20070420Decision memo.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
CO MMISSI 0 NER SMITH
COMMISSIONER HANSEN
COMMISSION SECRETARY
COMMISSION STAFF
LEGAL
FROM:SCOTT WOODBURY
DATE:APRIL 19, 2007
SUBJECT:CASE NO. IPC-07-04 (Idaho Power)
PETITION TO REVISE PUBLISHED AVOIDED COST RATES
(A) TO INCLUDE A DAILY LOAD SHAPE
(B) TO CLARIFY RULES REGARDING PUBLISHED RATE
ELIGIBILITY -- DISAGGREGATION
On February 6, 2007, Idaho Power Company (Idaho Power; Company) filed a
Petition with the Idaho Public Utilities Commission (Commission) requesting authority to revise
its published avoided cost rates for qualifying facilities (QFs) under Sections 201 and 210 of the
Public Utility Regulatory Policies Act of 1978 (PURP A) to reflect Idaho Power s daily load
shape and recognize the difference in value between energy delivered by QFs during heavy load
hours (HLH) and energy delivered during light load hours (LLH). As reflected in the
Company s Petition, this revision would not change the computation of avoided cost but it could
change the total revenues received by QFs depending on when during the day they deliver
energy.
The Company in its Petition also seeks to clarify the rules governing the entitlement
to published rates to prevent QF projects capable of delivering more than 10 aMW per month
from artificially restructuring into smaller projects in order to qualify for the published avoided
cost rates.
Daily Load Shape Adjustment
Idaho Power reports that since the early 1980s, when PURP A was first implemented
in Idaho , the Commission shaped Idaho Power s QF purchase rates to address the difference in
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energy values between the various seasons of the year. The seasonalization of the avoided cost
rates recognizes that energy delivered by QFs has different values based on when it is delivered.
Similar to seasonalization, Idaho Power contends that energy provided by QFs has
different values based on how it can help meet the Company s daily peaks in load. This
difference in value between heavy load hours and light load hours, the Company states, was the
basis for the daily shape adjustment that was approved for A vista Corporation in Commission
Order No. 30111 issued in Case No. A VU-06-04. The Company s proposed changes to the
published rates to reflect the daily shape adjustment are reflected in Attachment 1 to its Petition.
Disaggregation of Large QFs Into Smaller Projects
Addressing its concern that QF projects capable of generating more than 10 aMW per
month will choose to create multiple legal entities to reconfigure themselves into multiple
smaller projects in order to qualify for the historically higher published rates, Idaho Power
proposes to clarify its rules for published rate eligibility to preclude disaggregation.
Idaho Power states that the disaggregation issue was recently addressed in the
PURP A avoided cost rate proceedings before the Public Utility Commission of Oregon (Docket
No. UM-1129). The parties to that proceeding, the Company states, settled the disaggregation
issue by negotiating a stipulation which was approved by the parties and presented to the Oregon
PUC for approval. The stipulation was signed by all of the utilities, the Oregon Department of
Energy, the Staff of the Oregon Public Utility Commission, Sherman County and the lR.
Simplot Company. No party to that case, the Company states, opposed the stipulation. In Order
No. 06-538 and Order No. 06-586, the Oregon PUC approved the settlement stipulation that
defined those small cogeneration facilities or small power production facilities eligible to receive
Oregon "standard rates." Idaho Power submits a proposed rule set forth in Petition Attachment 2
proposing language similar to that approved in Oregon.
On February 16, 2007 , the Commission issued a Notice of Petition and Modified
Procedure in Case No. IPC-07-04. The deadline for filing written comments was March 23,
2007. Comments were filed by PacifiCorp dba Rocky Mountain Power, U.S. Geothermal, Inc.
and Commission Staff. On April 9, 2007, Idaho Power filed reply comments. The comments
can be summarized as follows:
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Rocky Mountain Power
Rocky Mountain Power (RMP) supports Idaho Power s Petition and notes its
intention to seek approval of similar changes in the near future. RMP requests that the
Commission acknowledge in its Order that the type of changes proposed by Idaho Power are
applicable to all Commission regulated electric utilities. RMP agrees with Idaho Power that
energy has a different value based on seasonal and time of day deliveries. Failing to recognize
this difference, it states, could result in either under or over-payment for the value of the power.
