20090202Comments.pdf

NEIL PRICE
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
POBOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 6864
pi:cr:ni n. ,.!I . '\... t'!¡,i
2009 FEB - 2 AM II: 25
Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5983
Attorney for the Commíssíon Staf
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF )
IDAHO POWER COMPANY FOR APPROVAL )
OF A SPECIAL CONTRACT TO SUPPLY )
ELECTRICAL POWER TO HOKU )MATERIALS, INC. )
)
CASE NO. IPC-E-08-21
COMMENTS OF THE
COMMISSION STAFF
The Staff of the Idaho Publíc Utílítíes Commíssíon, by and through ít Attorney of
Record, Neil Príce, Deputy Attorney General, ín response to the Notíce of Applícatíon and
Notíce of Modífied Procedure, íssued on December 3, 2008, Order No. 30697, submíts the
followíng comments.
BACKGROUND
On October 24, 2008, Idaho Power Company ("Idaho Power" or "Company") filed an
Applícatíon wíth the Commíssíon seekíng approval of a specíal contract to supply electrícal
power to Hoku Materíals, Inc. ("Hoku"). Idaho Power and Hoku have entered ínto an Energy
Sales Agreement ("ESA") stípulatíng that Idaho Power would sell and Hoku would purchase ín
excess of25,000 kW. Idaho Power has also agreed to constrct, at Hoku's expense, certaín
ínterconnectíon facíltíes necessary to enable delívery of electrícal servíce to Hoku's facíltíes.
The ESA's effectíve date ís June 1,2009 and íts termínatíon date ís May 31, 2013. The total
value of the Agreement over íts four-year term ís approxímately $126.7 mílíon.
STAFF COMMENTS 1 FEBRUARY 2, 2009
Under the terms of the ESA, Hoku's demand wíll vary durng the sumer and non-
sumer seasons. Hoku's peak monthly demand duríng the term of the ESA wíll not exceed 82
MW. The paríes have agreed that Hoku' s scheduled load demand for the sumer of 2012 ís
contíngent upon the tímely completíon of major transmíssíon and generatíon projects.
The paríes have agreed to dívíde Hoku's demand and energy requírements ínto two
blocks for prícíng puroses. The first block demand charge ís priced to be reflectíve of system
access costs, whích ínclude firm transmíssíon and ancílar servíces. The first block energy
pricíng ís equívalent to the Company's curent Commíssíon-approved avoíded cost rates. Two-
thírds of the energy ín the ESA ís first block energy. The second block rates are to be consístent
wíth the Company's approved Schedule 19-T rates. One-thírd of the energy ín the ESA ís
second block energy. Shown below ís a graphícal depíctíon of the first and second blocks and
theír varíatíon over the term of the Agreement.
Contract Demand
90
80
-_~ 70
60
I 50
c: 40
~ 30
l 20
10
o c eo ..v .0 ..C gr ..~.0 lr C eo ..~.0 ..C gr ..~.0 i-::::v w W 0.::v w 0.::::v Q.0.::v w 0...~0 0 u.c(..~0 0 u.~..c(0 0 u.c(..c(0 0 u.c(
2009 2010 2011 2012 2013
STAFF COMMENTS 2 FEBRUARY 2, 2009
STAFF ANALYSIS
First Block Energy Pricing
Fírst block energy pricíng ís critícal because, at the rates contaíned ín the Agreement, first
block energy charges compríse over 77 percent of the total value of the contract. One logícal
way to príce first block energy míght have been to tíe the contract príce to some sort of market
price índex that approxímately matches the príces that Idao Power would be exposed to íf ít had
to purchase power from the market to serve Hoku's first block needs. Such índexes are readily
available and frequently used. Index-based pricíng would help to ínsure that the príce Hoku ís
payíng to Idaho Power accurately matches the príce that Idaho Power ís payíng to acquíre power
to serve Hoku. The dísadvantage of market-based pricíng, however, ís that ít varíes on a daily,
or even hourly, basís. Hoku wanted the certaínty assocíated wíth a fixed price for the term of the
contract.
