20140519final_order_no_33038.pdf

Office of the Secretary
Service Date
May 19,2014
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF IDAHO POWER COMPANY FOR
APPROVAL OF A SPECIAL CONTRACT
WITH J.R. SIMPLOT COMPANY.
)) CASE NO. rPC-E-13-23
)) ORDER NO. 33038
)
Idaho Power filed an Application with the Commission on December 4, 2013,
requesting that the Commission issue an Order approving special contract terms for electric
service between Idaho Power and J.R. Simplot Company. Simplot filed an answer on February
5,2014, disputing Idaho Power's contract language and requesting that the Commission include
Simplot's suggested clauses in the contract. On February 25,2014, the Commission issued a
Notice of Application and Notice of Modified Procedure setting a comment deadline of March
28,2014, and a reply deadline of April4, 2014. Order No. 32984.
On March 28, 2014, Idaho Power, Commission Staff and Simplot each filed
comments. A Simplot Motion to extend the reply deadline until April Ll,2Ol4, was granted by
the Commission on April 3, 2014. Order No. 33010. Each party filed reply comments.
By this Order, we clarify our position regarding the liability dispute between the
parties and provide guidance as to the appropriate rate to be charged to Simplot.
THE APPLICATION
Idaho Power states, in spring 2013, a Simplot representative contacted Idaho Power
requesting that the Company enter into negotiations for a special contract for Simplot's Caldwell
plant. [n response, Idaho Power drafted a special contract and the parties entered into
negotiations regarding the specific terms.
Idaho Power maintains that the Company and Simplot have reached agreement "as to
nearly all of the terms and conditions of the contract, but have reached an impasse on certain
provisions regarding limitations on liability." Application at 1.
Idaho Power requests that the Commission approve terms regarding the bilateral
waiver of indirect, special and consequential damages. Application, Attachment 1, Section 11.2.
The Company also asks the Commission to approve its proffered terms regarding limitations on
direct damages. Id., Section 11.3.
ORDER NO. 33038
Should the Commission determine that it is "prudent for the Company to assume the
risk for unlimited direct damages and consequential damages associated with Simplot's business,
Idaho Power requests an opportunity to re-examine the terms of the special contract, including,
but not limited to, an appropriate cost-of-service, that appropriately reflect this assumption of
risk." Application at 8.
SIMPLOT'S ANSWER
Simplot argues that Idaho Power's request for limited and waived liability is a
violation of "the well-settled Idaho legal authority prohibiting the inclusion of such language in a
utility's tariff." Answer at 2. Simplot maintains that Idaho Power's proffered clauses contradict
the Idaho Supreme Court's rulings that exculpatory clauses used by a public utility are
unenforceable.
Simplot also disputes Idaho Power's calculation of the rates included in the contract.
Simplot states that "the cost of service study used to set Simplot's rate is vintage 2010 and is out
dated [sic]."
COMMENTS
Idaho Power
Idaho Power maintains that its limitations on liability are narrowly tailored to protect
customers. "Today, the electric grid faces a variety of challenges to maintaining its reliability,
from integrating increasing amounts of intermittent generation to acts of sabotage. The grid's
technological complexity results in potential service failures unrelated to human error. In light
of this complexity, it is very difficult for a jury to distinguish between human error, negligence,
and failures of technology beyond ldaho Power's control. Limitations on liability protect
utilities and customers from 'liability for catastrophic loss and potential financial distress."' IPC
Comments at 3.
Idaho Power asserts that the Commission's last "ofhcial policy statement" regarding
tort immunity limitations appeared in the Contel case. Case No. UPL-E-89-9. While the
Commission found that limitations on a utility's liability are "seldom just and reasonable," the
Commission did not conclude that it was legally prohibited from approving limitations on
liability. Comments at 5. The Commission stated that limitations on liability should be
approved only where the record established that (l) it is in the public interest to provide the
particular utility service and to encourage the provision of the service; and (2) there is a
ORDERNO. 33038
substantial likelihood that the service would not be provided in the absence of limitations of
liability.
