20120710Comments.pdf

2017 JUL 10 PM 3:55
KRISTThIE A. SASSER
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
P0 BOX 83720
BOISE, IDAHO 83720-0074
[phone]
BAR NO. 6618
DAHO P(.JB.jç
tJTiL1iE3 COMMIS5kN
Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5918
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF )
IDAHO POWER COMPANY FOR APPROVAL ) CASE NO. IPC-E-10-22
OF A FIRM ENERGY SALES AGREEMENT )
WITH YELLOWSTONE POWER, INC. FOR ) COMMENTS OF THE
THE SALE AND PURCHASE OF ELECTRIC ) COMMISSION STAFF
ENERGY. )
COMES NOW the Staff of the Idaho Public Utilities Commission, by and through its
attorney of record, Kristine A. Sasser, Deputy Attorney General, and in response to the Notice
of Filing and Notice of Modified Procedure issued in Order No. 32573 on June 19, 2012, in Case
No. IPC-E-1O-22, submits the following comments.
BACKGROUND
On May 4, 2004, the Commission approved a Firm Energy Sales Agreement (FESA)
between Idaho Power and Renewable Energy of Idaho, Inc. ("Renewable Energy") for a 17.5
megawatt (MW) biomass generating facility to be located at the old Boise Cascade Plant site
near Emmett, Idaho. Order No. 29487. The FESA subsequently went into default and was
terminated by Idaho Power after Renewable Energy failed to meet its scheduled operation date.
Renewable Energy claimed its inability to meet the scheduled operation date was due to reasons
beyond its control. Idaho Power determined that the project had incurred damages in the amount
STAFF COMMENTS 1 JULY 10, 2012
of $106,804 for Renewable Energy's non-performance. Renewable Energy was unable to pay
the assessed damages.
On August 13, 2010, Idaho Power filed an Application with the Commission requesting
approval of a 15-year FESA between Idaho Power and Yellowstone Power for an 11.7 MW
biomass fueled combined heat and power generator located at the same site as the Renewable
Energy project. Richard Vinson, a principal of Yellowstone Power, was also a principal of
Renewable Energy. Mr. Vinson agreed, as part of the Yellowstone FESA negotiations, to pay
the non-performance damages of the Renewable Energy FESA as an offset to the energy
payments Yellowstone was to receive in its FESA. On November 2, 2010, the Commission
approved the FESA between Idaho Power and Yellowstone, including the payment by
Yellowstone of Renewable Energy's $106,804 in non-performance damages. Order No. 32104.
Yellowstone chose a scheduled operation date of December 31, 2011. In addition, the FESA
required Yellowstone to post a delay liquidated damages deposit in the amount of $450,000.
Yellowstone timely posted this required deposit in the form of a Letter of Credit.
Yellowstone has failed to achieve its December 31, 2011, scheduled operation date. On
May 3, 2012, Idaho Power sent Yellowstone a notice of material breach for failing to achieve its
scheduled operation date and stating that it would collect on the Letter of Credit by May 10,
2012, if Yellowstone failed to cure the material breach. Yellowstone responded by alleging that
aforce majeure event had occurred. Settlement discussions between the parties ensued.
On May 31, 2012, Idaho Power Company and Yellowstone Power, Inc. filed a motion
requesting that the Commission accept a Settlement Stipulation ("Settlement") entered into
between the parties. The Settlement Stipulation provides for termination of the FESA between
Idaho Power and Yellowstone Power and mutual release of any future claims or causes of action
between the parties. Yellowstone agrees to pay Idaho Power $200,000 for its material breach of
the FESA, which amount includes Renewable Energy's pre-existing debt of $106,804. If
Yellowstone fails to make the $200,000 payment then Yellowstone agrees to allow Idaho Power
to draw on the current $450,000 Letter of Credit. Idaho Power and Yellowstone state that the
Settlement Stipulation is in the public interest and that all of its terms and conditions are fair,
just, and reasonable.