Under the terms of the Agreement, first block energy ís príced at a rate equal to the
curent PURP A avoíded cost rate for a levelízed four-year contract wíth a 2009 onlíne date.
Idaho Power represents that the decísíon to use a PURP A rate to price first block energy was
made through negotíatíon of the paríes.
Clearly, the Hoku facílty ís not a PURPA project, nor does ít generate any energy that ís
sold to the utílty líke other PURP A projects do. Nevertheless, avoíded cost rates are íntended to
represent the costs a utílty would íncur to generate or acquíre addítíonal new energy or
capacíty. i Thus, Staffbelíeves avoíded cost rates are a reasonable proxy for establíshíng a rate to
be paíd by new customers who place large loads on the utílty's system - at least during an
ínítíal contract term until the utílty ís able to acquíre long-term resources to serve the load.
The curent PURPA avoíded cost rate for a levelízed four-year contract wíth a 2009
onlíne date ís $61.66 per MWh. Thís ís the rate that was ín effect at the tíme the Agreement was
executed. Any changes to the avoíded cost rates that are pendíng or that occur ín the future wíll
not affect the rate contaíned ín thís four-year Agreement.
i i 8 CFR 292.101 (6) Avoided costs means the incrementa costs to an electric utility of electric energy or capacity or both which, but for the
purchase from the qualifying facilit or qualifying facilities, such utilty would generate itelf or purchase from another source.
STAFF COMMENTS 3 FEBRUARY 2,2009
Second Block Energy Pricing
Under the Agreement, second block energy ís príced at Idaho Power's Schedule 19-T
rate. Hoku's second block ís equal to 25 MW, whích ís the síze límü under Schedule 19. Second
block energy rates wíll be subject to any future changes ín Idaho Power's Schedule 19.
Because any other customer wíth load up to 25 MW would be entítled to Schedule 19
rates, Staff belíeves that ít ís reasonable for the first 25 MW of Hoku's load to be priced at
Schedule 19 rates as well. Hoku should not be dísadvantaged over smaller customers just
because of íts síze. Staff belíeves that Hoku should be entüled to the benefit of embedded rates
for at least some part of íts load, even from the begínníng of the contract term.
Overall Average Price
One way to assess the reasonableness of the energy príces ín the Agreement ís to
compare them to prices computed usíng the AURORA modeL. AURORA ís a sophístícated
productíon cost model used by Idaho Power that optímízes díspatch of Company-owned
resources, along wíth all other generatíon resources ín the Western Interconnect, to estímate
futue electríc market príces (among other thíngs). AURORA results are typícally used ín the
Company's general rates cases as the basís for establíshíng net power supply costs.
For puroses of evaluatíng energy príces ín the ESA, Staff asked Idaho Power to use
AURORA to compute margínal energy prices for a four-year future períod assumíng an addítíon
of load equal to Hoku's expected load. Attchment 1 shows the monthly prices computed by
AURORA. Also shown on Attachment 1 are the prices for first block and second block energy.
By combíníng first and second block monthly demand and energy charges, ít ís possíble to derive
a síngle rate per MWh that can be used for puroses of comparíson. Note from Attchment 1
that the combíned average energy cost for both blocks ís sometímes hígher and sometímes lower
than margínal energy costs computed by AURORA. However, over the four-year term of the
contract, the combíned average energy cost of both blocks ís $52.69, while the AURORA
margínal energy cost ís $55.94. Because the four-year average energy cost ís slíghtly lower than
the AURORA margínal energy cost, Staffbelíeves the contract rates are reasonable.
STAFF COMMENTS 4 FEBRUARY 2, 2009
Four-Year Transition to Embedded Rates
The Agreement provídes that Hoku ís entíted to transítíon from margínal cost-based rates
for íts first block energy to embedded cost-based rates at the end of the four-year contract term.
As stated prevíously, first block energy charges make up more than three-fourhs of the total
charges under ESA.