The Company insists that special contract customers are better positioned than a
utility to protect their own interests because they can more accurately assess their exposure to
losses. Idaho Power maintains that limitations of liability allow for fair and reasonable treatment
of all customers because small customers are not required to potentially subsidize
disproportionately large damage awards to large commercial and industrial customers. The
Company argues that public policy supports the Company's proposed liability limitations "as
necessary measures to protect customers, maintain just and reasonable rates, and allocate a
portion of the risk to the special contract customer who is best able to assess and mitigate it."
Comments at 6.
Finally, Idaho Power states that, pursuant to its regulatory compact, it is required to
serve all customers in its service territory and cannot choose to limit its risk by refusing service
to customers with exceptional potential damages. Therefore, "it would be unjust to hold Idaho
Power liable for potentially large unlimited direct and consequential damages when its currently
authorized rate of return on equity does not reflect the assumption of such risks." Comments at
9. Idaho Power reiterates that it is not seeking to be exempt from liability - it seeks to limit
damages that are potentially significant and outside Idaho Power's ability to predict or control.
Comments at 14.
Idaho Power professes that Simplot's special contract rates were calculated based on
a cost-of-service study specific to the new Caldwell site. The result of the updated cost-of-
service analysis was an annual revenue requirement for the new Caldwell facility of $8,302,325.
However, since this study was completed, Idaho Power's "base rates for all of its customers have
been adjusted to reflect Commission orders for the Open Access Transmission Tariff ("OATT")
deferral adjustment, the depreciation study adjustment, the Boardman balancing account
adjustment, and, most recently, the Langley Gulch power plant adjustment." Comments at 22.
After considering these factors, the adjusted total revenue requirement for the Caldwell facility is
$8,948,115. Id.
The Company argues that "Overall, the Company's approach is consistent with
previous cost-of-service determinations used to establish rates for each of the Company's current
special contracts. It is also consistent with the Company's overall objective of proposing a rate
oRDER NO. 33038
design based on a defensible study that can demonstrate that the special contract is in the public
interest and existing customers will not be unduly harmed." Comments at25.
Staff
Staff maintains that the issue of limitation of liability has been adequately addressed
by the parties to the contract. Staff clarified that, despite Simplot's argument to the contrary,
special contract customers negotiate terms with Idaho Power for electric service which puts them
in a different position than a customer receiving service under a tariff. Ultimately, Staff stated
that a determination regarding limitations on liability is a policy decision best left to the
Commission.
Staff more fully addressed the rate issue. Staff proposed that the average rate for the
Simplot Caldwell special contract be established using the simple average of the three existing
special contract rates, which is 3.795 l/kwh.t The associated annual revenue requirement is
$8,003,281. Staff proposes its rate for two reasons. First, the three special contract rates are rates
currently approved by the Commission for similarly situated customers, and second, the cost-of-
service results presented in this case are not credible.
Staff asserts that, for several reasons, the Commission has not established special
contract customer rates at a full cost-of-service level in recent cases. Likewise, for this case,
Staff believes that a cost-of-service based rate is not appropriate. Staff maintains that the cost-
of-service calculations presented in this case are outdated and inappropriate for establishing
current class cost-of-service. In general, the accounting data is not current, the class usage
characteristics used to develop demand and energy allocators has not been updated and the
methodology has not been approved. Staff believes that Simplot's initial rates should not be
based on Company proposed cost-of-service when the proposed cost-of-service methodology has
not been fully vetted nor approved by the Commission. Therefore, Staff recommended that the
average of the existing rates currently being paid by Idaho Power's three special contract
customers be established as the initial average rate for the new Simplot Caldwell special
contract.
rAssuming the level of sales used by Simplot and Idaho Power, this average rate would produce annual revenue of
S8,003,281 (.03795 $/kwh x 210,890,146 kWh = $8,003,281).
ORDERNO. 33038
Simplot
In its answer, Simplot proposed a o'compromise rate" of 4.197 p/kwh which Simplot
claims 'omore accurately reflects the fact that the Idaho Project will also be a special contract
customer that takes power at the transmission, rather than the primary, voltage level."
Comments at 3. In support of its compromise rate, Simplot points out that the Commission
recently "declared that it is inappropriate to use the 201I cost-of-service study to allocate rates."
Comments at 6. Simplot asserts that its proposal would place Simplot "in a comparable position
to the other special contract customers, and is therefore superior to Idaho Power's recommended
rate, which has no basis in Commission precedent or rate-making principles." Comments at 7.