STAFF COMMENTS 2 JULY 10, 2012
STAFF ANALYSIS
Staff believes that because the project has not achieved operation within 90 days of the
scheduled operation date, the project is in material breach and Idaho Power is entitled to
terminate the FESA. In addition, Article 5.3 of the FESA specifies that delay damages of $45
per kilowatt maximum capacity ($45 x 10,000 kW = $450,000) are due and payable to Idaho
Power as delay liquidated damages. Idaho Power provided notice to the project of the material
breach, and termination of the FESA, as well as the utility's request for payment of the $450,000
delay liquidated damages. The project responded to the notification of material breach with a
claim offorce majeure regarding its non-performance in the contract, as well as a draft complaint
for Idaho District Court challenging the legality of the liquidated damages in the contract.
Yellowstone, in its May 15, 2012 letter to Idaho Power alleges that conditions beyond its
control have made it impossible to complete the project and achieve the scheduled operation date
specified in the FESA. Yellowstone cites the following conditions that have prevented
construction of the facility:
Availability of Financing - Yellowstone created an extensive financing package,
employed lending specialists, and marketed to a wide variety of local/national banks,
venture capitalist, private equity, and hedge funds related to this project. Despite these
efforts, the unpredictable change in lending protocols following the banking crisis and
resulting extended national economic recession restricted the availability of financing
funds for projects such as Yellowstone Power and funds became severely limited.
• 1603 Grant In-Lieu Credit - The Section 1603 grant in lieu credit adversely impacted
conventional lending for projects such as Yellowstone Power by attracting predatory
investors to the market. Combined with the unpredictable change in conventional
lending protocols, available financing was further reduced.
• Renewable Energy Credits - Due to the unexpected prolific installation of wind power
experienced by many utilities, the value of renewable energy credits (RECs) decreased
dramatically. The revenue contemplated by Yellowstone Power from the sale of RECs
was adversely affected by the installation of wind generation.
• Emerald Forest Sawmill - Significant revenue and fuel sourcing was contemplated
from the Emerald Forest Sawmill. This facility experienced significant operating
problems during its start-up and eventually had to seek protection under Chapter 11
Bankruptcy. The loss of this revenue and fuel source had a significant impact on the
ability of the project to attract financing due to its close proximity to the proposed
Yellowstone Power project.
STAFF COMMENTS 3 JULY 10, 2012
Yellowstone alleges that the combination of changed conditions are beyond its control and
constitute an event offorce majeure.
For reference, the terms of the FESA relating to force majeure are repeated below.
ARTICLE XIV: FORCE MAJEURE
14.1 As used in this Agreement, "Force Majeure" or "an event of Force Majeure" means
any cause beyond the control of the Seller or of Idaho Power which, despite the
exercise of due diligence, such Party is unable to prevent or overcome. Force
Majeure includes, but is not limited to, acts of God, fire, flood, storms, wars,
hostilities, civil strife, strikes and other labor disturbances, earthquakes, fires,
lightning, epidemics, sabotage, or changes in law or regulation occurring after the
effective date, which, by the exercise of reasonable foresight such party could not
reasonably have been expected to avoid and by the exercise of due diligence, it shall
be unable to overcome. If either Party is rendered wholly or in part unable to perform
its obligations under this Agreement because of an event of Force Majeure, both
Parties shall be excused from whatever performance is affected by the event of Force
Majeure, provided that:
(1)The non-performing Party shall, as soon as is reasonably possible after the
occurrence of the Force Majeure, give the other Party written notice
describing the particulars of the occurrence.
(2)The suspension of performance shall be of no greater scope and of no longer
duration than is required by the event of Force Majeure.
(3)No obligations of either Party which arose before the occurrence causing the
suspension of performance and which could and should have been fully
performed before such occurrence shall be excused as a result of such
occurrence.
