20100312Decision Memo.pdf

DECISION MEMORANDUM 1
DECISION MEMORANDUM

TO: COMMISSIONER KEMPTON
COMMISSIONER SMITH
COMMISSIONER REDFORD
COMMISSION SECRETARY
COMMISSION STAFF
LEGAL

FROM: WELDON STUTZMAN
DEPUTY ATTORNEY GENERAL

DATE: MARCH 8, 2010

SUBJECT: CASE NO. IPC-E-09-34
IDAHO POWER’S APPLICATION FOR APPROVAL OF THE
PURCHASE OF ENERGY FROM THE NEAL HOT SPRINGS UNIT NO. 1
GEOTHERMAL GENERATION FACILITY

On December 28, 2009, Idaho Power Company filed an Application requesting an
accounting order authorizing the Company to recover purchases of energy and associated costs
from the USG Oregon, LLC, Neal Hot Springs Unit No. 1 geothermal generation facility. The
Company seeks recovery of its costs and purchases in its annual Power Cost Adjustment (PCA).
Idaho Power indicated in both its 2004 and 2006 Integrated Resource Plans (IRPs)
that it intended to actively seek acquisition of geothermal generating resources. In 2006, the
Company issued a request for proposal (RFP) to acquire geothermal resources and ultimately
entered into an agreement with U.S. Geothermal to purchase power from its Raft River No. 1
geothermal power plant. Idaho Power issued a new request for proposal in 2008 to acquire
additional geothermal resources. The Company received three responses, two of which were
withdrawn by the bidders. The Company concluded that the third bid was too speculative and
was therefore unacceptable. The Company’s Application states that this experience with the
unsuccessful RFP process demonstrates that “the competitive RFP process is not the optimal
means to acquire geothermal resources.” Application, pp. 3-4. Accordingly, the Company
actively pursued discussions with developers of five different potential geothermal sites,
including the Neal Hot Springs site. The Company believes the Neal Hot Springs development
is advantageous for several reasons, including (1) substantial prior geotechnical exploration at
DECISION MEMORANDUM 2
the site, (2) its location in Idaho Power’s service area and proximity to Treasure Valley load
centers, (3) available transmission capacity, and (4) favorable energy pricing in comparison to
other proposals.
On December 11, 2009, Idaho Power and USG Oregon, LLC entered into a Power
Purchase Agreement providing for the Company’s purchase of energy from the Neal Hot Springs
Unit No. 1 geothermal generation facility. USG Oregon, LLC is a subsidiary of U.S.
Geothermal. The Neal Hot Springs project is located approximately 12 miles west northwest of
Vail, Oregon. The project is expected to produce approximately 22 MW of power with an
estimated online date late in 2012. The Purchase Agreement provides an initial term of 25 years
with an option for Idaho Power to extend the term of the Agreement. The Agreement provides
that Idaho Power will receive the rights to all environmental attributes and renewable energy
credits now available or created during the term of the Agreement. The Agreement grants Idaho
Power the first right of offer to participate in any future U.S. Geothermal resource development
at the site or in close proximity to the site.
The energy price stated in the Agreement will be seasonally adjusted consistent with
seasonality factors currently used in Idaho Power’s PURPA agreements. The Company asserts
that seasonal prices give the correct price signal by promoting production when the value of the
energy to the Company is highest. Beginning in 2012, the flat energy price is $96/MWh. The
price escalates annually by 6% in the initial years and by 1.33% in the later years of the
Agreement. The approximate 25-year levelized contract price is $117.56/MWh. This compares
to a levelized price for a 20-year PURPA contract of $95.56/MWh. The Company asserts that,
while the price of energy under this Agreement is higher than energy purchased under PURPA
contracts, there are benefits to this Agreement that bring value to Idaho Power’s customers that
PURPA contracts do not. The Company identifies these benefits as (1) the Company’s rights to
any of the project’s renewable energy credits, (2) the limited ability to curtail energy, (3) the
right of first offer on ownership of other site development, (4) exploration, development and
construction milestone requirements and associated damages, and (5) the right to extend the
terms of the contract. The Application states that with the addition of a relatively minor system
upgrade, there is already sufficient firm transmission capacity available for the full output of the
project to be delivered to Idaho Power’s load centers.
DECISION MEMORANDUM 3
Because the Agreement is not a PURPA contract, the Company proposes that the cost
of power purchased under the Agreement be recovered in its annual PCA in a manner similar to
other non-qualified facility power purchase expenses. The Company requests that its
Application be processed by Modified Procedure, that the Commission find that the Agreement
is prudent for ratemaking purposes and that the Commission approve its request for recovery of
the power purchase expense associated with the Agreement in the Company’s power cost
adjustment rate.
Staff recommends the Commission issue a Notice of Application and Notice of
Modified Procedure providing a 45-day comment period and 10-day reply comment period.
COMMISSION DECISION
Should the Application of Idaho Power Company for approval of its Purchase Power
Agreement with USG Oregon, LLC be processed by Modified Procedure with a 45-day comment
period and a 10-day reply comment period?

Weldon B. Stutzman
Deputy Attorney General

bls/M:IPC-E-09-34_ws