Although Simplot proposed a base rate of 4.197 likwh in its answer, based on newly
available information, Simplot now proposes an alternative base rate of 3.699 P/kWh. Simplot
asserts that this rate "would appropriately place Simplot's Idaho Project on the same footing as
Idaho Power's other special contract customers and allow Simplot to receive the benefit of
reduced electricity rates that should be associated with a switch from primary to transmission
level delivery." Comments at l.
Simplot maintains that, during negotiations, Idaho Power presented Simplot with a
proposed rate design that would have resulted in an overall base rate of 3.937 d/kwh. However,
in an attachment to its Application in this case, Idaho Power shows a base rate for Simplot of
4.243 P/kWh. Simplot asserts that the 4.243 l/kwh rate appeared for the first time in Idaho
Power's Application to the Commission and that the Company included that rate without
Simplot's prior knowledge. Comments at 3. Simplot states that "Idaho Power's offered rates are
15% higher than the average of the three current special contract customers' rates and 19%
higher than the rates at Simplot's Don Plant, which has approximately the same level of power
consumption and a similar load factor." Comments at 5.
REPLY COMMENTS
Idaho Power
In reply, Idaho Power re-affirms its position that the Company's proposed rates are "a
reasonable reflection of the expected cost of providing service to the new Caldwell facility."
Reply at2. The Company states that Simplot's assertions regarding how Idaho Power arrived at
its proposed rate have no basis in fact or analysis and do not accurately reflect the actual
methodology utilized by the Company. Idaho Power also states that, contrary to Simplot's
ORDERNO. 33038
assertions, "Simplot's new facility does not take service at transmission-level voltage of 44
kilovolts ('kV') or higher but, rather, at primary-level voltage of 12.5 kV through a distribution
substation." Reply at 4.
Idaho Power admits that "the reason the proposed rates are higher than existing
special contract rates is because the existing rates for the Company's three special contract
customers are approximately l0 percent below cost-of-service, while the Company's proposed
rates for the new Caldwell facility reflect full cost-of-service." Reply at 4. The Company asserts
that its intent "was to calculate cost-based rates that reflect the new Simplot facility's allocable
share of all currently approved costs." Reply at 7. Idaho Power explains that the difference
between the rate that the Company provided in September 2013 and the rate provided in
December 2013 (when this Application was filed with the Commission) is the adjustment made
for costs that have been approved for recovery since the 20ll rate case. Reply at 8.
The Company discourages the Commission from utilizing Staffs and Simplot's
approach of averaging the three existing special contract customers' rates. Idaho Power explains
that special contract customers are not a combined class of similarly situated customers, "but
rather three separate customer classes that are unique to the extent that they warrant individual
consideration from a regulatory and ratemaking perspective." Reply at 12. Idaho Power further
argues that Staffs and Simplot's proposed methodology is "an unreasonable departure from
cost-based pricing." Comments at 13. The Company maintains that establishing rates for
Simplot that are below cost-of-service will create the potential for rate instability and set an
unworkable precedent for future new special contract customers. The Company states that, 'oif
the Commission establishes averaging as the methodology to determine rates for new special
contracts, the Company will be greatly limited in the level of reliable pricing information it can
provide. Essentially, the Company would be limited to providing an average of existing special
contract rates as a short term price estimation, with the significant caveat that the Company's
next general rate case may result in a shift to cost-based rates that is completely unrelated to the
initial average price. This unpredictable volatility will likely be viewed negatively by
prospective special contract customers, thus hindering the State of Idaho's ability to attract new
large businesses to Idaho Power's service area." Reply at 16.
oRDER NO. 33038
Stalf
In initial comments filed on March 28,2014, the Staff and J.R. Simplot Company
both proposed an average contract rate based on the rate average of the existing three special
contracts. However, Staff and Simplot used different rates to calculate the average and therefore,
calculated different averages. Staffs average was 3.795 l&Wh and Simplot's average was
3.699 p/kwh.
