miller
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June 26, 2006
Via Hand Delivery
Jean Jewell, Secretary
Idaho Public Utilities Commission
472 W. Washington St.
Boise, Idaho 83720
Re: Case No. IPC-05-
Dear Ms. Jewell:
Enclosed for filing in the above matter please find the original and seven (7) copies of
Comments of Magic Wind, LLC.
An additional copy of the document and this letter is included for return to me with your
file stamp thereon.
Very Truly Yours
(Mf~ttljofier LLP
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OR\G\NAL
Dean J. Miller ISB #1968
McDEVITT & MILLER LLP
420 West Bannock Street
O. Box 2564-83701
Boise, ID 83702
Tel: [phone]
Fax: [phone]
i oe~mcdevi tt -miller. com
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Attorneys for Magic Wind LLC
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE PETITION OF
MAGIC WIND LLC TO DETERMINE
EXEMPTION STATUS
(Corrected Caption)
Case No. IPC-O5-
COMMENTS OF MAGIC WIND
LLC
COMES NOW Magic Wind LLC (Magic Wind), by and through its counsel of record
and in response to the Commission s Notice of Petition, dated June 2 2006, submits the
following Comments:
Introduction and Backe:round
In this Motion for Declaratory Order (Motion), Magic Wind asks the Commission to
approve an alternative method for determining the reduction in price paid to a wind project when
generation from the project falls outside the "90-110 performance band". As discussed in more
detail below, Magic Wind refers to this alternative method as the "Modified PacifiCorp
Method.
As the Commission recalls, the 90-110 performance band grew out of Case No. IPC-
04-US. Geothermal v. Idaho Power Company. In Final Order No. 29632, the Commission
COMMENTS OF MAGIC WIND LLC- 1
determined that when the QF fails to deliver 90% of the monthly commitment amount all
delivered energy should be priced at 85% of market price or the contract price, which ever is less
Market Method"
In the intervening time since issuance of Order No. 29632 (November, 2004), the Market
Method has proved troublesome to project developers. Some financial institutions and other
capital sources, all of whom put a value on predictability of potential liability, have worried that
the relative unpredictability of future market prices creates a risk that is difficult to quantify, thus
making their investment less certain of recovery. Others have worried that a reduction of market
price by a seemingly arbitrary fifteen percent (15%) results in payments ofless than avoided
costs, in violation of PURP
As a result, project developers and some utilities, have explored options to the Market
Method which would honor the spirit and intent of the 90-110 performance band, but would
reduce the uncertainty inherent in the Market Method and would result in payments more
consistent with the full avoided cost concept. The first such effort was in Case No. PAC-05-
Application of PacifiCorp for Approval of Power Purchase Agreement with Schwindeman Wind
LLC filed August 15, 2005. Initially, PacifiCorp and Schwindeman proposed an alternative to
the 90-110 performance band known as the Mechanical Availability Guarantee (MAG). The
Commission, however, concluded that the MAG proposal was not comparably rigorous to the
90-110 performance band, and rejected it. (See Order No. 29880, dated October 4, 2005).
PacifiCorp and Schwindeman then explored options that would retain the 90-110
performance band, but decouple it from highly volatile market prices. The result was what is
now referred to as the "PacifiCorp Method." In contrast to the Market Method, the PacifiCorp
Method computed a schedule of fixed rates to be paid for non-conforming energy as a substitute
COMMENTS OF MAGIC WIND LLC- 2
for market-based rates. (See Joint Motion for Approval of Amended Agreement, Case No.
PAC-05-, dated January 27 2006). The PacifiCorp Method produced prices reflecting an
approximate 17 percent discount from published avoided costs. While the discount is
substantial, it is predictable, in contrast to the Market Method.
The Commission Staff supported the PacifiCorp method and explained it this way:
One way to rationalize the discount is to assume that a simple cycle combustion
turbine would be used as a backup to a wind project whenever the wind project'
generation could not be accurately predicted. One of the things a utility does not get if it
accepts unpredictable energy from a wind project is dependable capacity. It is reasonable
to assume that backup capacity to a wind project would be provided by a SCCT, the
cheapest capacity available. The cost of capacity of a SCCT is equal to its capital cost
and its fixed O&M cost. In addition, to the extent that the variable O&M costs for a
SCCT are higher than for a CCCT, it is reasonable to assign those incremental costs as
SCCT capacity costs.
