20040115Comments.pdf

SCOTT WOODBURY
DEPUTY A TTO RNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
472 WEST WASHINGTON STREET
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
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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 A PETITION FILED BY
IDAHO POWER COMPANY FOR APPROVAL )
OF MODIFICATIONS TO THE SECURITY
PROVISIONS REQUIRED TO BE INCLUDED
IN AGREEMENTS BETWEEN IDAHO POWER
AND CO-GENERATORS AND SMALL POWERPRODUCERS.
CASE NO. IPC-O3-
A VU-O3-
PAC-O3-
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
Petition, Notice of Modified Procedure and Notice of Comment/Protest Deadline issued on
December 5 2003 , submits the following comments.
BACKGROUND
On November 5 , 2003 , Idaho Power Company (Idaho Power; Company) filed a Petition
with the Idaho Public Utilities Commission (Commission) for authority to accept modified
insurance and lien rights as satisfactory risk mitigation measures in PURP Al Power Purchase
Agreements that contain levelized avoided cost rates. Without risk mitigation PURP A
Qualifying Facilities (QFs) desiring levelized rates must post liquid funds as security for the
1 Public Utility Regulatory Policies Act of 1978, Section 292.
COMMENTS JANUARY 15 2004
overpayment that results from the front-end loading that occurs with a levelized rate structure.
Two of the mitigation methods authorized by the Commission in Case No. U-I006-292 (-292
Case), Order No. 21690 are (1) the purchase of certain basic insurance policies and (2) the
establishment of certain lien rights. Attachment No.1 lists the type of insurance and levels of
coverages and deductibles deemed acceptable in Order No. 21690, as amended by Order
No. 25240, Case No. IPC-93-22. Attachment No.2 describes the lien rights of Idaho Power
on QF projects that receive levelized purchase rates.
In response to the requirements of the insurance industry and either the negligible value
of second liens on QF projects or the Company s inability to obtain a second lien on a QF
project, Idaho Power proposes to conform its QF contract requirements to contemporary
insurance industry standards and realistic lien rights.
Attachment No.3 shows, in legislative format, Idaho Power s proposed changes to the
basic business insurance requirements that are now deemed by the insurance industry to be
reasonably available to QFs. The Company proposes that the modified insurance requirements
be accepted as basic business insurance coverages for purposes of risk mitigation as established
in Order No. 21690, as amended, for future QF agreements and for pre-existing QF projects as
their current insurance is renewed.
Due to what the Company contends is the marginal value of the secondary lien position
and the inability of the Company, in some circumstances, to obtain security in the form of a
second lien, Idaho Power proposes to delete the secondary lien rights as a risk mitigation
measure in levelized rate arrangements with QFs.The Company also proposes that the
requirement for the establishment of secondary lien rights in favor of Idaho Power as established
in Order No. 21690, as amended, for future QF agreements and for pre-existing QF projects as
their agreements are amended be rescinded.
ANALYSIS
Insurance Requirements
Idaho Power reports that numerous projects are not now in compliance with the risk
mitigation requirements of their specific Power Purchase Agreements with the Company. Some
projects carry no insurance while numerous others have insurance products that are standard in
the insurance industry but which, in many circumstances, do not conform with the insurance
COMMENTS JANUARY 15 2004
requirements of the projects' agreements. Idaho Power states that notices were recently sent to
the various projects which were non-compliant with respect to the insurance requirements and
three common responses were received: (1) the specific insurance required within the Power
Purchase Agreement is not currently available from the insurance industry; (2) because the
insurance is not available, as a matter of law (i., the Doctrine of Impossibility), Idaho Power
cannot enforce these requirements or require alternative security; and (3) the financing structures
of existing projects do not allow Idaho Power to place a second lien on the project as required in
the -292 case.
Regarding insurance, Idaho Power states it has contacted various insurance providers and
verified the unavailability of the specified insurance. Staff has also contacted insurance
providers for many Idaho QFs and confirms the unavailability or extreme high cost of insurance
products specified under current security requirements.
Idaho Power states that some QFs have advanced the Doctrine of Impossibility as a legal
defense to enforcement of insurance requirements. Insurance products with the limits and
maximum deductibles called for in the current requirements they state are simply no longer
offered by the insurance industry.
