20080724Comments.pdf

BEFORE THE
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IDAHO PUBLIC UTILITIES Cavr,JSSION
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IN THE MATTER OF IDAHO POWER
COMPANY'S APPLICATION FOR AN
ACCOUNTING ORDER AUTHORIZING THE
INCLUSION OF POWER SUPPLY EXPENSES
ASSOCIATED WITH THE PURCHASE OF
CAPACITY AND ENERGY FROM PPL
ENERGYPLUS, LLC IN THE POWER COST
ADJUSTMENT
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) CASE NO. IPC-E-08-13
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COMMENTS OF THE COMMISSION STAFF
IDAHO PUBLIC UTILITIES COMMISSION
JULY 24,2008
ALLEGEDLY PROPRIETARY DATA HAS BEEN
DELETED FROM THIS DOCUMENT
SCOTT WOODBURY
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 1895
Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5983
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF IDAHO POWER )
COMPANY'S APPLICATION FOR AN ) CASE NO. IPC-E-08-13
ACCOUNTING ORDER AUTHORIZING THE )
INCLUSION OF POWER SUPPLY EXPENSES )
ASSOCIATED WITH THE PURCHASE OF ) COMMENTS OF THE
CAPACITY AND ENERGY FROM PPL ) COMMISSION STAFF
ENERGYPLUS, LLC IN THE POWER COST )ADJUSTMENT )
)
COMES NOW the Staff of the Idaho Public Utilties Commission, by and through its
attorney of record, Scott Woodbur, Deputy Attorney General, and in response to the Notice of
Application, Notice of Modified Procedure and Notice of Comment/Protest Deadline issued on
June 25,2008, submits the following comments.
BACKGROUND
On June 16,2008, Idaho Power Company (Idaho Power; Company) fied an Application
with the Commission for an Order approving a firm wholesale Power Purchase Agreement
(PPA; Agreement) between Idaho Power and PPL EnergyPlus, LLC (EnergyPlus). The
Company requests accounting treatment that wil allow Idaho Power to include the expenses
associated with the purchase of capacity and energy from EnergyPlus in the Company's Power
Cost Adjustment (PCA).
STAFF COMMENTS 1 JUL Y 24, 2008
The EnergyPlus Agreement replaces an Idaho Power/PPL Montana contract that wil
expire at the end of August 2009. Reference Order No. 29286, Case No. IPC-E-03-08. In the
spring of 2008, the Company issued a Request for Proposals (RFP) to replace the expiring
contract. EnergyPlus was the successful bidder. EnergyPlus is the marketing ar of PPL
Montaa. As a result, it has access to the generating resources owned and operated by PPL
Montaa.
The principal provisions of the Power Purchase Agreement with EnergyPlus call for a
firm power purchase for the heavy load hours, six days a week (Monday through Saturday), 16
hours a day (6 x 16) in the months of June, July and August (except for NERC holidays). These
are the time periods identified in the Company's 2006 IRP as critical peak hours. The term of
the Agreement is two years, June 1 through August 31 of each year beginning in 2010 and
ending in 2011. The quantity of energy purchased is 83 MWh per hour. The price to be paid for
this energy is $92.25 per MWh. After adjusting for losses, Idaho Power wil actually receive
approximately 80 MWh per hour under the PP A. The total cost of the Agreement over its term is
$19,111,248.
In addition to power costs under the Agreement, Idaho Power states it wil purchase firm
monthly transmission service across Northwestern Energy's transmission system to the Jefferson
point of delivery. At current rates under Northwestern Energy's open access transmission tarff
(OATT), the maximum charge for monthly firm transmission service is $3.42 per kW of reserved
capacity per month. Losses are charged at four percent. After consideration of losses and
transmission costs, Idaho Power wil incur a total cost of approximately $101 per MWh under
the PPA.
