19911230Reconsideration_Order_No_24025.pdf

Office of the SeemtarySeMœDMe
DEC 3 0 1991
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION )OF IDAHO POWER COMPANY FOR AP-)CASE NO.IPC-E-90-20
PROVAL OF AN INTERCONNECTION )TARIFF FOR NON-UTILITY GENERA-)ORDER NO.24025TION-SCHEDULE 72.)
On April 12,1991,the Idaho Public Utilities Commission (Commission)
in Case No.IPC-E-90-20 issued final Order No.23631 approving Idaho Power
Company's (IPCo;Company)proposed Tariff Schedule No.72 -Interconnection
Tariff for Non-Utility Generation for effective date April 15,1991.
On April 19,1991,A.W.Brown,a protestor in the underlying case,filed
a timely Petition for Reconsideration.In Order No.23718 the Commission
granted Reconsideration on two of the issues raised by A.W.Brown:
1.The inclusion of interconnect costs in theadministrativelydeterminedavoidedcostrate;and
2.The calculation and reasonableness of the Schedule 72operationandmaintenanceservicecharges.
By this final Order on Reconsideration,the Commission with only slight
modification reaffirms Tariff Schedule 72.
The Commission initially scheduled the public hearing on
reconsideration for July 11,1991.Pursuant to the motion of Independent Energy
Producers of Idaho (IEPI)and the written stipulation of the parties to waive
statutory time limits for reconsideration,the Commission in Order No.23770 on
July 5,1991 vacated the July 11 hearing and rescheduled the hearing for
November 7,1991.
On November 7,1991,the public hearing on reconsideration in Case
No.IPC-E-90-20 was held in Boise,Idaho.The following parties appearedby and
through their counsel of record:
Idaho Power Company Barton L.Kline
Independent Energy Peter J.Richardson
Producers of Idaho
Commission Staff Scott D.Woodbury
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The remaining parties of record elected not to appear.Because Brown had
previously submitted pre-filed testimony but did not appear to sponsor the
testimony,it is therefore accorded no more weight than unsupported public
written comment.
L The Inclusion of Interconnect Costs in the Mministratively Determined
Avoided Cost Rate.
FERC regulations at 18 C.F.R.§292.101(b)(7)define "interconnection
costs"as:
The reasonable costs of connection,switching,metering,transmission,distribution,safety provisions and administra-tive costs incurred by the electric utility directly related to theinstallationandmaintenanceofthephysicalfacilities
necessary to permit interconnected operations with aqualifyingfacility,to the extent such costs are in excess of thecorrespondingcostswhichtheelectricutilitywouldhaveincurredifithadnotengagedininterconnectedoperations,but instead generated an equivalent amount of electric energyitselforpurchasedanequivalentamountofelectricenergyorcapacityfromothersources.Interconnection costs do notincludeanycostsincludedinthecalculationofavoidedcosts.
FERC regulations at 18 C.F.R.§292.306 regarding interconnection costs states
as follows:
(a)Obligation to pay.Each qualifying facility shall beobligatedtopayanyinterconnectioncostswhichtheStateregulatoryauthority(with respect to any electric utility over
which it has ratemaking authority)or non-regulated electricutilitymayassessagainstthequalifyingfacilityonanon-discriminatory basis with respect to other customers withsimilarloadcharacteristics.
(b)Reimbursement of interconnection costs.Each Stateregulatoryauthority(with respect to any electric utility overwhichithasratemakingauthority)and non-regulated utilityshalldeterminethemannerforpaymentsofinterconnectioncosts,which may include reimbursement over a reasonableperiodoftime.
Commission Staff:
Staff concludes after investigation that Idaho's avoided cost rates
include reasonable interconnect costs as invisioned by PURPA.Tr.p.73.
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Although its research indicated that Colstrip interconnection substation
(step-up)costs were excluded from the avoided cost computations,Staff contends
that the omitted portion,which amounts to less than five percent of total
interconnect costs,is insignificant and inconsequential.Tr.p.76.The reasonable
range of interconnect costs considered in IPC-E-89-11 was approximately plus or
minus thirty percent of the ordered amount (Order No.23357,pp.17-19).
Summarized,the interconnection costs associated with IPCo's SAR are as follows:
Colstrip step-up costs $18.56/kW/2=$9.28/kW
Valmy step-up costs $9.53/kW/2 =$4.77/kW
Transmission costs $213.00/kWTotalinterconnection$227.05/kW
costs...