Staff notes that Idaho courts have held that the Doctrine of "Impossibility" operates to
excuse performance. In order to prove Impossibility: (1) a contingency must occur; (2)
performance must be impossible, not just more difficult or more expensive; and (3) the non-
occurrence of the contingency must be a basic assumption of the agreement. Kessler v. Tortoise
Development, Inc.130 Idaho 105 (1997); Haessly v. Sa/eco Title Insurance Company, 121 Idaho
463 (1992).sine qua non for application of the doctrine. is that the parties must have
contracted, expressly or in necessary contemplation, with reference to continued existence of the
specific thing as a condition essential to performance. Haessly at p. 465. Impossibility that is
only temporary will not act to discharge a contractual obligation if the contract can yet be
performed after the impossibility ceases. Sutheimer v. Stoltenberg, 127 Idaho 81 (App.) (1995).
Temporary impossibility thereby suspends the duty of performance until impossibility ceases.
Culp v. Tri-County Tractor, Inc.112 Idaho 894 (App.) (1987).
In its -292 security case the Commission in Order No. 21446 made the following
statement regarding insurance:
COMMENTS JANUARY 15 2004
The feasibility of insurance as security against overpayment liability is
dependent upon the willingness of the industry to ensure against economic
abandonment for a 35-year period with limited rights of cancellation (non-
payment of premium). It was the expressed concern of some that
insurance companies rarely make an unconditional commitment to cover
all amounts of risk; that a residual risk, the risk above policy limits
remains with the policy holder.
Staff recognizes that Idaho Power s proposed changes to the required basic business
insurance coverage will provide slightly less security in the event of a default. However, Staff
believes that a slightly lower security requirement is better than having numerous projects with
no insurance at all because of changing insurance industry standards that make current insurance
requirements unattainable or economically impracticable. Current security requirements are
ineffective if enforcement and compliance is not reasonably possible.
Staff has reviewed Idaho Power s proposed changes to the insurance requirements and
suggests adding some clarifying language. Idaho Power has verbally concurred with Staff's
proposed modifications. Staff's proposed insurance requirements are shown in Attachment No.
Second Lien
Regarding liens, Idaho Power reports that the financing arrangements of some projects
preclude a subsequent lien position by the Company or any other party without the consent of the
primary lender. Where such restrictions do not exist, the Company either places a second lien on
the project at the time a levelized rate agreement is executed or at the time a project is amended
to conform to the risk mitigation requirements of Order No. 21690, as amended. Realistically,
however, the Company contends that the value of security obtained by placement of a second
lien on a project is tenuous. Either the value of equipment, particularly on less sophisticated
projects, is negligible since used or rebuilt equipment is utilized (often non-standard utility
equipment, pump motors running in reverse, etc.) or the value of that equipment is highly
financed and the financial institution has the first lien on those assets making the value of the
second lien marginal. As the project ages and the financing is either paid or at least reduced, the
value of the assets depreciate over the same time frame. Thus, the Company contends, were a
project to default, the value of the assets remaining for the second lien would be minor due to
removal and other costs. Furthermore, the Company states that the value of a project is generally
not the actual value of the physical equipment; instead, the marketable and bankable value of a
COMMENTS JANUARY 15 2004
project is the value of the projected revenues of the energy delivered to Idaho Power under the
levelized rate agreement.
In the -292 security requirements case, Order No. 21690, the Commission in its Findings
of Fact found:
1. That levelized rates are an incentive to the development of the CSPP industry;
2. That CSPPs receiving levelized avoided cost payments will be overpaid if they
substantially reduce generation or if they discontinue generation (i., default) prior to the end of
their contract term; ...
4. That the burden of said overpayment falls on the ratepayers unless they are
reimbursed by the defaulting CSPP; ...
7. That CSPPs may be unable to provide said reimbursement unless they are
required to establish and maintain some form of liquid security; ...