Hoku's ínítíal proposed maxímum load of 82 MW ís sízeable ín comparíson to other
índívídual Idaho Power customers. In fact, once Idaho Power begíns provídíng servíce, Hoku
wíll be the Company's largest síngle customer. Obvíously, Hoku ís not an exístíng customer. It
has not taken servíce from Idaho Power ín the past, nor ís ít curently takíng servíce.
Consequently, Idaho Power's only abílty to províde servíce ís through excess capacíty and
energy ít may already have on íts system or ímmedíately be able to acquíre through off-system
purchases. The 82 MW load was not ín Idaho Power's IRP at the tíme Hoku made íts request for
servíce or during the tíme the contract was beíng negotíated. Consequently, Idaho Power has not
procured any new resources ín advance specífically to serve Hoku's load.
Although Idaho Power has an oblígatíon to serve Hoku, Staff belíeves that the Company's
oblígatíon to serve very large new loads must be coupled wíth reasonable expectatíons about the
tíme needed to acquíre new resources and the Company's abílty to províde ímmedíate servíce.
Moreover, the príce at whích Idaho Power provídes servíce ís crucíal to íts oblígatíon ín Staffs
opíníon. At one extreme, Idaho Power could charge Hoku an embedded rate for 100 percent of
íts load begínníng wíth the first day ít provídes servíce, and charge an embedded rate forever. In
fact, most new customers are entítled to just such treatment. However, very few new customers,
unless they are extremely large, wíl have a sígníficant ímpact on Idaho Power's revenue
requírement and the Company's abílty to contínue to serve other exístíng customers at exístíng
rates. If Hoku were charged embedded rates ímmedíately for íts entíre load, ít ís líkely that
enough upward pressure would be put on rates to cause Idaho Power to seek an íncrease ín all
customers' rates through a general rate case. All customers should not have theír rates íncrease
just because of a síngle large new customer. For thís reason, Staff does not belíeve that ít would
be reasonable to charge Hoku an embedded rate for íts entíre load from the day Hoku begíns
takíng servíce.
At the opposíte extreme, Idaho Power could charge Hoku a margínal rate forever, based
on whatever ít costs Idaho Power to procure new supply. Staffbelíeves that thís extreme ís
STAFF COMMENTS 5 FEBRUARY 2, 2009
equally uneasonable because ít would deny Hoku the benefit of lower embedded rates that all
other customers are able to enjoy.
Staff belíeves a reasonable íntermedíate posítíon ís to charge an embedded rate for a
portíon of Hoku's ínítíal load, charge a margínal rate for the remaíníng portíon of ínítíal load, and
transítíon the margínal portíon to an embedded rate over a reasonable períod of tíme. At the end
of the transítíon períod, 100 percent of Hoku's load would be at an embedded rate, determíned
based on cost of servíce ín a maner símilar to that used for other specíal contract customers.
Thís ís, ín fact, exactly how thís Agreement ís structued.
The length of such a transítíon períod ís a faír questíon. The four-year transíton tíme
períod ís, by necessíty, somewhat subjectíve. Staffbelíeves ít ís reasonable, however, for several
reasons. Fírst, four years ís about the mínímum tíme needed to íncorporate the contract ínto the
Company's íntegrated resource plan and to build any new resources that may be requíred to serve
the íncreased load. Second, accordíng to Idaho Power, four years ís typícal of what the
Company would ask of a specíal contract for an ínítíal term. Thírd, four years commíts Hoku to
payíng a material amount ofmargínal costs. Fínally, four years líkely allows for at least one or
two rate cases to be processed wíth Hoku as a customer.
Substation and Interconnection Facilties
The ESA provídes that Hoku pay for constrctíon of a substatíon and transmíssíon
upgrade costs under a separate agreement. Under that agreement, Idaho Power retaíns ownershíp
of the substatíon and ínterconnectíon facíltíes and pays the assocíated O&M costs. Because the
constrctíon agreement ís not a specíal contract under Idaho Power's rate schedules, the
Company ís not seekíng approval of the constrctíon agreement.