The rates are different because Staffbased its calculations on base revenues and sales
in the Langley Gulch case, Case No. IPC-E-12-14, and Simplot based its calculations on base
revenues and sales in Idaho Power's 2013 PCA filing, Case No. IPC-E-I3-10. The tariffed rates
(demand, energy and customer charges) are the same in both cases but energy and possibly
demand billing determinants are different. The Langley Gulch case used forecasted billing
determinants for June 2012 through May 2013. The PCA case used forecasted billing
determinants for June 2013 through May 2014. The different test years produced different
revenues and different energy sales amounts for existing special contract customers even though
the tariffed rates were the same in both years. Because special contract rates are different, the
average ofthe special contract rates are different.
Staff agrees that the calculation should be based on the most recent base revenues and
sales. In utilizing the rates from Idaho Power's 2013 PCA, Staff supports an initial annual
revenue requirement of $7,800,827 . The revenue requirement is the average rate times expected
sales (.03699 $/kwh X 210,890,146 kwh : $7,800,827). This revenue requirement is
$l,l47,290less than the $8,948,117 proposed by Idaho Power. It is Staff s proposal that the J.R.
Simplot - Schedule 33 demand and energy rates be designed to produce $7,800,827 in annual
revenue.
Staff also noted that two other filings will change all customers' rates on June l,
2014. Base rates will change as the result of Commission Order No. 33000 issued in Case No.
IPC-E-13-20, which requires Idaho Power to move some Net Power Supply Expense (NPSE)
from the PCA into base rates. PCA rates are also expected to change on that same day as a result
of Idaho Power's annual PCA filing which is scheduled for April 15. These two changes will
impact rates for all customer classes including special contract customers and will change rates
established in this case for the new Simplot special contract.
ORDER NO. 33038
Simplot
Simplot urges the Commission to prevent Idaho Power from limiting its liability.
Simplot explains that "the only circumstances at issue in this case are those in which Idaho
Power has itself committed some legal wrong that causes damages to flow to Simplot. Thus,
Idaho Power's concern with 'forces beyond the utility's control' is irrelevant." Reply at 3.
Simplot also maintains that Idaho Power incorrectly represents that the ratepayers would suffer if
liability is not limited. Simplot explains that o'a utility's legal wrongs are not ratepayer expenses
in Idaho." Reply at 3.
Simplot states that Idaho Power's request for "a waiver for liability not only of its
negligent conduct but also of its own intentionally wrongful conduct" is legally impermissible.
Reply at 4. Alternatively, Simplot argues that, even if the Commission finds that it is not a
violation of law to allow such limitations on liability, "the Commission should still reject Idaho
Power's proposed contract language because it is entirely unsupported by any evidence or facts
establishing the need for such broad waivers of liability." Reply at 10.
FINDINGS AND CONCLUSIONS
The Idaho Public Utilities Commission has jurisdiction over Idaho Power Company,
an electric utility, and the issues raised in this matter pursuant to the authority and power granted
it under Title 6l of the Idaho Code. Specifically, the Commission has jurisdiction pursuant to
Idaho Code $ 6l-520 regarding the Commission's authority to "fix just and reasonable standards,
classifications, regulations, practices, measurements or service to be furnished, imposed,
observed and followed by all electrical, gas and water corporations. . . ."
The Commission has thoroughly reviewed the Application, Simplot's answer, and the
comments and replies of all parties. Contrary to Simplot's assertions, limitations of liability are
not, per se, illegal and unenforceable in utility contracts. By the same token, "no regulated
monopoly can contract away its duty to serve the public interest or the state's right to enforce
that obligation." Bunker Hill Co. v. Washington Water Power Co., 98 Idaho 249,253, 561 P.2d
391,395 (1977).
Idaho Code $ 6l-302 mandates that o'every public utility shall furnish, provide and
maintain such service, instrumentalities, equipment and facilities as shall promote the safety,
health, comfort and convenience of its patrons, employees and the public, and as shall be in all
respects adequate, efficient, just and reasonable." In furtherance of the utilities' duties, this
ORDER NO. 33038
Commission is directed to "prescribe rules and regulations for the performance of any service or
the fumishings of any commodity of the character furnished or supplied by any public utility,
and, on proper demand and tender of rates, such public utility shall furnish such commodity or
render such service within the time and upon the conditions provided in such rules." Idaho Code
$ 6l-507. The Commission is authorized to "fix just and reasonable standards, classifications,
regulations, practices, measurements or service to be furnished, imposed observed and followed
by all electrical, gas and water corporations. . . ." Idaho Code $ 6l-520.
