991021Decision Memo.doc

DECISION MEMORANDUM

TO: COMMISSIONER HANSEN
COMMISSIONER SMITH
COMMISSIONER KJELLANDER
MYRNA WALTERS
DON HOWELL
STEPHANIE MILLER
TONYA CLARK
RON LAW
BILL EASTLAKE
RANDY LOBB
RICK STERLING
SYD LANSING
WORKING FILE

FROM:

DATE: October 21, 1999

RE: CASE NO. IPC-E-99-8 (Idaho Power)
CANCELLATION OF PURPA CONTRACT
NORTHSIDE CANAL CO./Y-8 HYDRO (IdaWest Energy Co.)

On August 17, 1999, Idaho Power Company (Idaho Power; Company) filed an Application with the Idaho Public Utilities Commission (Commission) requesting Commission approval of the proposed cancellation of an existing Power Sales Agreement between Idaho Power and Y-8 Hydro. Reference Application Exhibit 2—Cancellation Agreement.
The Y-8 hydro project is a qualified small power production facility under the Public Utility Regulatory Policies Act of 1978 (PURPA). The facility is located in the Southwest Quarter of the Northwest Quarter of Section 28, Township 10 South, Range 21 East, Boise Meridian, Jerome County, Idaho. Pursuant to initial agreement, Y-8 Hydro was to provide Idaho Power with 80 KW of annual contract capacity and 560,682 kilowatt hours of annual energy. The project has since been derated to 20 KW and pursuant to contract restructuring is paid only for energy delivered. The revised annual estimated generation is 175,000 kWh. There is no minimum generation requirement.
The underlying Power Sales Agreement dated April 20, 1983, between Idaho Power and the Northside Canal Company was approved by Commission Order No. 15746 and is for a 35-year term expiring in June 2018. Subsequent to contract approval, Northside Canal Company entered into a general partnership with Y-8 Power Company. The general partnership is named Y-8 Hydro. The Power Sales Agreement was assigned to Y-8 Hydro. The Y-8 Power Company is a wholly-owned subsidiary of IdaWest Energy Company and owns less than 50% of Y-8 Hydro. IdaWest Energy Company and Idaho Power are both wholly-owned subsidiaries of Ida Corp Inc.
As reflected in the Application, Y-8 Hydro contacted Idaho Power regarding the potential for a cancellation or buy-out of the Power Sales Agreement. The Y-8 Hydro project has reportedly experienced periodic maintenance and operating problems during the term of the Agreement. Y-8 Hydro indicates that with an investment of approximately $5,000 the project could be returned to full operational level and operate reliably for the remaining life of the contract. Because of its small size and relatively remote location, however, Y-8 Hydro has indicated that it prefers to divest itself of the project.
Energy purchase prices under the Power Sales Agreement, Idaho Power contends, are approximately 64 mills per kWh. Idaho Power estimates that if the project is repaired and generates at the stated project capability for the remaining term of the Agreement, Idaho Power will pay approximately $107,900 net present value (NPV) for the energy output of the project. Market prices at the mid-C hub, the Company contends averaged 21.32 mills per kWh in 1998. Escalating this average price at 3% per year for the remaining life of the Power Sales Agreement, the Company contends, would result in an NPV of approximately $45,500 market value for the output of the project.
The underlying Power Sales Agreement provides that if the Power Sales Agreement is terminated in 1999, prior to completion of the full 35-year term, Y-8 Hydro would be obligated to pay Idaho Power an early termination payment of approximately $23,000. Y-8 Hydro has indicated that if Idaho Power insists on receiving a termination payment of $23,000 as a condition of cancellation, it will transfer the project to third party who will invest the $5,000 needed to repair the project and who will, in all likelihood, continue to operate the project at full capacity for the balance of the term or the Power Sales Agreement.
Recognizing that the cancellation of the Power Sales Agreement in 1999 is likely to result in cost savings to ratepayers, Idaho Power has agreed to accept a cancellation payment of $2,500, i.e., 50% of the cost of repairing the project from Y-8 Hydro. Idaho Power requests that the Commission approve the tendered Cancellation Agreement and requests that the matter be processed pursuant to Modified Procedure, i.e., by written submission rather than by hearing. Reference Commission Rules of Procedure, IDAPA 31.01.01.203. The Company contends that a Minute Entry rather than a formal Order approving the Cancellation Agreement would be sufficient for accounting and ratemaking purposes. Pursuant to the Cancellation Agreement, the Power Sales Agreement will be cancelled effective as of the date of Commission approval. Y-8 Hydro agrees for itself, its successors and assigns that following cancellation of the Power Sales Agreement, any future purchase by Idaho Power of electricity generated by the project, or any new, modified, or successor electric generating project utilizing the project’s generating equipment or located at the site of the project, will be at mutually agreeable rates.
On September 21, 1999, the Commission issued Notices of Application and Modified Procedure in Case No. IPC-E-99-8. The deadline for filing written comments was October 13, 1999. The Commission Staff was the only party to file comments (attached).
Staff notes that it has met with representatives of Idaho Power and has thoroughly reviewed the Company’s analysis. Staff states that it is convinced that if Y-8 foregoes cancellation of the contract, a willing buyer could indeed be found who would make the necessary investment to return the project to operating condition. Apparently, Staff notes, one willing buyer with an existing project in the same vicinity has already expressed some interest. If that were to occur, the Power Sales Agreement would be transferred to the new owners and remain in effect.
The Power Sales Agreement, Staff notes, is now clearly above market prices. Assuming reasonable future escalation rates for market prices, Staff contends that the power purchased under the Agreement would still exceed the cost of power obtained from the market. Staff agrees with the Company that obtaining power from the market in the future would be much less expensive than continuing to purchase under terms of the existing agreement.
Although the negotiated termination payment of $2,500, Staff contends, appears to be a somewhat arbitrary amount, Staff believes that it has been negotiated in good faith. Staff does not believe Y-8 Hydro has received preferential treatment as a consequence of IdaWest partial ownership. The negotiations, Staff states, seem to have been conducted at arms length, even though IdaWest and Idaho Power are sister companies.
Given the alternative, Staff believes that it would be better for Idaho Power and for ratepayers to accept the termination payment and allow the project to be abandoned. Although the $2,500 termination payment agreed to by the parties is far less than the $23,000 termination payment specified in the contract, Staff contends that it appears to be a reasonable settlement under the circumstances. Staff recommends that the Commission approve the Application to terminate the Agreement.

Commission Decision
Should the proposed cancellation of the existing Power Sales Agreement between Idaho Power and Y-8 Hydro be approved? If not, what direction should be given to the Company?

vld/M:IPC-E-99-8_sw2

DECISION MEMORANDUM 4