10. That it is just and reasonable to require CSPPs to maintain a form of liquid
se~urity equal to 100% of the estimated cumulative overpayment (estimate) throughout the life
of each QF Power Purchase Agreement;
11. That it is just and reasonable to reduce the amount of the required liquid security
(required amount) by 25% of the estimate for each QF protected by adequate basic business
insurance as described herein;
12. That it is just and reasonable to reduce the required amount by an additional 20%
of the estimate for each QF meeting the requirements of subparagraph 11 , above, and also
providing full engineering certification as described herein;
13. That it is just and reasonable to reduce the required amount by an additional 10%
of the estimate for each QF meeting the requirements of subparagraph 11 , above, and also
maintaining a maintenance escrow as described herein;
14. That it is just and reasonable to reduce the required amount by an additional 35%
of the estimate for each QF meeting the requirements of subparagraphs 11 , 12, and 13 , above
and also providing the energy purchasing utility with adequate lien rights as described
herein... .
In Order No. 21446 in the -292 case the Commission made the following findings
regarding lien rights:
We believe that some form of security and/or risk mitigation is necessary
to achieve an optimum level of ratepayer indifference...
COMMENTS JANUARY 15 2004
The lien rights available to secure ratepayer interest in CSPP projects are
usually subordinate to the first lien of the project financier. The value of a
second lien position in all the QF property and facilities is the measure of
degree of control over the project that it imparts with respect to its
continued financing, operations and maintenance. Although it provides no
liquid fund for satisfaction of overpayment obligation, we nevertheless
recognize it as a valuable tool in safeguarding the interests of the
ratepayer. To be acceptable a lien should be subordinate only to the first
lien of the project financier and the FERC license, as evidenced by an
appropriate policy of Title insurance.
In Commission Order No. 21690 the Commission stated:
The value to the utility and the ratepayer of a lien is directly related to the
quality of the underlying QF. Hence, the 35% reduction in liquid security
requirement for this risk mitigation item shall remain in effect only so
long as the QF fulfills all requirements of sections G (Basic Insurance), H
(Engineering Certification), I (Maintenance Escrow) and J (Lien Rights).
Failure to maintain these terms and conditions at any time during the life
of the Power Sales Agreement shall result in the 35% reduction being
revoked. Failure to establish and maintain the appropriate new level of
liquid overpayment security shall constitute breach of contract.
The risk to Idaho Power if a QF defaults is non-recovery of overpayment liability and
replacement of QF power. Overpayment liability is the difference between the levelized rate
paid to the QF and the non-levelized rate that would have otherwise been paid. However
because the majority of QF contracts were signed in the 1980s and have levelized rates still far
above today s prices, the value to Idaho Power of being relieved of purchasing at high levelized
rates may outweigh any accumulated overpayment liability. Ideally in the event of contract
default, Idaho Power would be able to recover the QF's overpayment liability and be relieved of
further purchases under the contract. Unfortunately, Staff sees no good alternative to second
liens as a security measure. Because elimination of the second lien requirement lessens Idaho
Power s security position, Staff opposes the Company s request to eliminate it. Staff notes that
without a lien, a QF with a levelized contract is required to post as liquid security 35% of the
estimated overpayment liability amount. It is the Company s obligation to monitor and maintain
appropriate security requirements for its QF contract portfolio in accordance with Commission
Orders.
COMMENTS JANUARY 15 2004
RECOMMENDATIONS
Staff recommends that the Commission approve the modified insurance requirements for
levelized QF contracts as amended by Staff and shown in Attachment No.4. Staff recommends
that Idaho Power s request to eliminate the second lien requirement on QF projects with
levelized contracts be denied. To maintain consistency, Staff recommends that any changes
approved in this case also apply to A vista and PacifiCorp.
Respectively submitted this IS day of January 2004.
~~d,
Scott Woodbury
Deputy Attorney General
Technical Staff: Rick Sterling
i:umisc/comments/ipceO3 .16 _avueO3.9 -paceO3.13 comments swrps
COMMENTS JANUARY 15 2004
EXHIBIT
INSURANCE
TYPE LIMITS MAXIMUM
DEDUCTIBLE
Commercial General The greater of 15% of plant 5% of Plant Cost
Liability cost or $1 Milliion/incident
All Risk Property Not less than 90% of Plant Plant Cost
Cost $25,000 whichever
greater
Catastrophic Perils Not less than 60% of 5% of Plant Cost
(Earthquake and Flood)equipment cost
Boiler/Machinery Not less than 90%0% of equipment cost
equipment cost $25,000 whichever
greater
Loss of Income (Business Not less than 75%30 days of income
Interruption)estimated daily income; not
less than 20% of estimated
annual income
All of the above insurance coverages shall be placed with insurance companies with an
M. Best rating of A- or better.
A TT ACHMENT NO.