The Legislature enacted a 'Just and reasonable" standard in order to allow the
Commission 'Judicial interpretation on a case by case basis, considering the particular
circumstances" of each situation. Powers v. Canyon County, 108 Idaho 967 ,972,703 P.2d 1342,
1347 (1985). ooln arriving at a conclusion as to what constitutes 'adequate, efficient, just and
reasonable' service in any particular case, the relative rights of the utility and the public must be
taken into consideration, for, under some circumstances, each may have to suffer some
inconvenience or loss." In re Application of Union Pac. R. Co., for Leave to Discontinue Agency
at Montour, Idaho,64 Idaho 529, 532, 134 P.2d 599, 602 (1943). Numerous state, circuit and
federal courts, including Idaho, use the Restatement of Contracls as a starting point in an analysis
of whether an exculpatory clause or limitation of liability will be deemed valid. The Restatement
of Contracrs $ 574 states that
A bargain for exemption from liability for the consequences of negligence
not falling greatly below the standard established by law for the protection of
others against unreasonable risk of harm, is legal except in the cases stated in
s 575.
Section 575 then states:
(l) A bargain for exemption from liability for the consequences of a willful
breach of duty is illegal, and a bargain for exemption from liability for the
consequences of negligence is illegal if
(a) the parties are employer and employee and the bargain relates to
negligent irjury of the employee in the course of the employment, or
(b) one of the parties is charged with a duty of public service, and the
bargain relates to negligence in the performance of any part of its duty to the
public, for which it has received or been promised compensation.
(2) A bargain by a common carrier or other person charged with a duty of
public service limiting to a reasonable agreed valuation the amount of
damages recoverable for injury to property by a non-willful breach of duty is
lawful.
9ORDER NO. 33038
(Emphases added.)
In its discussion regarding permissible limitations of liability, the Idaho Supreme
Court recently stated that "[t]he general rule sustaining agreements exempting a party from
liability for negligence is subject to two exceptions: '(l) one party is at an obvious disadvantage
in bargaining power; or (2) a public duty is involved (public utility companies, common
carriers)."' Jesse v. Lindsley, 149 Idaho 70,75,233 P.3d l, 6 (2008) (internal citations omitted).
"The idea of a public duty is closely related to the idea of public policy. . . ." Lee v. Sun Valley
Company, 107 Idaho 976,978, 695 P.2d 361,363 (1985). Whether a contract violates public
policy is a question of law for the court to determine from all of the facts and circumstances of
each case." Jesse,233 P.3d at 6. However, courts "are usually reluctant to allow those charged
with a public duty, which includes the obligation to use reasonable care, to rid themselves of that
obligation by contract. . . . Implicit in such decisions is the notion that the service performed is
one of importance to the public, and that a certain standard of performance is therefore required."
Wagenblast v. Odessa School Dist. No. 105-157-l66J,ll0 Wash.2d 845, 849, 758P.2d968,972
(1988). This Commission has stated that our authority to limit a public utility's liability in
connection with the provision of utility services "must follow our conscious exercise of
discretion in a formal case proceeding or rulemaking in which we have had an opportunity to
review the factual underpinnings for the claim that liability should be limited." In the Matter of
Advice Letter No. 89-05 of Contel of the West, Inc., Order No. 22812 at 3.
Exculpatory clauses, whether in contracts or tariffs, are often disfavored because
these clauses "alter the normal rule that an entity is responsible for the consequences of its
negligent conduct; they are imposed on a take-it-or-leave-it basis, without the possibility of
negotiation; they benefit the typically economically stronger utility; and, as they are also drafted
by the utility, it is fair to construe uncertain language against the utility . . . ." Uncle Joe's Inc. v.
L.M. Berry and Co., 156 P.3d 1113, 1119 (2007). However,'o[c]ourts are virtually unanimous
that provisions limiting a public utility's liability are valid so long as they do not purport to grant
immunity or limit liability for gross negligence." Ganison v. Pacific Northwest Bell,45 Or.App.
523,531, 608 P.2d t206,1214 (1980).