Although agreeing with Idaho Power s method of calculating the on-peakloff-peak
differential, RMP notes that due to geographic differences among utilities it may be appropriate
to use different market hubs or combination of market hubs.
s. Geothermal
The comments of u.s. Geothermal (USG) address the complexities, costs and
unintended adverse outcomes of the proposed changes. The remedies proposed by Idaho Power
for what the Company perceives to be inadequacies in the existing QF program, USG states, are
contrary to existing law, clumsy, unnecessarily broad, mistargeted, likely to result in significant
and unintended outcomes, and are wholly inappropriate. The risks inherent in the Company
proposal, it contends, are likely to produce outcomes exactly opposite of the intended results.
Many of the potential outcomes would result in costs and inefficiencies, without corresponding
benefits, contrary to the interest of the state and its electrical customers.
USG makes the following recommendations, which it states address the Idaho Power
stated concerns, without creating costs and outcomes, which do not serve the public interest:
1. Standard form power sales agreements for QF projects meeting the
Commission s requirements shall include a representation and covenant
by the QF that "the project is a base load facility and will be continuously
operated as a base load facility throughout the term of the contract."
the Company feels that a QF is operated in a manner inconsistent with the
representation, it could declare a breach and seek appropriate contractual
and legal remedies.
2. The Company should be directed to pursue, through actions similar to its
filing of Case No. IPC-07-, the remedies for which it believes are QF
rate inequities through appropriate QF rate filings with the Commission.
S. Geothermal notes that the Idaho State Legislature with its recent adoption of the
2007 Idaho Energy Plan (Plan) specifically cites the importance of developing in-state renewable
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energy projects to provide a "secure, reliable energy system by reducing dependence on remote
resources " and to "provide fuel diversity, reducing Idaho s exposure to high and fluctuating
natural gas, oil and coal prices.In addition, the Plan recognizes that "in-state renewable
resources contribute to economic growth by creating jobs and tax revenue in Idaho, frequently in
rural areas that are most in need of economic stimulus." USG contends that the changes
proposed by Idaho Power will increase the complexity and cost of QF projects, and will apply an
arbitrary, restrictive limit on the location of QF projects, contrary to the 2007 Idaho Energy Plan
and the expressed will of the Legislature.
Finally, USG notes that the changes resulting from the Oregon case cited by Idaho
Power were only accomplished through the acquiescence of all parties. U.S. Geothermal
strongly disagrees with the Company s proposed changes and recommends that the Commission
dismiss them in their entirety.
Daily Load Shape Adjustment
USG contends that the costs required to meet Idaho Power s daily load shape
adjustment proposal, as well as the risks created, will not be offset by any resulting benefits
unless a facility under the current rules was intentionally operated in other than a base load
manner, with its output weighted to light load hours. It is just as likely, perhaps more likely,
USG contends, that an inaccurate valuation of period prices will result in higher costs to
electrical customers than a QF program based on compliance with base load operations. Adverse
behavior aimed at maximizing revenues, USG contends, is actually more likely to occur under
Idaho Power s proposal than it is under the current rate structure. In addition, USG contends that
the proposal will most adversely impact the smaller qualifying facilities, QFs that are of the least
concern to the Company and who could least afford the administrative burdens and direct costs.
USG contends that a more direct approach would appear to be a contractual
representation by the QF "that it is a base load facility and will be continuously operated during
the terms of the contract as a base load facility.
(A) Setting Heavy Load and Light Load Values:
Idaho Power in its proposal has utilized the average Mid Columbia heavy load and
light load transactions for the period January 1 , 2003 through January 20 , 2007. The
appropriateness of that period in establishing values, USG contends, is unsubstantiated and many
questions are left unanswered. Does this approach adequately represent "Idaho Power s daily
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load shape" over the anticipated contract period? Why not a shorter or longer period of historical
transactions? Why not a forecasted heavy load and light load price differential for future years?
Does the approach adequately reflect the difference in heavy load and light load periods during
different seasons within the year? Can a non-base load project operate in a manner that is
detrimental to the Company s customers if the values are not reflective of true market costs?
