ipce998.swr.doc

SCOTT WOODBURY
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 1895

Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5983

Attorney for the Commission Staff

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF THE APPLICATION OF IDAHO POWER COMPANY FOR CANCELLATION OF POWER SALES AGREEMENT. )
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CASE NO. IPC-E-99-8

COMMENTS OF THE COMMISSION STAFF

COMES NOW the Staff of the Idaho Public Utilities Commission, by and through its Attorney of record, Scott Woodbury, Deputy Attorney General, and in response to the Notice of Application, Notice of Modified Procedure and Notice of Comment/Protest Deadline issued on September 21, 1999, submits the following comments.
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.
The Y-8 hydro project is a qualified small power production facility under the Public Utility Regulatory Policies Act of 1978 (PURPA). 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 de-rated to 20 kW and pursuant to contract restructuring is paid only for energy delivered. The revised annual 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 Ida-West Energy Company and owns less than 50 percent of Y-8 Hydro. Reference 18 CFR § 292.206(a)(b). Ida-West Energy Company and Idaho Power are both wholly-owned subsidiaries of Idacorp, 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 three percent 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 prior to completion of the full 35-year term, Y-8 Hydro would be obligated to pay Idaho Power an early termination payment. In 1999 this early termination payment would be 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 a 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 of the Power Sales Agreement.
Recognizing that the cancellation of the Power Sales Agreement in 1999 is likely to result in a cost savings to ratepayers, Idaho Power has agreed to accept a cancellation payment of $2,500, i.e., 50 percent of the cost of repairing the project from Y-8 Hydro.

STAFF ANALYSIS
Staff has met with representatives of Idaho Power and has thoroughly reviewed the Company’s analysis.
If the contract is terminated in 1999 as proposed, Idaho Power is rightfully owed a termination payment of $23,000. However, Y-8, rather than pay the termination payment, has indicated that it would sell the project, along with its contract, to a third party. The third party would make the necessary investment to repair the project and would return it to operation. Payments for energy at 64 mills per kWh would then presumably resume.
Staff is convinced that if Y-8 forgoes 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, 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 only apparent alternatives for Idaho Power then are 1) to cause the project and its associated contract to be sold to a third party, therefore resuming payment of 64 mills per kWh for future energy purchases, or 2) to accept a much smaller termination payment with an agreement that the project would be permanently abandoned.
The Power Sales Agreement is now clearly above market prices. Assuming reasonable future escalation rates for market prices, 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.
The negotiated termination payment of $2,500 appears to be a somewhat arbitrary amount. It appears, however, to have been negotiated in good faith. Staff does not believe Y-8 Hydro has received preferential treatment as a consequence of Ida-West’s partial ownership. The negotiations seem to have been conducted at arms length, even though Ida-West and Idaho Power are sister companies.

STAFF RECOMMENDATION
Given the two alternatives, Staff believes 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, it appears to be a reasonable settlement under the circumstances. Staff recommends the Commission approve the Application to terminate the Agreement.

Dated at Boise, Idaho, this day of October 1999.

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Scott Woodbury
Deputy Attorney General
Technical Staff: Rick Sterling

SW:RS:gdk:i:word/umisc/comments/ipce998.swr

STAFF COMMENTS 1 OCTOBER 4, 1999