PACE001.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 PACIFICORP DBA UTAH POWER & LIGHT COMPANY FOR APPROVAL OF A NEW RENEWABLE ENERGY TARIFF, SCHEDULE 70 NEW WIND, GEOTHERMAL AND SOLAR POWER RIDER - OPTIONAL.
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CASE NO. PAC-E-00-1

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 March 23, 2000, submits the following comments.

BACKGROUND
On January 28, 2000, PacifiCorp filed an Application requesting authority to implement Schedule 70, New Wind, Geothermal and Solar Power Rider. As a result of concerns raised by the Commission Staff and to square its filing with submittals in other states, PacifiCorp withdrew its original Application and submitted a revised Application on March 13, 2000.
The new tariff is being proposed by PacifiCorp because it was offered as a commitment in the recently approved merger between PacifiCorp and ScottishPower (Case No.
PAC-E-99-01). The commitment made by PacifiCorp and ScottishPower was as follows:

Within 60 days after the completion of the transaction, PacifiCorp
will file applications in each state for a “green resource” tariff.

The proposed tariff will allow customers who so choose, to purchase blocks of energy from new renewable generation sources. All customer classes are eligible to participate. The customer will choose the number of blocks to purchase, which is not dependent on the amount of energy used. Customers who participate will pay an additional $4.75 per month per 100 kWh block of renewable energy. This premium is in addition to the normal billed rate. The premium will be used to cover the costs of the program. Program costs include marketing costs, program administration and the above market incremental cost of the renewable energy.
For accounting purposes the costs associated with the program will be booked in accordance with normal FERC accounting procedures. For the purpose of earnings demonstrations (i.e., Results of Operations reports, general rate cases, etc.) a normalizing adjustment will be made to remove the revenues, program costs and above market costs of the energy associated with the program from the revenue requirement calculation. This will assure that no program costs are borne by non-participants.
The program is considered by the Company to be a generation program. As such, all revenues and costs will be allocated system-wide using the generation allocation factors.
The Company proposes to provide annual reports commencing October 31, 2000. The reports will include the revenues received, blocks purchased, blocks generated or contracted for, and other program costs. The reports are intended to provide the Company, the Commission and interested parties the information necessary to assure that the program revenues are just sufficient to cover the program costs over the life of the program. After an initial two-year period, the Company will review the revenues and costs associated with the program. The Company may at that time request that the program be modified to adjust the price and/or size of the block purchased to match the costs and revenues on an ongoing basis.

PacifiCorp, under its own initiative, offered to introduce a “green tariff” in each of the states as a commitment in the merger case. The Idaho Staff neither supported nor opposed the commitment during the course of the merger case, and did not address the commitment specifically in any of its testimony.

