20050920Reply comments.pdf

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Lisa Nordstrom (ISB # 5733)
Dean Brockbank
PacifiCorp
825 N.E. Multnomah, Suite 1800
Portland, OR 97232
Telephone: [phone]
Fax: [phone]
E-mail: lisa.nordstrom~pacificorp. corn
dean. brockb ank~pacificorp. corn
Attorneys for PacifiCorp
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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
ACIFICORP FOR APPROV AL OF A POWER
PURCHASE AGREEMENT FOR THE SALE
AND PURCHASE OF ELECTRIC ENERGY
BETWEEN P ACIFICORP AND
CHWEND!MAN WIND LLC
REPLY COMMENTS OF
ACIFICORP
CASE NO. P AC-05-
PacifiCorp dba Utah Power & Light ("PacifiCorp ), by and through its attorneys of
record, respectfully submits the following response to comments filed by the Commission Staff
in the above captioned proceeding on September 13, 2005:
I. THE MECHANICAL AVAILABILITY GUARANTEE ("MAG"
A. The Commission Did Not Mandate That All Utilities Adopt Idaho Power
Company s Standard QF Contract Approved in Order 29632 .
The Commission, in its Final Order on Reconsideration in Case No. IPC-04-10 ("the
S. Geothermal Proceeding ), made clear that in approving the provisions in Idaho Power
Company s Power Purchase Agreement for QFs seeking published avoided cost rates ("Idaho
Power PP A"), it remained open to alternative approaches that utilities and QFs may negotiate
and present to the Commission for approval:
This Commission finds no compelling reason to convene further hearings to
explore the new alternatives and proposals suggested for the first time on
reconsideration. As indicated in (Order 29632), the Commission will consider the
REPLY COMMENTS OF P ACIFICORP Page 1
reasonableness of any signed contract negotiated by and acceptable to the parties
and their respective arguments as to the equity and fairness in approving same.
Order No. 29682, p. 10 (emphasis added). Staff now asserts that the eligibility criteria for
avoided cost rate contracts approved in Order 29632 are mandatory requirements applicable to
all Idaho electric utilities. See Staff Comments, pp. 2 and 8. This position goes against Order
No. 29682 as well as established Commission practice.
The Commission can announce rules of general applicability in the context of a contested
case, and has done so in the past. For example, in Case No. U-I006-292 -- a 1988 case
investigating terms offered in QF contracts by Idaho Power -- the Commission left no doubt
whether its ruling applied to other utilities. The Commission said:
Although framed as an Idaho Power Company case, the implications of this Order
have generic consequence for all Idaho regulated electric utilities. We therefore
discuss various items in generic terms, although we use (Idaho Power Company)
in all of our examples.
Order No. 21690
, p.
1 (emphasis added). The Commission did not make a similar statement in
Order No. 29632, nor did the Commission frame the issues in generic terms. To the contrary, the
Commission defined two of the three issues decided in terms specific to Idaho Power. Issue 1
was whether Idaho Power should be allowed to insert a regulatory out clause in its PURP
contracts. Issues 2 and 3 were set forth as follows:
10 MW Definition-Eligibility for Posted (Published) Rates
What is the definition of the 10 MW size limit for entitlement to the
Commission s published avoided cost rates?
90-110% Performance Band
Should Idaho Power be allowed to include contractual provisions that
impose financial penalties or liquidated damages if a PURP
generator s energy deliveries vary by more than plus or minus 10%
from its forecasted performance?
REPLY COMMENTS OF P ACIFICORP Page 2
Order No. 29632, p. 4 (emphasis added). If the Commission intended that Issue 3 have generic
applicability, it presumably would have asked
, "
Should utilities be required. . ." instead of
Should Idaho Power be allowed (to include the 90-110 Performance Band)." All of the above
strongly indicate that the Commission found that the 90-110 Performance Band is reasonable
but not the only reasonable performance requirement for standard Idaho QF power purchase
agreements offering published avoided cost rates.