USG contends that the broad and diverse nature of the QFs within Idaho Power s QF
program, has in the past and will in the future, average out any daily period production variances
as long as facilities are not allowed to intentionally operate in a non-base load manner. The
Company s proposal, USG contends, is a complex solution, subject to unintended outcomes
which is being targeted at a very narrow issue that can be more effectively addressed through
contractual terms and conditions.
(B) Costs of the Proposal:
USG contends that the Company s proposal will reqUIre additional metering,
recording, payment processing and administrative management for implementation. USG notes
that Idaho Power has provided no cost benefit analysis information. USG recommends that
Idaho Power be required to provided the Commission with an implementation plan, including
costs for both the utility and the QF, prior to any approval and implementation of the proposal so
that a rational analysis of costs and benefits can be obtained.
Disaggregation of Large QFs Into Smaller Projects
As stated in the Company s Petition, Idaho Power is concerned that "larger wind
powered QF projects will choose to create multiple legal entities to reconfigure themselves into
multiple smaller projects in order to qualify for the historically higher published rates." The
Company s solution to this concern is not a discussion of appropriate rates, but the imposition of
an arbitrary ownership restriction on projects located within a "five-mile radius.
Geothermal contends that such a rule would conflict with federal law and have significant
impacts on the re-contracting of existing projects, the future development of new projects and on
overall industry efficiencies. USG notes that federal regulations provide that adjacent facilities
shall be considered a single facility only if they are located within one mile of each other.
Reference 18 C.R. ~ 292.204(a)(2).
S. Geothermal citing three examples (all hydro projects) contends that the
Company s proposal will also preclude the re-contracting of existing QF projects located within
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five miles of each other and having common ownership. The rules proposed by Idaho Power
USG contends, may also significantly impact the development of new QF projects. How does
the Company s proposed rule, it queries, serve the public good?
USG further notes that ownership interest over the life of QF facilities may change
for a number of reasons: consolidation, foreclosures, corporate market entry or exit, and residual
contractual or leasehold rights to mention a few. None of these potential changes, USG notes
has anything to whatsoever to do with the Company s stated purpose in establishing the proposed
rule. The ownership transfers may further well be in direct response to the efficiencies that the
market will require in order for the industry to be viable on an ongoing basis. The indirect
impacts of the Company s proposed rule on the efficiency of the industry could be substantial
and in any case wasteful, USG contends, without producing any material benefits for either the
QF or the electrical customers.
Commission Staff
Daily Load Shape Adjustment
Staff recommends that a daily shape adjustment be approved, but that the amount of
the adjustment be $7.28 rather than the $11.63 proposed by Idaho Power. Idaho Power
proposed amount of $11.63 per MWh as the daily shape adjustment is based on the weighted
difference in value between on-peak and off-peak prices (the "spread"). To calculate this value
Idaho Power accumulated historical daily volumes and prices for all Mid-Columbia firm heavy
load hour (HLH) and light load hour (LLH) transactions for January 1 , 2003 through January 20
2007 provided by Dow Jones. Staff believes the amount of the adjustment proposed by Idaho
Power is too high. First, Staff does not believe that it is appropriate to compute a weighted
spread based on daily trading volumes because daily prices are completely independent of daily
volumes. If a non-weighted average spread were computed instead, the adjustment would be
$8.90 per MWh. Second, an examination of the daily price data shows that the daily spreads
exceed the $11.63 proposed by Idaho Power only 23% of the time. This is because the average
of the daily spreads is affected by a few days during the year when the difference between heavy
and light load hour prices is extreme. Staff proposes that the daily shape adjustment amount be
computed as the median of the historic values since January 1 , 2003. The median of the historic
values is $7.28. Staff believes that the median value better represents the difference in value
between heavy and light load hours because, by definition, exactly half the time the spread is
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greater and half the time the spread is less. Furthermore, because the spreads are not symmetric
Staff believes the median is a better representation of the expected spread than either the
weighted or the non-weighted average spread. Staffs comments are accompanied by an
attachment showing both an exceedance curve and a histogram depicting the frequency of the
historical spreads.