STAFF ANALYSIS
Staff believes that the most important consideration in the renewable resource tariff is that non-participating customers not be required to bear any of the program costs. Because the program has been offered by PacifiCorp under its own volition and not in response to requests from any Idaho customers or demands by the Idaho Commission, Staff believes customers who choose not to participate should be insulated from the risks that program revenues will be insufficient to fully cover the program costs. Idaho customers did not ask that such a program be implemented, therefore, they should not be expected to help support the program if it is not self-sustaining.
After five years, PacifiCorp expects to achieve a penetration rate of 2.75 % throughout its service territory, which equates to 38,500 customers. In Idaho however, the Company expects the penetration rate to be approximately half of the system-wide penetration rate. This would translate into participation by approximately 800 Idaho customers. Because Idaho customers are expected to be less receptive to this program, the Company plans to undertake a very limited marketing program in its Idaho service territory. The primary marketing medium will be customers' bills. Staff concurs with the Company's plan of action. Staff has encouraged the Company to pursue a more targeted approach in Idaho. By identifying and working with groups or individuals who support "green" programs, the Company will be in a better position to market its program to those who are more likely to participate.
As structured, program revenues will be dependent on the price charged per block of renewable energy and on the number of customers who choose to participate. The price per block has been set based on estimated participation levels such that program revenues will just cover planned program costs. However, expected revenues could possibly not be realized if participation levels are below what the Company has estimated.
Staff believes that the possibility of insufficient participation and revenues has been adequately addressed by the Company. PacifiCorp has agreed that a normalizing adjustment will be made to remove the revenues, program costs and above market costs of the energy associated with the program from the revenue requirement calculation in any earnings demonstrations. This concession will insure that any shortfall in revenues below program costs cannot be recovered from the general body of ratepayers. If program revenues are insufficient to cover costs, shareholders, not customers, will be responsible for the shortfall.
A second important consideration is the reverse of the situation just discussed—What happens if the program revenues exceed the program costs? This could happen if participation levels exceed expectations or if the renewable generation can be acquired for less than has been assumed. If excess revenues are generated and no changes are subsequently made to the price charged for the blocks of renewable energy, then conceivably, shareholders could realize a profit from the program, over and above the same rate of return authorized for other regulated shareholder investments.
Staff does not believe the program should be used as a venture to generate excess profits. To guard against this possibility, Staff proposed that the Company conduct regular reviews of the program, track the balance of the off-book balancing account containing program revenues and costs, and beginning two years after the start of the program, to modify the program if revenues are higher than expected. The goal of this monitoring would be to try to insure that revenues just matched costs at the end of five years and on an ongoing basis thereafter. Staff recognizes that program costs will exceed revenues in the early years of the program because of the promotional and start-up costs in the early years and because of the time needed to reach expected penetration levels. After five years, however, Staff believes that costs and revenues should balance. The Company has agreed with Staff’s suggested monitoring and reporting approach, and has agreed to modify the program as needed to keep the balancing account as close to zero as possible.
Staff wishes to emphasize that customer participation in the program is strictly voluntary. Customers can choose to participate for as little as one month or for the full duration of the program. Similarly, customers can purchase as few as one block of renewable energy, or can purchase as many as they desire. With the safeguard of not permitting the Company to pass program costs on to non-participants, a customer who chooses not to purchase any blocks of renewable resources should be unaffected by the program.
Because participation is strictly voluntary and because costs cannot be passed on to non-participants, Staff is not overly concerned with the program details. However, Staff does wish to make some observations. First, the price PacifiCorp is proposing to charge is $4.75 per 100 kWh block. It is important to recognize that this price is in addition to the regular retail rate. Thus, for residential customers for example, a customer would pay the tariffed rate of 7.4904¢/kWh plus 4.75¢/kWh for a total of 12.2404¢/kWh for each kWh of renewable energy purchased. Although this is a rate based on actual projected program costs, it nevertheless is an artificially high rate because of the substantial marketing and management costs built into the program. Approximately one-third of the 4.75¢/kWh cost premium is for marketing and management. Marketing and management costs will, of course, be expected to decrease over time as the program becomes more established. However, the federal wind energy tax credits upon which the price has been based will also expire after 2001, and will likely more than offset any savings from reduced marketing and management costs. Thus, unless participation levels increase greatly or technological improvements lead to cost reductions, renewable energy prices in the future are likely to be higher than they are now. Staff believes it is unfortunate that the price to be charged will not accurately reflect the true costs of renewable energy. An artificial price, whether too high or too low, is detrimental to the long-term development of renewable resources. We recognize, however, that without significant marketing efforts, particularly at the program’s inception, program success is unlikely.
In assessing the true costs of renewable energy, Staff also wishes to recognize that renewable resources such as wind, solar, and geothermal, offer environmental benefits over traditional coal-fired generation sources. While difficult to quantify, these benefits can help to justify higher prices for renewable energy. In addition, the environmental benefits of renewables will ultimately be shared by all customers.
Although PacifiCorp has provided financial analysis to support its proposed price of $4.75 per 100 kWh, the price is still much higher than prices being charged in other programs throughout the Northwest. The following table summarizes various programs currently being offered in the region:

Utility Price Premium (¢/kWh)
Energy Source Portland General Electric 5.00 Vansycle Ridge wind (OR) Eugene Water & Electric Board 3.09 Foote Creek wind (WY) Avista (MOPS II pilot program) 2.00 Wind (source not specified) Flathead Electric 2.00 Hydro & Foote Cr. wind (WY) through BPA Central Electric Co-op 1.80 Landfill gas Clark Public Utilities 1.50 Wind (WY) and Geothermal (UT) from PacifiCorp

The only program in the region where renewable energy is priced higher than PacifiCorp’s is Portland General Electric’s program. All of the other programs charge a price premium significantly less than PacifiCorp. Staff is uncertain, however, about the degree to which non-acquisition costs are included in the price and whether the other programs are subsidized using non-program revenue.

STAFF RECOMMENDATION
Staff recommends approval of the Company's proposed renewable resource tariff. Staff further recommends that the Company be required to provide annual reports to the Commission. The reports should include both the program revenues and costs, the number of blocks purchased and the blocks generated or contracted for. The Company should track all program costs and

revenues in a balancing account and should modify the price and/or size of the block as necessary with a goal of keeping the balance of the account as close to zero as possible at the end of five years.

Respectfully submitted this day of April 2000.

______________________________
Scott Woodbury
Deputy Attorney General

Technical Staff: Rick Sterling
Beverly Barker

RS:va:u:umisc/comments/PACE001.swr
COMMENTS OF THE
COMMISSION STAFF 7 APRIL 12, 2000