Staff is correct that PacifiCorp supported the 90-110 Performance Band as reasonable in
the u.S. Geothermal Proceeding. However, in doing so, PacifiCorp never intended to forego
consideration of alternative approaches. PacifiCorp carefully read Commission Order No. 29632
and incorporated into the Schwendiman Wind Project L.C. Power Purchase Agreement
Agreement") several provisions of the Idaho Power PP A that were approved in that Order.
However, when negotiations with Schwendiman Wind L.C. required PacifiCorp to explore
ramifications of the 90-110 Performance Band at great depth, the Company determined that it
might not be a good fit for use with PacifiCorp s intermittent QF resources. Rather than
automatically embrace an approach which both the QF developer and PacifiCorp found
problematic, PacifiCorp accepted the Commission s invitation to negotiate new alternatives and
present them to the Commission in the form of a signed contract. While PacifiCorp continues to
believe that the 90-110 Performance Band approach can be a desirable feature of non-
intermittent QF contracts, PacifiCorp believes that for intermittent resource QFs, the provisions
contained in the Schwendiman Agreement when taken as a whole better protect the interests of
its ratepayers for the reasons provided below.
REPLY COMMENTS OF P ACIFICORP Page 3
MA G Approach Better Suits the Interest of PacifiCorp s Ratepayers
.L 90-110 Approach Does Not Ensure Firmness
PacifiCorp, with concurrence from Schwendiman Wind L., developed the MAG
concept in the Agreement as an alternative to the 90-110 Performance Band. The MAG is
founded on the simple premise that consistent, high availability of wind turbines results in more
predictable energy delivery. 1 The converse is also true: if a wind QF is unreliable due to poor
mechanical availability, predictability will be poor, even if the QF accurately forecasts the wind
resource.
PacifiCorp s MAG approach recognizes that a wind QF cannot accurately predict
monthly generation six months in advance (as required under the 90-110 Performance Band) and
therefore grades the QF's performance by what it can control: mechanical availability. The
Agreement's MAG provisions require that QF's average availability equal or exceed the
following: 75% for Contract Year 1; 85% for Contract Years 2-10; and 80% for Contract years
11-20. With each passing year, PacifiCorp and the QF expect to gain more confidence in the
dependable annual energy production of the facility-a number critical to PacifiCorp s long
range resource planning. Without the MAG provision, PacifiCorp would have less confidence in
the facility s minimum annual output because the QF would have less incentive to invest in
reliability. In the event actual deliveries demonstrate that monthly QF output is predictable
PacifiCorp will make use of that information as well.
Staff urges the Commission to rej ect the Agreement because, it asserts, the 90-110
Performance Band insures a "reasonable degree of firmness" which the MAG approach does not.
See Staff Comments, p. 8. In fact, the 90-110 Performance Band itself does nothing to ensure
1 Generally speaking, monthly wind resource at a site can vary greatly from year to year, but the annual wind supply
tends to be much more stable. Accordingly, once the annual wind resource at a facility has been established, the
annual output from that facility should be predictable so long as the availability of the facility remains the same.
REPLY COMMENTS OF P ACIFICORP Page 4
firmness of delivery. To the contrary, the 90-110 Performance Band allows a QF to revise
downward its delivery schedule every six months with no floor and puts PacifiCorp at risk that
the QF will phase out capacity before the end of its contract, thus forcing PacifiCorp to purchase
a hedge. While it is true that the MAG approach proposed by PacifiCorp measures performance
annually whereas the 90-110 approach uses monthly delivery requirements, Staff proffers no
evidence that one approach will insure more firmness than the other. PacifiCorp believes that the
MAG approach is superior to the 90-110 Performance Band in several respects, explained below.
2. The MAG Approach Should Yield More Total Energy.
Under the 90-110 Performance Band approach, the QF is paid the full published rate if it
delivers between 90% and 110% of its monthly scheduled delivery. If the QF delivers more than
110% of its schedule, the QF is paid a reduced rate on the excess energy delivered. But if the QF
delivers less than 90% of its schedule, it is paid a reduced rate on the entire amount delivered.