STAFF ANALYSIS
Need for Power
As noted previously, the PPL EnergyPlus contract replaces a similar existing contract
with PPL Montana for an identical amount of capacity and energy. The only differences
between the new Agreement and the old one is in the price and the length of the agreement. In
its 2006 Integrated Resource Plan, Idaho Power has assumed that the PPL Montana contract, or a
similarly structured replacement delivered to Idaho Power's east side, would be in place
throughout the planing period. Consequently, if this Agreement is not approved, the Company
wil have to seek an additional 83 MW to meet planed loads durng the summers of 2010 and
STAFF COMMENTS 2 JUL Y 24, 2008
2011. Idaho Power's plans also assume that all existing peaking capacity would be operating
during the peak load hours of June, July and August, thus, no additional capacity could be tapped
to provide 83 MW in the absence of the PPL EnergyPlus contract. Based on analysis in the
Company's 2006 IRP, Staff believes the Company wil be unable to meet its 83 MW need using
only its existing resources.
Proposals
This section of Staffs comments contains confidential information subject to
protective agreement. Ultimately, Idaho Power negotiated a two-year agreement with PPL
EnergyPlus at a price of $92.25 per MWh.
Comparison to Other Alternatives
Idaho Power contends that the energy costs of $92.25/MWh are competitive and
favorable when compared to alternative resource options. Idaho Power states in its Application
that it has already purchased heavy load energy for August 2008 at prices between $110 and
$120 per MWh.
In its Application, the Company also noted that heavy load forward price curves for Mid-
Columbia (Mid-C) are slightly above the PPA contract price. On Attachment A, Staff plotted
forward prices for Mid-C from the beginning of 2007 through June 19,2008. As the graph
shows, the $92.25 rate in the PPL EnergyPlus contract has exceeded forward prices for June and
July of 2010 and 2011 for all of the past 18 months. In the past several months, however,
August forward prices have begun to exceed prices in the Agreement. The graph would seem to
indicate that prices lower than those in the Agreement might reasonably be obtained for
purchases from Mid-C. However, it must also be recognized that transmission capacity is
constrained to Idaho Power's system from Mid-C in the months of July-August, making
purchases from Mid-C an unealistic option.
On Attchment A, Staff also plotted forward prices for Palo Verde from the beginning of
2007 through June 19, 2008, since Idaho Power would most likely have to make market
purchases from the east side of its system in the peak sumer months. Palo Verde prices are a
STAFF COMMENTS 3 JUL Y 24, 2008
better indicator of east-side prices. In comparison with Palo Verde forward prices, the contract
rate of $92.25 has been higher for most of the past 18 months for June and July deliveries in
2010 and 2011, but lower than August forward prices.
It is impossible to judge whether forward prices over the past 18 months wil be an
accurate indication of forward prices in the future. Prices could continue to rise or they could
fall. Nevertheless, forward prices do give an accurate indication today of the price at which
counterparties wil agree to deliver power in the future. Based on forward prices, it appears that
the PPL EnergyPlus contract price is attractive for the month of August, but a bit high for the
months of June and July.
Gas-fired Generation
As stated previously, Idaho Power's 2006 IRP assumes that all of the Company's existing
gas-fired generation wil be operating in June-August of 2010 and 2011, yet a deficit of at least
83 MW stil exists. To satisfy that 83 MW deficit with gas-fired generation, Idaho Power would
have to add additional generation capacity.
In terms of cost, Idaho Power states that the estimated July 2010 operating costs of its
gas-fired combustion tubines used in preparation of the May 29, 2008, Operating Plan were
approximately $119 per megawatt hour for Danskin units 2 and 3, $107 per megawatt hour for
Bennett Mountain, and $100 per megawatt hour for Danskin unit 1. New gas-fired generation
would have similar costs; therefore, new gas-fired generation would be more costly than the PPL
EnergyPlus Agreement.
DSM, Peak Reduction
Irrigation and air-conditioning account for a significant par of the Idaho Power's peak
sumer load. The Company has implemented peak-period demand reduction programs for each
of these load sectors. Under the A/C Cool Credit program, air-conditioning is cycled off during
heavy load hours in the June, July and August months. Peak load reductions due to the A/C
cycling program now total about 11 MW. The A/C Cool Credit program had 13,692 participants
at the end of 2007, and Idaho Power is targeting 16,000 new paricipants for 2008.