Another reason for adopting an adjustment lower than the amount proposed by Idaho
Power, Staff contends, is because the Company s proposed adjustment, when combined with the
seasonal adjustment already being applied, would create an extremely wide range of prices. For
example, for a 20-year levelized contract, the minimum price would be $41.11 during light load
hours in the spring and the maximum price would be $81.08 in heavy load hours during the
summer. This is nearly a two-fold difference in price. Staff believes that the daily shape
adjustment, at least initially, should be somewhat conservative.
Staff notes moreover, that the daily shape adjustment recently approved for A vista in
Case No. A VU-06-04 was only $5 per MWh. By Staffs and Avista s own admissions, this
value was conservative; nevertheless, it is less than half of Idaho Power s proposed adjustment
amount.
In comments submitted in the A vista case, Staff expressed several concerns. One of
the concerns was that a daily shape adjustment could introduce greater uncertainty in the
monthly payments wind generators would receive because many wind generators have no way of
accurately knowing how many kilowatt-hours their project will produce in on-peak versus off-
peak hours. Another concern raised by Staff was the need for hourly metering capability at all
future projects. Staffs final concern was that adoption of a daily shape adjustment introduces
additional complexity into an already fairly complex system of avoided cost rates. While those
stated concerns are equally valid in this case, Staff still believes the advantages of a daily shape
adjustment outweigh the disadvantages. Staffs proposed changes to the published rates to
reflect the daily shape adjustment are reflected in Attachment 2 to its comments.
Disaggregation of Large QFs Into Smaller Projects
Staff recommends denial of the Company s proposal to clarify its rules for published
rate eligibility to preclude disaggregation. Staff believes that project developers will devise ways
to circumvent the proposed rules, making them ineffective in accomplishing their intended
objective. In a production request, Staff inquired of Idaho Power about the likely effect on
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existing projects if the definition had been in place, since many wind projects are clustered in the
same area. The Company responded that it ". . . cannot not say for certain that some existing
wind developments might have been precluded from obtaining contracts under the proposed
definition.Idaho Power also went on to say "Of course, if the definition had been in place
before the 18 wind Firm Energy Sales Agreements were signed, Idaho Power expects that the
wind QFs could have been restructured to avoid any problem with the definition." Staff believes
it would be bad policy to adopt a new rule if there are serious doubts from the beginning about
whether it will actually achieve its intended objective.
Idaho Power Reply Comments
Daily Load Shape Adjustment
In response to comments filed regarding the Company s proposed daily load shape
adjustment Idaho Power believes that Staff s recommended method for computing the heavy
load hour/light load hour price differential represents a reasonable and probably better approach
in light of the fact that the Company is currently proposing other rate changes to reflect
integration costs for wind QFs.
Idaho Power contends that u.S. Geothermal does not understand the rationale
underlying the Company s daily load shape adjustment proposal. The Company s intent in
proposing a HLH/LLH rate differential is not to encourage or discourage base load operation by
QFs. The Company s primary purpose instead is to more accurately value the energy being
delivered. It is difficult for the Company to understand how U.S. Geothermal's alternative
proposal, with its remedy for breach of the provision being litigation, presents a less complicated
approach. Idaho Power believes that its approach is self-executing and does not require litigation
to provide the intended result.
Regarding u.s. Geothermal's express concern that the rate differential proposed by
Idaho Power will give incentives to QFs to modify the way they operate their projects and skew
their deliveries to heavy load periods, Idaho Power does not see that as a bad result. However
Idaho Power s experience over the past 20 years has been that QFs will generate all the energy
they can all the time.
Regarding U.S. Geothermal's concern that heavy load hour/light load hour periods
identified today may not reflect the value of energy in future years, Idaho Power concurs that it
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would be prudent to periodically review the price differential between and if necessary, adjust
the rate differentials to reflect changes in "the spread.
u.s. Geothermal argues that Idaho Power s proposal will require additional metering,
recording, payment processing and administrative management for implementation and, as a
result, QF program costs will increase. Idaho Power contends that U.S. Geothermal is incorrect.