The source for the capital and O&M costs of a SCCT is PacifiCorp s 2004
Integrated Resource Plan Update. The 2004 IRP was accepted by the Commission.
Reference Case No. PAC- 05-, Acceptance of Filing issued August 26 2005. The 2004
IRP Update was submitted in 2005 by PacifiCorp to reflect significant changes in the
Company s plan. However, while the Update was submitted, the Staff did not formally
review the Update nor did the Commission issue an order accepting or acknowledging
the Update. Nevertheless, Staff believes that the revised resource costs included in the
Update are reasonable, and reflect the most up-to date costs available for a new SCCT
resource in PacifiCorp s service territory.
Over time, the Non-Conforming Energy Prices could turn out to be higher or
lower than market prices. Staff believes that the Non-Conforming Energy Prices are a
reasonable proxy for Mid-C market index prices and represent a fair price to be paid for
energy that cannot be delivered predictably. In addition, unlike market prices, they offer a
fixed, known set of prices that will be paid over the life of the contract for energy
delivered outside of the 90/110 percent performance band"(See, Staff Comments dated
March 8 , 2006, Case No. PAC-05-, pg 6-7).
While the PacifiCorp Method produced an end result that was acceptable to the parties
for negotiation purposes, the method contained a technical flaw-it included variable O&M
costs in the costs allocated to capacity value. These costs were based on a simple cycle
COMMENTS OF MAGIC WIND LLC- 3
combustion turbine (SCCT). This defect was explained in the Schwendiman case in an informal
filing by the Idaho Farm Energy Association and its consultant Dr. Don Reading:
There is a theoretical flaw in PacifiCorp s avoided cost calculation methodology.
The Company includes variable O&M in the SCCT's fixed costs. While this is consistent
with the way PacifiCorp calculates avoided capacity prices in Utah and Oregon, it is
simply incorrect. In economic terms, the task here is to determine the change in cost due
to a change in demand (kW). Operating costs (kWh) are not part ofthis calculation. The
change in variable O&M due to a change in kW is zero. There is no justification for
treating variable O&M costs differently than variable fuel costs (See Exhibit B to
Motion for Declaratory Order, pg 7
The magnitude of error produced by including variable O&M costs in fixed cost varies
depending on the assumed capacity factor ofthe peaking resource. In the case ofPacifiCorp the
assumed capacity factor is 18%, while in the case of Idaho Power the assumed capacity factor is
59%. Accordingly, when applied to Idaho Power, the magnitude of error produced by the
incorrect treatment of variable O&M costs in the PacifiCorp Method must be corrected.
In light of this, consultants for Magic Wind recalculated surplus energy prices for Idaho
Power using the PacifiCorp Method, corrected for the proper treatment of variable O&M costs.
Magic Wind now refers to this method as the Modified PacifiCorp Method. Attached to the
Motion as Exhibit C are spreadsheets showing the calculation of surplus energy prices using the
Modified PacifiCorp MethodI
On April 5 , 2006 Magic Wind tendered to Idaho Power a proposed Firm Energy Sales
Agreement containing prices for surplus energy calculated by the Modified PacifiCorp Method.
Idaho Power has refused to execute a Firm Energy Sales Agreement that incorporates prices
calculated by the Modified PacifiCorp Method, thus necessitating the filing ofthis Motion.
I Electronic copies with formulas intact have been provided to Commission Staff and Idaho Power Company.
COMMENTS OF MAGIC WIND LLC- 4
The Commission should approve the Modified PacifiCorp Method as an Alternative to the
Market Method
In other aspects of administering the PURP A regulatory framework in Idaho, the
Commission has made sensible mid-course adjustments as better knowledge is accumulated and
as circumstances change. The Commission for example has adjusted its pricing methodologies
as abilities to predict elements such as gas prices became more sophisticated. In short, the
PURP A regulatory framework is not static regime. As circumstances change, regulatory policy
can change.