Total included in $217.77/kWavoidedcosts...
Tr.p.79.
If the Commission were to recompute avoided cost rates for the purpose
of capturing the omitted component,Staff calculates that the change would ibe
less than one half of one percent,ranging from less than one tenth of a mill for
short term contracts to slightly more than three tenths of a mill for long term
contracts.Tr.p.81.Staff contends that to re-open avoided cost calculations for
the sake of what is a relatively insignificant oversight in the development of
estimates would be both unreasonable and counterproductive.To simply make a
mathematical adjustment,it states,would also ignore the interrelated nature of
the components and the variables that make up avoided costs.Tr.p.82.Staff
recommends no change.Tr.p.81.
Idaho Power:
Idaho Power agrees with Staff testimony and conclusions.The
interconnection cost component of the generic avoided costs (-170),it states,is a
just and reasonable representation of total SAR interconnection costs.Tr.pp.158,
159.
ORDER NO.24025 -3-
ŒPI:
The inclusion of interconnect costs in the administratively determined
avoided cost rate is not challengedby IEPI.Tr.p.51.
Based on the evidence of record and its analysis of same,the
Commission finds that reasonable interconnect costs were included in the
administratively determined avoided cost rates as required by FERC
regulations.We further find the omitted portion associated with Colstrip to be
relatively insignificant in relation to the aggregateavoided cost rate established.
We conclude that no adjustment in avoided cost rates paid to QFs is warranted
at this time;nor is a related adjustment required in the utility interconnect costs
charged to QFs.
2.The calculation and reasonableness of the Schedule 72 Operation and
Maintenance Service Charges.
The monthly operation and maintenance (O&M)service charges for QF
interconnection facilities under Idaho Power's proposed Schedule 72 as a
percentage of actual interconnection investment are 0.7%for distribution
facilities and 0.4%for transmission facilities.The Schedule 72 O&M percentages
are based on the current average O&M costs for Idaho Power's distribution and
transmission facilities.Tr.p.157.
Staff:
Based on its analysis of Idaho Power calculations and methodology for
computing Schedule 72 O&M rates,Staff concludes that the Company's
calculations are reasonable and based on correct data;and that the methodology
used is both logical and appropriate.Tr.p.64.The cost allocation method used by
the Company for O&M rates is based on investment.This method,Staff
contends,is logical and verifiable;simple to derive and to understand;and
results in the most realistic and fair allocation.Tr.pp.64,65.It is also a
common methodology used by other Idaho and northwest utilities,with the
exceptionof the Washington Water Power Company.Tr.p.66;IPCo Exhibit 3.
As pointed out by Staff,the Uniform System of Accounts which Idaho
Power follows does not separate QF interconnect costs or O&M expenses from
general utility expenses of the same type.Tr.p.64.Although an
ORDER NO.24025 -4-
incremental cost study would permit a more precise definition of O&M costs,it
was generally agreed by the parties that the cost of performing such a study
would be prohibitivelyexpensive.Tr.pp.68;46 (IEPD.
Although agreeing with the Company's underlying methodology aand
results,Staff contends that Idaho Power should charge non-level (escalating)
O&M rates rather than the essentially level O&M rates included in Schedule 72.
Tr.pp.73,186.The basis for Staff's proposalis the relationship of cost inflation to
the application of the rates.QFs,Staff contends,are disadvantaged in the early
years of the contract by IPCo's methodology.Tr.p.192.The question,Staff
states,is "who pays too much,and when?"Staff assumes that if the QF contract
term is less than the average asset life,the QF pays too much immediately.
Conversely,if the QF contract term is greater than the average asset life,the
rate payer pays too much eventually.Tr.pp.84,193.Staff recommends using
non-level rates that reflect the approximate inflation rate over the average asset
life of the appropriate accounts.The method proposed by Staff as reflected in
Exhibit 105 would reportedly eliminate the over payment requirement;would
more accurately match IPCo's O&M revenues with O&M expenses;and would
help encourage the QF industry by reducing QF expenses during the early debt
service years.
Staff envisions that the O&M rate will change whenever IPCo's O&M
costs change by more than about seven percent relative to capital costs.The
probability of this happening,Staff states,is identical under both IPCo's and
Staff's proposedmethodologies.Tr.p.190
IPQolkapons ;
Implementing Staff's O&M recommendation,the Company states,
would require separate O&M accounting for every QF and if IPCo is to remain
revenue neutral would entail unnecessary administrative complexity.Tr.p.158.