Idaho Power currently installs metering and telemetry equipment on all QF projects larger than
MW that is capable of recording the times when deliveries of generation occur. Meters with data
storage capability can be installed on smaller QF projects that will track when energy is
generated and delivered. These data storage meters cost approximately $500 more than regular
meters. The computation of payments to QFs based on the different times of delivery will
require a one-time change in the relatively simple spreadsheet program the Company uses to
compute payments to QFs. In reality, the Company contends that the incremental cost of
implementing and administering the Company s HLH/LLH proposal is negligible.
Disaggregation of Large QFs Into Smaller Projects
Regarding the Company s proposal to limit QFs with common ownership from being
located closer than five miles of each other, Idaho Power contends that U.S. Geothermal'
assumption that the Company s proposal is impermissible under federal law is incorrect. Idaho
Power states that it is not proposing to change the test for QF status. PURP A's one-mile radius
standard would still apply for the determination of QF status. However, under PURP A, it is the
Idaho Commission, not FERC, Idaho Power contends, that determines which projects are entitled
to the published rates. The five mile radius test Idaho Power proposes, the Company contends
deals solely with entitlement to published rates and is no way, it states, contrary to federal law.
Regarding Staffs argument that the five mile radius approach proposed by the
Company is desirable in principal but should be rejected because QF project developers will
always find ways to circumvent Commission-imposed rules, Idaho Power states that Staffs
reasoning in part misinterprets Idaho Power s response to a Staff production request. In the
production request, Staff inquired about the likely effect on existing projects if Idaho Power
proposed five-mile radius definition had been in place earlier. The Company responded that
because it is not privy to ownership information concerning QF projects, it "cannot say for
certain that some existing wind developments might have been precluded from obtaining
contracts under the proposed definition." The Company went on to say however that "of course
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if the definition had been in place before the 18 wind Firm Energy Sales Agreements were
signed, Idaho Power expects that the wind QFs could have been restructured to avoid any
problem with the definition." Obviously, Idaho Power states it should have been more clear in
its response. Idaho Power s response was only intended to indicate that if QF developers know
what the rules are ahead of time, they can comply with them.
It is not Idaho Power s intent that its proposed five-mile radius rule place undue
burdens on the development of new QF generation projects. At the same time, the Company
believes that it is important for the Commission to honor its longstanding policy that it is in the
public interest for small QFs to receive the published rates and large QFs to have their avoided
costs determined using the IRP methodology. Idaho Power believes that its proposed five-mile
radius rule is consistent with the Commission s policy by requiring each small QF to
demonstrate a separation of ownership and control. Idaho Power does not believe that the
current policy of setting avoided cost rates based on the size of the QF project is inequitable or
inappropriate.
S. Geothermal in its comments cites three instances where pairs of relatively large
QF hydroelectric projects are located in close proximity to each other. USG contends that
application of Idaho Power s proposed five-mile radius rule make require the application of the
IRP methodology to set their avoided cost for a contract renewal. Idaho Power contends that the
public good is served by having the avoided cost rates for these large QF projects determined
using the more sophisticated and precise IRP methodology. Idaho Power anticipates that when
these contracts expire, regardless of what methodology is used to compute avoided costs, the
owners . of the projects will shop the generation from the projects to the highest bidder.
Speculation as to what will happen with these contracts far in the future, Idaho Power contends
is not particularly productive.
Idaho Power maintains that its proposal is prospective and potential QF developers
will have ample notice and opportunity to develop their projects in a way that complies with the
rule.
COMMISSION DECISION
Idaho Power has proposed to revise its published avoided cost rates to (a) include a
daily load shape and (b) to clarify rules regarding disaggregation of large projects to qualify for
published avoided cost rates. U.S. Geothermal opposes both proposals. Commission Staff
DECISION MEMORANDUM
recommends a different methodology for computing the daily load shape adjustment and Idaho
Power concurs in Staff s alternate methodology. Commission Staff opposes the Company
proposed change to rules governing entitlement to published avoided cost rates. Idaho Power
maintains that its disaggregation proposal is justified and that the five-mile separation does not
run counter to FERC rules. Does the Commission continue to find it reasonable to process the
case pursuant to Modified Procedure?
changes (as modified) to be reasonable?
Does the Commission find the Company-proposed
Scott D. Woodbury
blslM:IPC-O7-04 sw2
DECISION MEMORANDUM