Order No. 29632, p. 20. The asymmetric penalty provisions of the 90-110 Performance Band
gives the QF an incentive to submit unrealistically low delivery targets in order to reduce its risk
of incurring the harsh under-delivery penalty.
There is no such incentive under the MAG approach. Under the MAG approach, the QF
is penalized only if it fails to achieve the availability benchmark. Compared to the 90-110
Performance Band, the MAG approach gives the QF greater incentive to maximize its production
by maximizing its availability. Over the life of the contract, the MAG approach can reasonably
be expected to yield more energy from the same facility than would the 90-110 Performance
Band.
The MAG Approach Should Yield Fewer Contract Disputes.
Under the 90-110 Performance Band approach, the QF's montWy delivery target may be
adjusted downward if the QF experiences a forced outage due to equipment failure. No such
REPLY COMMENTS OF P ACIFICORP Page 5
adjustment will be made, however, if the forced outage resulted from "an event of Force Majeure
or by neglect, disrepair or lack of adequate preventative maintenance of the Seller s Facility.
Idaho Power PP A, Section 14.3 .1. The difficulty of determining whether an outage should be
excused under this provision, coupled with the large amount of money potentially at stake
makes fertile ground for repeated disputes whether a given outage should or should not be
excused.
Under the MAG approach, the QF bears the risk of equipment failure, whether or not
such failure resulted from neglect. See Agreement, Section 1.2 (limiting excused non-
performance to lack of wind, Force Majeure, and scheduled maintenance). Relative to the 90-
110 Performance Band, the MAG approach for determining whether non-availability should be
excused is straightforward, predictable, and less likely to give rise to contractual disputes over
the cause of forced outages.
4. The MAG Approach Should Yield More Predictable Delivery Over the
Term of the Contract.
Because the MAG rewards reliability and does not create incentives for gaming the
monthly performance target, it should also yield more predictable energy supply over time than
will the 90-110 Performance Band. An unreliable QF is an unpredictable source of energy,
regardless of how precisely that resource is scheduled.
For example, during times when the wind QF is on the verge of not making 90% of its monthly target, if actual
wind speeds are below forecasted wind speeds, the QF may have a strong financial incentive to game the 90-110
Performance Band by declaring a forced outage (or forced curtailment).
REPLY COMMENTS OF P ACIFICORP Page 6
The Agreement Protects Ratepayers in Other Respects.
When evaluating the relative merits of the two approaches, the Commission should also
consider the following:
a) QFs Using PacifiCorp 's P P A Are More Likely to Achieve the
Scheduled Operation Date.
PacifiCorp s Agreement includes a liquidated damage formula, specifying daily damages
PacifiCorp will incur in the event the QF fails to meet its Scheduled Commercial Operation Date.
See Agreement, Section 2.3. Thus, the PacifiCorp Agreement affords the ratepayer more
protection against exposure to market rates in the event the QF fails to achieve its scheduled
online date.
b) PacifiCorp P P A Preserves Ratepayers ' Claim to QF Project
Green Tags.
The PacifiCorp Agreement preserves (by remaining silent on the matter) the utility
claim to potentially valuable Project environmental attributes, pending final resolution of Green
Tag ownership by the Commission or the Idaho legislature. PacifiCorp believes that its approach
regarding Green Tags potentially captures more value for its ratepayers.
The PacifiCorp Agreement Better Protects Ratepayers From
Under-delivery Damages.