In the present case, the proposed contract between Idaho Power and Simplot was
arrived at through mutual negotiations. We do not find evidence that the terms were imposed on
Simplot or that any obvious disadvantage in bargaining power existed. Indeed, the parties are
ORDER NO. 33038 l0
before the Commission on issues related to acceptable terms to be included in a fully negotiated
contract. We continue to find the Restatement of Contracls instructive and persuasive.
Exempting a public utility from the consequences of negligent conduct when the utility is
charged with a public duty is not reasonable. Idaho Power cannot abrogate its general duty to
exercise reasonable care in operating its system to avoid unreasonable risks of harm to its
customers. However, we find that limiting the liability of a utility to a reasonable, agreed-upon
valuation for damages recoverable by a non-willful breach of duty is fair, just and reasonable.
We further find that any limitations of liability regarding intentional tortious conduct or gross
negligence are contrary to the public interest and, as such, are unfair and unreasonable.
Idaho Power requested that, if the Commission failed to adopt its proposals regarding
limitations of liability, the Company be permitted to re-examine all terms of the special contract
in light of the Commission's findings. Consequently, we grant Idaho Power's request to re-
examine and renegotiate the terms of its special contract with Simplot. Based on evidence and
arguments provided through the comments and replies of the parties, we offer guidance with
respect to the appropriate rate to be charged by Idaho Power to Simplot.
The Commission has broad authority to regulate and fix the rates and charges
assessed by Idaho Power. Idaho Code $$ 6l-502,61-503. "Not all differences in a utility's rates
and charges as between different classes of customers constitute unlawful discrimination or
preference. . . ." Application of Boise Water Corp.,l28 Idaho 534, 539,916 P.2d 1259, 1264
(1996). The Commission "is not under a duty to set rates for different classes of customers
which are either equal or uniform provided the rates set are just and reasonable." FMC Corp. v.
Idaho Public Utilities Com'n, 104 Idaho 265, 275,658 P.2d 936, 946 (1983). Each special
contract customer exists as a separate class. "Differences in rates between classes of customers
based on such criteria as the quantity of electricity used, nature of the use, the time of the use, the
pattern of the use, or based on differences of conditions of service, or cost of service are not only
permissible but often are desirable and even necessary to achieve reasonable efficiency and
economy of operation." Utah-Idaho Sugar Co. v. Intermountain Gos Co., l00Idaho 368,377,
597 P.2d 1058, 1067 (1979), citing Pennsylvanio Public Utility Comm'n v. Metropolitan Edison
C o., 86 P.U.R. 3d | 63, 195-96 (Pa.Pub.Util.Comm. I 970).
Because each special contract customer is considered a separate class with different
conditions and contract terms affecting their rates, we find it unreasonable to determine a rate for
l1oRDERNO. 33038
Simplot by simply averaging the rates of Idaho Power's other special contract customers. It is
just and reasonable to utilize the Company's most recent cost-of-service study as a basis in
determining the appropriate rate. Cost-of-service studies attempt to apportion to each customer
class the various costs incurred by a utility in providing service to that class. Determining cost-
of-service is more akin to an art than a mathematical science. Different variables can be used to
arrive at different results. Moreover, "cost of service is but one criterion among many for
consideration in forming a basis for rate differentiation between classes of service and between
classifications of customers within a certain schedule." Grindstone Butte MuL Canal Co. v.
Idaho Public Utilities Com'n,102 Idaho 175,179,627 P.2d 804, 808 (1981). However, we find
that a rate utilizing cost-of-service as a starting point for negotiation is consistent with prior
Commission Orders and is fair, just and reasonable.
ORDER
IT IS HEREBY ORDERED that the Application of Idaho Power for approval of
special contract terms for electric service between Idaho Power and J.R. Simplot Company is
denied, as more particularly described herein.
THIS IS A FINAL ORDER. Any person interested in this Order may petition for
reconsideration within twenty-one (21) days of the service date of this Order. Within seven (7)
days after any person has petitioned for reconsideration, any other person may cross-petition for
reconsideration. See ldaho Code $ 6l-626.
oRDER NO. 33038 t2
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this
day of May 2014.
PAUL zuEL
M t6'^L
MARSHA H. SMITH, COMMISSIONER
ATTEST:
Commission Secretary
O:IPC-E-13-23_ks3
oRDER NO. 33038 13