Ratemaking Treatment
For Power Cost Adjustment (PCA) purposes, Idaho Power proposes to treat first block
revenues and expenses as íf they were wholesale purchases and sales, thereby removíng them
from PCA treatment. Second block energy - embedded block - would be íncluded as an Idaho
retail load and would adjust each year wíth the PCA. Thís PCA treatment ís símilar to the
approach authorized when the FMC specíal contract was served under two blocks, one priced at
embedded rates and one at market rates. Staff agrees wíth the Company's proposed ratemakíng
treatment.
STAFF COMMENTS 6 FEBRUARY 2, 2009
Other Terms and Conditions
Both the first and second block demand components, as well as the first block of energy,
ímpose take or pay requírements on Hoku. However, Idaho Power has agreed that Hoku may
request a release of all or par of íts first block energy purchase commítment. Idaho Power states
that ít wíl make a commercíally reasonable effort to absorb or resell the released energy and
províde a credít to Hoku. The amount credíted wíll depend upon the rate period during whích
the Company receíves tímely notíce of Hoku's request to release íts energy demands as well as
the Company's abilíty to manage and supply commítments to serve Hoku's load. Staffbelíeves
these terms are reasonable.
Idaho Power acknowledges that íts abílty to províde all of the power Hoku would líke to
tae duríng the summer period ín 2012 ís contíngent on tímely completíon of major transmíssíon
and generatíon projects. If Hoku desíres to take addítíonal power duríng the sumer, then Idaho
Power ís oblígated under the ESA to make the same commercíally reasonable efforts tò obtaín
proposals to supply Hoku's addítíonal energy request. Hoku wíll be responsíble for the full costs
of these purchases and any assocíated transmíssíon and ancílar servíce expense to transport
such purchase to the Hoku facílty. Hoku can expand íts first block contract demand up to 175
MW, but íts abílty to expand ís contíngent upon the Company's abílty to supply and delíver
addítíonal power. Staffbelíeves these are also reasonable contract terms, but recommends that
the príces and terms of any decísíon to supply more than 82 MW to Hoku be subject to
Commíssíon approval, due mostly to the sheer síze and potentíal cost of such purchases.
RECOMMENDATIONS
Staff recommends approval of the ESA between Idaho Power and Hoku Materials. If
Hoku exercíses íts optíon under the ESA to íncrease íts contract demand beyond 82 MW and íf
Idaho Power ís able to satísfy Hoku's request to íncrease íts load, then Staff recommends that the
price and terms under whích such íncreased load would be served be subject to fuher
Commíssíon approvaL. Staff also recommends that any future amendments to the ESA be
submítted for Commíssíon approvaL.
STAFF COMMENTS 7 FEBRUARY 2, 2009
Respectfully submítted thís d- day of February 2009.,,
.Nijb~~rice
Deputy Attorney General
Technícal Staff: Ríck Sterlíng
i:umisc:commentslipce08.2 i nprps
STAFF COMMENTS 8 FEBRUARY 2, 2009
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 2ND DAY OF FEBRUARY 2009,
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN
CASE NO. IPC-E-08-21, BY MAILING A COPY THEREOF, POSTAGE PREPAID, TO
THE FOLLOWING:
BARTON L KLINE
LISA D NORDSTROM
IDAHO POWER COMPANY
PO BOX 70
BOISE ID 83707-0070
E-MAIL: bklíne(iídahopower.com
lnordstrom(iídahopower .com
JOHNRGALE
IDAHO POWER COMPANY
PO BOX 70
BOISE ID 83707-0070
E-MAIL: rgale(iídahopower.com
SCOTT PAUL
VP BUSINESS DEVELOPMENT &
GENERAL COUNSEL
HOKU SCIENTIFIC INC
1288 ALA MOANA BLVD STE 216
HONOLULU HI 96814-4233
E-MAIL: spaul(ihokuscí.com
~~
SECRET~Y
CERTIFICATE OF SERVICE