COMMENTS JANUARY 15 2004
EXHIBIT 2
SECOND LIEN RIGHTS
The project will provide Idaho Power with adequate security inter~st in the
project, including, but not limited to:
Deed Of Trust securing the project real property and
improvements;
Title Insurance;
A contractually stipulated first lien amount, if any;
Appropriate U.C. security interests in personal property and
fixtures; and
Assignments for security purposes of all contract rights including
the Firm Energy Sales Agreement, water rights, permits , licenses
easement, etc, relating to the project.
The form of the liens will be tailored to the individual projects depending on the first lien
financing and other individual characteristics of the project. Idaho Power s lien rights
will be subordinated only to the initial long-term financier s lien , if any.
A TT ACHMENT NO.
COMMENTS JANUARY 15 2004
INSURANCE
TYPE LIMITS MAXIMUM
DEDUCTIBLE
Commercial General The greater of 15% of plant 5% of Plant Cost
Liability cost or $1 Million/incident Consistent with current
Insurance Industry Utility
practices for a similar property
All Risk Property Not less than W%-80%5% of Plant Cost or $25 000
Plant Cost whichever is greater
Consistent with current
insurance Industry Utility
practices for a similar
property.
Catastrophic Perils Not less than w.%-80%5% of Plant Cost Consistent
(Earthquake and Flood)equipment cost with current Insurance
Industry Utility practices for a
similar property.
Boiler/Machinery Not less than W%-80%0% of equipment cost or
equipment cost $25 000, whichever is greater
Consistent with current
Insurance Utility practices for
a similar property.
Loss of Income (Business Not less than 75% of 30 days of income Consistent
Interruption)estimated daily income; not with current Insurance
less than 20% of estimated Industry Utility practices for a
annual income similar property.
All of the above insurance coverages shall be placed with insurance companies with an A.M Best
rating of A- or better.
ATTACHMENT NO.
COMMENTS JANUARY 15 2004
INSURANCE
TYPE LIMITS MAXIMUM
DEDUCTIBLE
Commercial General Liability The greater of 15% of plant 5% of Plant Cost
cost or $1 Million per Consistent with current
occurrence Insurance Industry utility
practices for a similar property
All Risk Property Not less than W%-80%5% of Plant Cost or $25 000
Plant Cost the current whichever is greater
replacement cost of plant Consistent with current
buildings and/or equipment*insurance Industry utility
practices for a similar
property.
Catastrophic Perils Not less than 6Q%-80%5% of Plant Cost Consistent
(Earthquake and Flood)equipment cost the current with current Insurance
replacement cost of plant Industry utility practices for a
buildings and/or equipment*similar property.
Boiler/Machinery Not less than W%-80%0% of equipment cost or
equipment cost the current $25 000, whichc',er is greater
replacement cost of plant Consistent with current
buildings and/or equipment*Insurance utility practices for
a similar property.
Loss of Income (Business Not less than 20% of 30 days of income Consistent
Interruption)estimated annual income with current Insurance
Industry utility practices for a
similar property.
* Replacement shall be with property oflike kind, age and quality.
All of the above insurance coverages shall be placed with insurance companies with an AM Best
rating of A- or better.
A TT ACHMENT NO.
COMMENTS JANUARY 15 2004
CERTIFICATE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS 15TH DAY OF JANUARY 2004
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF IN CASE
NOS. IPC-03-, AVU-03-, PAC-03-, BY MAILING A COpy THEREOF
POSTAGE PREPAID, TO THE FOLLOWING:
BARTON L KLINE
MONICA B MOEN
IDAHO POWER COMPANY
PO BOX 70
BOISE ID 83707-0070
RANDY ALLPHIN
IDAHO POWER COMPANY
PO BOX 70
BOISE, ID 83707-0070
H DOUGLAS YOUNG
AVISTACORP.
PO BOX 3727
SPOKANE W A 99220-3727
MARK WIDMER
P ACIFICORP
825 NE MUL TNOMAH ST
PORTLAND OR 97232
R BLAIR STRONG
PAINE HAMBLEN ET AL
717 W SPRAGUE AVE
SPOKANE W A 99204
~~~~, )C
SECRETARY
CERTIFICATE OF SERVICE