Under the Irrigation Peak Rewards program, irrigation pumps are shut off during peak
sumertime load hours. For the curent season, Idaho Power is estimating a seasonal average
peak reduction of approximately 30 MW. Program changes are being considered for 2009 that
STAFF COMMENTS 4 JUL Y 24, 2008
would introduce an option for pumps to be shut off by being dispatched based on Idaho Power's
load conditions, rather than be shut off according to a predetermined schedule. Such a change, if
successful, could cause load reductions in superpeak hours to increase several fold.
Idaho Power has already incorporated forecasted peak-hour reductions from these
demand response programs and its other energy effciency programs into its Integrated Resource
Plan. Consequently, if the load reductions anticipated as a result of these programs are not
achieved, forecast peak-hour deficits will increase beyond curent planing estimates. One
exception, however, could be the Irrigation Peak Rewards program. Potential substatial peak
load reductions due to the future introduction of a dispatchable option have not yet been
accounted for in the Company's planing. While it may be possible that future peak load
reductions will be large enough to displace the need for the PPL EnergyPlus contract, to rely on
uncertain program results, especially when details of the program changes have yet to be worked
out, would be extremely risky.
PURP A Avoided Cost Rates
Although new PURP A generation is not a realistic alternative to replacing the existing-
PPL Montaa contract, a comparison to PURP A avoided cost rates may have some value. The
curent avoided cost rates for summer, heavy-load-hour PURPA purchases for 2010 and 2011 are
shown below in dollars per MWh:
2010
2011
June
48.16
46.34
July & August
78.63
75.65
Clearly, the $92.25 per MWh rate in the PPL EnergyPlus Agreement far exceeds the curent
PURPA avoided cost rates. These PURPA rates, however, assume natural gas prices of
$6.54/MMBtu and $6.1O/MMBtu respectively in 2010 and 2011. Natural gas forward prices for
the sumers of2010 and 2011 are currently trading at about $10.20 and $9.80 respectively. Gas
prices used for the computation of avoided cost rates are based on forecasts of the Northwest
Power and Conservation CounciL. As par of the Council's work on its upcoming Sixth Power
Plan, Staff expects the Council to update its natural gas price forecast later this year, and most
likely forecast much higher prices for 2010 and 2011.
STAFF COMMENTS 5 JUL Y 24, 2008
Furhermore, the PURP A avoided cost rates shown above are also based on curent
generic varable assumptions. There is currently a review of generic variable assumptions
underway in Case No. IPC-E-07-15 as directed by Order No. 30480. Increased equipment and
construction costs wil likely result in generic variable changes that will, in tur, cause an
increase in .avoided cost rates.
Recomputation of avoided cost rates using reasonable generic variable assumptions and
curent gas forward prices for 2010 and 2011 produces rates for 2010 and 2011 of approximately
$71 per MWh for June and $115 per MWh for July and August. Based on these avoided cost
rates, the $92.25 price in the PPL EnergyPlus Agreement seems reasonable.
Timing of Purchase
The existing PPL Montana agreement which this new Agreement replaces does not
expire until the end of the summer of 2009. Idaho Power has elected to execute a contract now,
two years in advance of when the new contract would begin. Again, without knowing what
electric prices wil be in the futue, it is impossible to judge whether it is better to sign a contract
now or wait until later in hopes that prices wil go down. Forward prices have generally been
steadily increasing over at least the past 18 months, however. Because the increasing price trend
has persisted for so long, Staff does not believe it is uneasonable to lock in prices by signing a
new contract this far in advance of expiration of the existing agreement.
Term of the Agreement
The RFP issued by Idaho Power sought power for a five-year term, although it stated
that shorter term contracts would be considered. Ultimately, Idaho Power contracted for only a
two-year term. The Company has stated that the limited duration of the PP A reduces risk by
dovetailing with the Company's ongoing efforts to develop energy efficiency programs that
target the Company's summer peak loads and with the Company's planed acquisition of new
base load resources in 2012 through its curent request for proposals.
Given the high price of the PP A, Staff believes that it is wise to limit the duration of the
PP A to only the length of time that the Company can be reasonably certain that the power wil be
needed. Staff believes that the recent unusually high electric market prices are being driven to a
large degree by extremely high natural gas prices. Natural gas prices, in turn, are likely being
affected by record oil prices. While no one can be certain how long this situation might exist or
STAFF COMMENTS 6 JUL Y 24, 2008
whether some relief wil ever come, Staff believes that there is at least some chance that prices
will subside somewhat in the future. If electric market prices do eventually come down, and if
Idaho Power finds that it cannot fully replace the need for this contract with other alternatives,
then it can seek another short-term PP A or other resources. While there is some risk that future
prices could be even higher, a short two-year term Agreement provides greater flexibilty at time
when prices are highly uncertain.