The associated administrative and regulatory burden would entail periodic
approval of changes in variables introduced into the equation.The added cost
the Companycontends is not supported by benefit/burden analysis.Tr.p.160.
Countering the Company's objections Staff contends that the issue is
not whether the tariff requires individual application to each QF,but whether
the increased costs and difficulties are reasonable relative to the
ORDER NO.24025 -5-
increased accuracy that will result.Tr.p.187.Staff concludes that the difference
is negligible (Tr.p.187);implementation will not be unduly burdensome (Tr.187);
billing will be computerized (Tr.p.188);billing non-level O&M rates would be no
more complicated than paying non-level QF rates (Tr.p.188);and that it is
unlikely that the total direct cost increase for converting to non-level O&M rates
would exceed $100/year (in 1991 dollars)for all QF purchases combined.
(Tr.p.189).Addressing the perceived issue of increased administrative and
regulatory burden associated with maintaining IPCo's revenue neutrality,Staff
contends that precise revenue neutrality should not be the goal,rather the goal
should be approximate neutrality.What we are talking about,Staff states,is a
small part of an approximation that is an approximation in itself,and if we're
only talking about a minuscule degree of non-neutrality,then that should be
ignored in order to maintain the underlying simplicity.Tr.p.196.
The Commission approves the calculation and reasonableness of the
underlying Schedule 72 operation and maintenance service charges.We find
Staffs proposal that O&M charges escalate over the life of each contract to more
reasonablyrepresent reality than IPCo's proposed level O&M charge.We further
find the additional administrative burden associated with implementing Staffs
proposal to be relatively insignificant.We therefore require Idaho Power to
submit a revised Schedule 72 tariff that includes escalating O&M rates
determined by the methodologyproposed by Staff in this case.Idaho Power may
use the Consumer Price Index (CPI)or may use some other indicator of actual
inflation that is reasonably applicable to the type of equipment being considered.
In either case,the Company should use the weighted average asset life of the
equipment being considered,as determined by its normal accounting practices,
and should apply the average inflation rate incurred over that period of time as
the escalation rate for contractual interconnect O&M rates.
IEPI:
IEPI takes issue with the underlying methodology used by IPCo to
calculate monthly O&M charges for interconnection equipment.The average
embedded cost calculation used by the Company,IEPI states,is a violation
ORDER NO.24025 -6-
of the spirit,if not the letter,of FERC Rules relating to the appropriate cost basis
for interconnection charges.Tr.p.33.It is also,IEPI states,in contravention of
what the Commission intended in Commission Order No.15746,p.38.Tr.pp.34,
35.FERC Rules and IPUC Order,IEPI contends,clearly presume pn
incremental as opposed to an average costing approach,since they focus on the
increased costs of connection.Tr.p.36.IEPI indeed contends that the correct
methodology to follow in the calculation of monthly O&M charges is an
incremental approach.Tr.p.46.All parties agreed,however,that an incremental
cost study would entail a rather sophisticated,expensive and involved
calculation;and that such a study,while valuable,would not be cost justified.
IEPI Tr.pp.46,180;IPCo;Staff Tr.p.68.
To arrive at what it believes is a surrogate or proxy for an incremental
cost study,IEPI eliminates A&G expenses from the Company's calculation of
O&M and also excludes A&G related payroll taxes.Tr.pp.38,41,47,59.The
Company'sA&G cost figures,IEPI argues,were the best proxy it could find for
fixed costs (which are included in average costs but excluded from incremental
costs).A&G expenses were eliminated not because such figures would give us
mathematically precise incremental costs;not because A&G costs are totally
unaffected by interconnection decisions ---but because,IEPI contends,they are
less affected by those decisions than other costs and thus removing them is the
best available method for estimating incremental costs,short of doing an
expensivestudy.Tr.pp.172,179.
Company data,IEPI concedes,yields reasonable figures (albeit total
system)for an approximation of incremental costs.Tr.p.170.IEPI's
recommended monthly O&M charge for distribution facilities is 0.5%.