In the event of under-delivery, the Idaho Power PP A reduces the purchase price Idaho
Power must pay for the energy the QF does deliver. Order No. 29632, p. 20. If market prices
are much higher than the contract rate, the Idaho Power formula may not cover Idaho Power
cost to replace the amount under-delivered. This is particularly true if the QF delivers only a
small fraction of its scheduled delivery and Idaho Power has to purchase replacement power
when the market prices are high. The PacifiCorp Agreement, on the other hand, requires the QF
to pay PacifiCorp s cost (if any) of covering the QF's under-delivery with market purchases. See
REPLY COMMENTS OF P ACIFICORP Page 7
Agreement, Section 5.2. The QF must pay PacifiCorp s replacement cost plus any wheeling
costs, plus an administrative overhead fee, thus leaving ratepayers less exposed to market prices.
6. 90-110 Performance Band Approach Is Unduly Burdensome to Administer.
Compared to the 90-110 Performance Band, the MAG approach is much less burdensome
to administer. Under the MAG approach, PacifiCorp calculates the QF's availability once each
year and, if necessary, deducts liquidated damages from the next regular QF payment. See
Agreement, Section 5.3. The 90-110 Performance Band approach is more complicated. At the
end of every month, Idaho Power must calculate the Surplus Energy delivered, adjusting the
monthly delivery target to take into account: (1) Idaho Power-initiated curtailments; (2) Force
Majeure events; and (3) qualifying forced outages. See Idaho Power PPA, Section 14.
PacifiCorp has no existing capability to administer the Surplus Energy calculation used in
the 90-110 Performance Band approach. To implement, PacifiCorp will have to modify existing,
or develop new, contract administration tools. In particular, Section 14.1 of the Idaho Power
PP A (excusing forced outages "not caused by . . . neglect, disrepair or lack of adequate
preventative maintenance ) is likely to give rise to extraordinary administrative effort because of
its subjectivity and its susceptibility to gaming. In sum, compared to the MAG approach, the 90-
110 Performance Band approach requires more investment to implement, more resources to
administer on an ongoing basis, and is more likely to result in disputes between PacifiCorp and
the Seller regarding which forced outages should be excused.
7. 90-110 Performance Band Approach Is Burdensome for Smaller QFs.
In selecting the MAG approach, PacifiCorp also took into account the precedent it was
setting for future PacifiCorp Idaho published rate QF contracts. Even if the Commission
believes that the 90-110 Performance Band approach is not unduly burdensome in the isolated
case of the Schwendiman Agreement, it should also consider the cumulative effect of using the
REPLY COMMENTS OF P ACIFICORP Page 8
approach with all small Idaho QFs. Generic application of the 90-110 Performance Band to all
ofPacifiCorp Idaho QFs under 10 aMW would be burdensome and would not be cost effective.
Currently, PacifiCorp has contracts with thirteen QFs under 10 aMW in Idaho
comprising just over 21 MW. The median nameplate capacity rating for those projects is
900 kW. PacifiCorp currently is negotiating a standard QF power purchase agreement with an
existing Idaho QF that is adding 120 kW of new hydroelectric capacity. If the Commission
adopts Staff s position, PacifiCorp would be required to incorporate the 90-110 Performance
Band into this Agreement and any other small QF agreement in the future. Applying the 90-110
Performance Band uniformly to all new Idaho QF projects would impose an onerous forecasting
and accounting burden on small QF developers and likely would increase PacifiCorp
administrative costs in excess of any corresponding benefit. In adopting the MAG, PacifiCorp
sought an approach that would work for all eligible QF projects, from 10 aMW down to 100 kW
projects, and smaller.
Capacity
No.Type Name (kW)
Hydro Bell Mountain 600
Hydro Birch Creek 800
Hydro COM Hydro 000
Hydro Com. Energy Mgmt 900
Hydro Georgetown Power 350
Hydro Ingram Warm Springs 950
Hydro Marsh Valley 700
Hydro Mink Creek 700
Hydro Nicholson Sunny Bar 350
Hydro J. Power 260
Hydro Pancheri
Hydro Preston City 400
Hydro Westinghouse 000
TOTAL:090
Fig. 1: Table showing Idaho QF's Currently under Contract to PacifiCorp
In sum, PacifiCorp does not believe that the Commission intended its findings in Order
No. 29632 to preclude other approaches, and does believe that the MAG provides better value, in
the case of intermittent resources, to its ratepayers than does the 90-110 Performance Band. For
REPLY COMMENTS OF P ACIFICORP Page 9
the reasons stated herein, and in its previous application, PacifiCorp urges the Commission to
approve the Agreement in its current form.