Accounting Treatment
Idaho Power proposes that the cost for power acquired through the PPL EnergyPlus
Agreement be booked in FERC Account 555, Purchased Power, and that the costs upon contract
approval flow through the Company's Power Cost Adjustment (PCA). Until the costs of the
contract are included in a general revenue proceeding, any contract costs associated with the
Agreement that exceed costs included in the base wil be borne by Idaho customers at 90 percent.
Staff agrees with the proposed treatment of power costs.
Idaho Power proposes that costs associated with acquiring firm monthly transmission
service from Northwestern Energy's transmission system be booked in Book Account 565
Transmission of Electricity by Others. These monthly transmission costs will not flow through
the Company's PCA. Staff also agrees with this proposed treatment of transmission costs.
Deposit
As consideration for EnergyPlus's agreement to hold the price in the PPA firm to allow
time for Commission review and approval, Idaho Power has paid EnergyPlus a depositin the
amount of$100,000 that is refudable if the Application is approved by the Commission. If the
Commission does not approve the Agreement by that deadline, the Company will forfeit the
deposit and either party may terminate the Agreement.
If the Commission is unable to approve the Agreement by August 4, 2008 and Idaho
Power is forced to forfeit its $100,000 deposit, Staff recommends that Idaho Power not be
allowed to recover the deposit amount from ratepayers. While Staff recognizes that PPL
EnergyPlus canot hold its bid price indefinitely, a deposit requirement effectively pressures the
Commission to rule on the Agreement in a relatively limited time frame or have customers face
the consequences. Allowing ratepayers to be exposed to deposit forfeiture places an unfair
burden on them, while completely relieving the Company of all risk.
STAFF COMMENTS 7 JUL Y 24, 2008
STAFF RECOMMENDATION
Staff believes that the PPL EnergyPlus contract is needed by Idaho Power to meet its
summertime peak loads, and that there are few, if any, other alternatives for satisfying these
loads that are as certain or less expensive. The price in the Agreement is extremely high-
$92.25 per MWh in the new Agreement vs. $44.50 per MWh in the old agreement that it
replaces. While lower prices might be available if the Company waited longer to sign a
contract, prices could just as easily be much higher than they are now. Staff recommends that
the Commission issue an Order approving the Power Purchase Agreement between Idaho Power
and EnergyPlus and approving Idaho Power's requested accounting treatment for inclusion of the
power purchase expenses associated with the EnergyPlus Agreement in the Company's Power
Cost Adjustment.
Respectfully submitted this ~
6J LIt day of July 2008.
Scott Woodbury
Deputy Attorney General
Technical Staff: Rick Sterling
i:/umisc/comments/ipce08.13swrpskh comments
STAFF COMMENTS 8 JUL Y 24, 2008
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Attachment A
Case No. IPC-E-08-13
Staff Comments
07/24/08
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 24TH DAY OF JULY 2008,
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN
CASE NO. IPC-E-08-13, BY MAILING A COPY THEREOF, POSTAGE PREPAID, TO
THE FOLLOWING:
BARTON L KLINE
DONOVAN E WALKER
IDAHO POWER COMPANY
PO BOX 70
BOISE ID 83707-0070
E-MAIL: bkline(iidahopower.com
dwalker(iidahopower .com
JOHNRGALE
COURTNEY WAITES
IDAHO POWER COMPANY
PO BOX 70
BOISE ID 83707-0070
E-MAIL: rgale(iidahopower.com
cwaites(iidahopower .com
PETER J RICHARDSON
RICHARDSON & O'LEARY
515 N 27TH ST
PO BOX 7218
BOISE ID 83702
E-MAIL: peter(irichardsonandoleary.com
DR. DON READING
6070 HILL ROAD
BOISE ID 83703
E-MAIL: dreading(imindspring.com
Jo~SECRETARY -
CERTIFICATE OF SERVICE