IPJlo_Response;
Regarding the underlying methodology,Idaho Power admits that it did
not perform an incremental cost study analysis.However,Idaho Power contends
that such an analysis is not necessary.If the incremental plant is fairly similar
to the existing plant,then Idaho Power states that it is acceptableto use that
ratio,i.e.,a percentage multiplied by the cost of the incremental plant to
estimate the O&M or A&G.Tr.p.126.It was generally agreed that we are
dealing with approximations and estimates.Not all of the
ORDER NO.24025 -7-
associated adjustments,both additions and reductions,that could have been
made have been made.Tr.pp.56,58,148.With respect to A&G expenses,this is
true for both the setting of avoided cost rates and the calculation of interconnect
O&M.Tr.p.122.
Idaho Power contends that if A&G costs are included in the avoided
cost rates paid to QF's,then they ought to be included in calculating the O&M
expenses associated with interconnect rates.Tr.pp.121,139.Consistency and
common sense,it states,requires no less.Tr.pp.115,125,146.All things being
equal,the Companybelieves that it is worthwhile to treat the same issue on both
sides of the equation the same way.Tr.p.146.It is undisputed that A&G costs
are included in the setting of IPCo avoided cost rates;indeed it is standard
practice in the industry.Tr.p.114.It is also common practice for utilities to
charge QF's for both capital and O&M costs of interconnection.Tr.p.112;Exhibit
3.
What this case has to do with,Idaho Power states,is what happensto
IPCo's A&G plant when they have to increase the size of their distribution
system or the size of their transmission system to bring the QF power to their
load center.Tr.p.127.Transmission and distribution investment are the
accounts to which interconnect investment are booked.Tr.p.133.A&G varies
with the level of production,transmission and distribution plant.Tr.p.129.
Increased interconnection investment increases A&G expenses.Tr.p.133.The
degree or level of increase arguably varies depending on whether or not the
resources added are Companyor QF.IEPI Tr.pp.178,179.
StafŒœnst
Staff disagreeswith IEPI's proposalto eliminate A&G.Tr.p.67.
The Commission finds the underlying methodology used by IPCo to
calculate monthly O&M charges for interconnection equipment to be reasonable.
Under the facts of this case we find a strict incremental cost study to be
contraindicated and not justified on a cost/benefit basis.We further find the
Company's reasoning on inclusion of A&G expenses in O&M interconnect rates,
as expressedabove,to be persuasive.Based on our analysis,we are satisfied
that the Company'sproposal,without change,establishes a reasonable proxy for
incremental O&M costs.
ORDER NO.24025 -8-
CONCLUSIONS OF IAW
I
The Idaho Public Utilities Commission has jurisdiction over the Idaho
Power Company and The Washington Water Power and PacifiCorp Companies
pursuant to the authority and power granted it under Title 61,Idaho Code and
pursuant to the Rules of Practice and Procedure of the Idaho Public Utilities
Commission,IDAPA 31.A.
II
The Idaho Public Utilities Commission has authority under the Public
Utility Regulatory Policies Act of 1978 (PURPA)and implementing regulations of
the Federal Energy Regulatory Commission (FERC)to set avoided costs,to order
electric utilities to enter into fixed term obligations to purchase energy from
qualifying cogenerationand small power production facilities,and to implement
FERC rules.PURPA Sections 210,210(a),210(f),16 U.S.C.A.Sections 824-A-3,
824-A-3(a),(f);Afton Energy,Inc.vs.Idaho Power Company,107 Idaho 781,693
P.2d 427 (1984).
ORDER
In consideration of the foregoing and as more particularly described
above and based on the Commission's review of the petition for reconsideration,
its prior orders and the record,it is the final Order of the Commission on
reconsideration that tariff Schedule 72 as submitted by the Company in Case
No.IPC-E-90-20 be reaffirmed subject to the Commission's revision requirements
regarding use of non-level vis-à-vis level O&M charges.The Company is directed
to submit a revised tariff.
THIS IS A FINAL ORDER ON RECONSIDERATION.Any party
aggrievedby this Order or other final or interlocutory Orders previously issued in
this Case No.IPC-E-90-20 may appeal to the Supreme Court of Idaho pursuant
to the Public Utilities Law and the Idaho Appellate Rules.See Idaho Code
§61-627.
ORDER NO.24025 -9-
DONE by Order of the Idaho Public Utilities Commission at Boise,
Idaho,this day of December 1991.
MARSHA H.SMITH,PRESIDENT
IJË2 .MILLER,COMMISSIONER
RALP NËLSON,COMMISSIONER
ATT ·
M .WAI/ÌÌRS,SECRETARY
SW:jr/O-1634
ORDER NO.24025 -10-