In response to production requests, Idaho Power states that it does not believe that
Yellowstone has provided evidence that a force majeure event has occurred that would provide
the project relief from performance as required by the contract. Staff agrees. The inability of
Yellowstone to obtain financing, the decrease in value of RECs, and the bankruptcy of the
associated Emerald Forest Sawmill are not the types of things Staff believes are, envisioned by
the force majeure provisions of the FESA.
Staff believes that Idaho Power is entitled to collection of the full amount of the Delay
Liquidated Damages ($450,000), in addition to the pre-existing debt of $106,804. Under the
terms of section 5.6 of the contract, the parties have agreed that the damages Idaho Power would
incur due to delay in the facility achieving the scheduled operation date would be difficult or
impossible to predict with certainty, and that the delay liquidated damages are an appropriate
approximation of such damages.
STAFF COMMENTS 4 JULY 10, 2012
However, Idaho Power believes that the actual collection of those damages could require
additional legal proceedings prior to the Company being able to secure full payment for the
damages. As noted earlier, Yellowstone has threatened to file a complaint in Idaho District
Court challenging the legality of the liquidated damages in the contract. Yellowstone might
argue that the actual damages incurred by Idaho Power could be quantified at less than the
$450,000 delay liquidated damages amount specified in the contract.
The proposed Settlement collects $106,804 of previously uncollectable damages from a
defaulted agreement and provides approximately $93,196 in damages for default of the current
agreement. Consequently, the proposed settlement amount falls $356,804 short of the $556,804
amount Staff believes is rightfully owed by Yellowstone to Idaho Power pursuant to the terms of
the FESA.
Nonetheless, the proposed Settlement eliminates the uncertainty and additional cost and
resources necessary to litigate the termination of the agreement and validity of the delay
liquidated damages. While Staff would normally be reluctant to recommend approval of a
settlement that appears inconsistent with the express terms of the contract, Staff recognizes that
the current circumstances may support acceptance of the proposed Settlement. Currently,
electric market prices are far below the avoided cost rates specified in the contract.
Consequently, the actual damages to Idaho Power as a result of contract default are likely
minimal, and in fact, Idaho Power could arguably be better off because Yellowstone has
defaulted. The terms of the proposed Settlement acknowledge some liability for Yellowstone's
default while also acknowledging some uncertainty about the actual amount of damages to Idaho
Power. Approval of the proposed Settlement will also avoid litigation. Consequently, Staff
believes that the proposed Settlement is in the public interest.
RECOMMENDATIONS
Staff recommends approval of the Settlement Stipulation between Idaho Power and
Yellowstone Power.
STAFF COMMENTS 5 JULY 10, 2012
-fl.1
Respectfully submitted this day of July 2012.
x . S~41 Its.
Kristine A. Sasser
(

Deputy Attorney General
Technical Staff: Rick Sterling
i:umisc:comments/ipce 1 0.22ksrps comments
STAFF COMMENTS 6 JULY 10, 2012
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 10TH DAY OF JULY 2012,
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN CASE
NO. IPC-E-10-22, BY E-MAILING AND MAILING A COPY THEREOF, POSTAGE
PREPAID, TO THE FOLLOWING:
DONOVAN E WALKER
LISA D NORDSTROM
IDAHO POWER COMPANY
P0 BOX 70
BOISE ID 83707-0070
E-MAIL: [e-mail]
[e-mail]
RANDY C ALLPHIN
ENERGY CONTRACT ADMINISTRATOR
IDAHO POWER COMPANY
P0 BOX 70
BOISE ID 83707-0070
E-MAIL: [e-mail]
DICK VINSON
YELLOWSTONE POWER, INC.
P0 BOX 1539
THOMPSON FALLS MT 59873
E-MAIL: [e-mail]
DEAN J. MILLER
MCDEVITT & MILLER LLP
420 WEST BANNOCK ST
BOISE ID 83701
E-MAIL: ioe(mcdevitt-mi11er.com
JAQ1.QQ
SECRETARY
CERTIFICATE OF SERVICE