So it is with the pricing methodology for energy falling outside the 90-110 performance
band. As noted above, experience has shown that the Market Method produces an undue amount
of uncertainty risk. And, the fifteen percent (15%) reduction to market price appears inconsistent
with the avoided cost concept. A method, such as the Modified PacifiCorp Method, which
calculates fixed prices based on capacity not delivered, eliminates this uncertainty risk, even
though under some scenarios it produces price discounts greater than the Market Method. It is
also more clearly faithful to the avoided cost concept.
Unlike the Market Method, the Modified PacifiCorp Method, is consistent with and is
derived from the SAR avoided cost calculation methodology and the utility s Integrated
Resource Plan. As can be seen from Exhibit C, accompanying the Motion for Declaratory Order
the Modified PacifiCorp Method starts with costs reported by Idaho Power in its 2004 IRP with
respect to its Bennett Mountain SCCT. It is thus consistent with the current avoided cost
methodology which bases avoided costs on a SCCT as the surrogated avoided resources.
accepts, without dispute, costs reported by Idaho Power Company. The method then develops
prices for deliveries outside the 90-110 band, consistent with the theory that failure to deliver
within the band is a failure to deliver capacity. Finally, the method takes into account the
COMMENTS OF MAGIC WIND LLC- 5
seasonalization factors in Idaho Power s current avoided cost methodology. These prices are
then transported as a schedule of fixed prices for each contract year into the Firm Energy Sales
Agreement. (See Exhibit A to Motion for Declaratory Order, paragraph 7.2).
Additionally, the Modified PacifiCorp Method provides an energy-only price for surplus
energy deliveries. The concern about "lack of predictability" and "variability" identified by the
Commission in US. Geothermal can also be stated as a concern that wind QF's may be less able
to deliver promised capacity than other QF resources. A method that subtracts capacity price
from total avoided costs to produce an energy-only price as the basis for pricing surplus energy is
fully consistent with the intended effect of the 90-110 performance band.
Idaho Power s Objection to the Modified PacifiCorp Method is Without Merit
Idaho Power s objects to deviation from the Market Method on the grounds that
" . . ..
elimination of market prices from consideration will shift costs and risks to customers that
should appropriate be borne by Magic Wind and such shift in inconsistent with PURP A" (Idaho
Power Answer to Motion for Declaratory Order, Dated May 8, 2006). Idaho Power advanced
and explained in more detail this objection in Comments filed in the Schwindeman case. In
response, PacifiCorp fully analyzed and refuted this contention. PacifiCorp s response to this
contention is set forth below:
PacifiCorp respectfully disagrees with IPC's contention that the pricing
methodology for non-conforming energy contained in the power purchase agreement
executed by PacifiCorp and Schwendiman Wind LLC ("Schwendiman PP A") shifts
financial risk from the QF developer to PacifiCorp ratepayers, relative to IPC's pricing
approach in its standard power purchase agreement ("PP A"'). IPC correctly observes, in
pages 4 and 5 of its comments, that in months when market prices (defined in the IPC
PPA as 85% of non-firm Mid-C index price) are less than the PacifiCorp off-peak energy
price (defined as PacifiCorp s published energy-only avoided cost price in Idaho),
PacifiCorp customers will pay a QF more for non-conforming energy than they would
have paid under the pricing methodology included in the IPC PP A. Conversely, when
market prices are higher than PacifiCorp s off-peak energy price, its customers will pay
less than they would under Idaho Power s approach. However, the conclusion IPC draws
COMMENTS OF MAGIC WIND LLC- 6
from this difference-that its approach is better for utility customers-depends upon several
subjective assumptions that cannot be substantiated or verified. For one matter, it is not
always appropriate to assume that the market prices from the last several years are
indicative of future market prices. One only has to look at the energy crisis of2000-01 as
a clear example of that. For another, IPC's conclusion assumes that the QF's behavior
(e.g. scheduling algorithm and risk management strategies) will be identical under the
two approaches-another unverifiable assumption. PacifiCorp believes (as Schwendiman
has asserted to it) that Schwendiman s monthly delivery estimates will be more accurate
under the Schwendiman PP A than they would be under the IPC PP A because the added
risk from using indexed prices for non-conforming energy in the IPC PP A would cause
Schwendiman to low-ball its estimates. In other words, fear of the unknown inherent in
the IPC PP A could change Schwendiman s scheduling priority, from accurate prediction
to under-prediction in order to avoid under-delivery price risk. For both reasons
PacifiCorp believes it is more accurate to say that its approach changes the allocation of
risks associated with under-or over-deliveries compared to IPC's PP A; whether the net
result ofthis difference favors PacifiCorp s customers or the QF, however, is
unknowable. The important point, in PacifiCorp s opinion, is that its pricing methodology
for non-conforming energy, like IPC', gives the QF a strong incentive to accurately
schedule its Net Output (regardless what market prices may be in the future) while
limiting the maximum potential liability of the ratepayer." (Reply Comments of
PacifiCorp, Case No. P AC-05-, dated March 22, 2006).