II. P ACIFICORP DOES NOT DETERMINE THE "COMPARABLE RESOURCE" FOR
ITS OF CONTRACTS.
Determination of the Comparable Resources for purposes of the PacifiCorp Inter-
Jurisdictional Cost Allocation Revised Protocol is a process that PacifiCorp believes is best
undertaken in the context of a general rate case. The Revised Protocol defines Comparable
Resources as ones with "similar capacity factors, start-up costs and other output and operating
characteristics." PacifiCorp does not know which Comparable Resources will be used in
evaluating how much, if any, excess costs under the Revised Protocol may result from approval
of the Schwendiman Agreement.
, for example, a state commission were to use the 64.5 MW Goshen Wind Generation
Project as the sole determinate of a Comparable Resource, excess costs could be assigned to
Idaho ratepayers because power from that recently acquired Idaho resource is significantly less
expensive than Schwendiman Wind power priced at standard avoided cost rates. Such a
comparison is complicated by the fact that the Goshen project includes wind integration costs
the market value of green tags, and other site-specific adjustments that are not and cannot be
accounted for in Idaho Standard QF contracts.
3 As with the 90-110 Performance Band approach, opinions differ on the ideal performance target value (e., Staff
recommended an 80-120 Performance Band in the U.S. Geothermal Proceeding). PacifiCoIp agreed to annual MAG
values ranging from 75 to 85% depending on the age of the QF facilities. However, the Commission may conclude
that higher MAG values, or monthly MAG values, are more appropriate. PacifiCoIp stands by the MAG values in
its Agreement; however if the Commission agrees with Staff that the Agreement is not acceptable in its current
form, PacifiCoIp believes that a modified MAG provision would address Staffs concerns and protect ratepayers
better than would the 90-110 Performance Band.
REPLY COMMENTS OF P ACIFICORP Page 10
III. CONCLUSION
For the reasons herein, PacifiCorp respectfully requests that the Commission issue its
Order:
(1) Approving the Power Purchase Agreement between PacifiCorp and Schwendiman
Wind L.C. without change or condition; and
(2) Declaring that prices to be paid for energy and capacity are just and reasonable, in the
public interest, and that the cost incurred by PacifiCorp for purchasing capacity and energy from
Schwendiman are legitimate expenses, all of which the Commission will allow PacifiCorp to
recover in rates in Idaho in the event other jurisdictions deny recovery of their proportionate
share of said expenses.
In the alternative, PacifiCorp urges the Commission to provide PacifiCorp guidelines for
developing a revised PP A utilizing the MAG approach in a manner that the Commission finds
acceptable.
Respectfully submitted this 20th day of September 2005.
Lisa N ordstro
Attorney for PacifiCorp
REPLY COMMENTS OF P ACIFICORP Page 11
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I hereby certify that on this 20th day of September 2005 I causep.A9 ~~;s~fVJ~l~~~ ih~nd
delivery, a true and correct copy of the foregoing REPLY COMMENTS 'eF P*CfFT~~~N
Case No. P AC-05-9 to the following parties as shown:
Jean Jewell
Commission Secretary
Idaho Public Utilities Commission
472 West Washington
Boise, Idaho 83702
Bruce Griswold
Manager Origination
PacifiCorp
825 NE Multnomah Ste 600
Portland, Or 97232
Brian D. Jackson, P.
7800 Alfalfa Lane
Melba, ID 83641
Dean J. Miller, Esq.
McDevitt & Miller LLP
420 W. Bannock
Boise, ID 83702
Lisa Nordstrom
Office of the General Counsel
PacifiCorp
825 NE Multnomah Suite 1800
Portland, OR 97232