Likewise, in the Schwindeman case, Commission Staff disagreed with Idaho Power and
observed that prices derived by the PacifiCorp Method are, in themselves, a reasonable
approximation of market prices:
Over time, the Non-Conforming Energy Prices could turn out to be higher or
lower than market prices. Staff believes that the Non-Conforming Energy Prices are a
reasonable proxy for Mid-C market index prices and represent a fair price to be paid for
energy that cannot be delivered predictably. In addition, unlike market prices, they offer a
fixed, known set of prices that will be paid over the life of the contract for energy
delivered outside of the 90/110 percent performance band." (See Staff Comments, Case
No. P AC-05-09 dated March 8 , 2006).
The Modified PacifiCorp Method is Superior to the PacifiCorp Method
As discussed above, while the PacifiCorp Method produced prices acceptable in
negotiations between the parties in Schwindeman the method contains the theoretical flaw of
including variable O&M costs in fixed costs which has the effect of reducing the price from non-
conforming or surplus energy.
COMMENTS OF MAGIC WIND LLC- 7
Dr. Reading s basic point-that in a pricing structure which includes both fixed and
variable costs, fixed costs should be assigned to the fixed cost component of the price and
variable costs to the variable cost component-is so obviously correct that further elaboration is
not reqUIre.
As explained by Dr. Reading, if not corrected, the flaw will produce a significant error in
calculating surplus prices for Idaho Power Company:
The size of the PacifiCorp error is determined by the capacity factor assumed for
the SCCT. PacifiCorp uses an 18% capacity factor based on their 2004 IRP
Update. If this error isn t corrected, it will have a far larger impact if the method is
applied to Idaho Power. Idaho Power assumes an SCCT capacity factor of 59%
in their 2004 IRP. For 2006, the PacifiCorp calculation reduces the Non conforming
Energy Price byl.86 $/MWh. If applied to Idaho Power, the error will equal 2.
$/MWh." (Exhibit B , pg. 8 of Motion for Declaratory Order).
The error in the PacifiCorp Method is not just a matter of theoretical purity. If applied to
Idaho Power it would seriously distort the schedule for prices for non-conforming energy.
Conclusion
For the reasons and authorities cited herein, Magic Wind respectfully requests that the
Commission enter its order declaring and determining that Magic Wind is entitled to receive
from Idaho Power Company a Firm Energy Sales Agreement that establishes for surplus energy
using the Modified PacifiCorp Method.
2 In setting retail rates for public utilities there may be equitable reasons for departing from this principle, but in the
context of the prices at issue here there is no reason-economic, equitable or otherwise-for departure from the
principle.
COMMENTS OF MAGIC WIND LLC- 8
DATED this 11-day of June, 2006.
COMMENTS OF MAGIC WIND LLC- 9
McDEVITT & MILLER LLP
Dean J. Miller
McDevitt & Miller LLP
420 W. Bannock
Boise, ID 83702
Phone: [phone]Fax: [phone]
Attorneys for Magic Wind LLC
CERTIFICATE OF SERVICE
I hereby certify that on the ~ay of June, 2006, I caused to be served, via the
method(s) indicated below, true and correct copies of the foregoing document, upon:
Barton L. Kline
Idaho Power Company
1221 West Idaho Street
O. Box 70
Boise, ID 83707
BKline~idahopower.com
Hand Delivered
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Fed. Express
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McDEVITT & MILLER LLP
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COMMENTS OF MAGIC WIND LLC- 10