20060324Decision memo.pdf

DECISION MEMORANDUM
TO:CO MMISSI 0 NER KJELLAND ER
CO MMISSI 0 NER SMITH
CO MMISSI 0 NER HANSEN
COMMISSION SECRETARY
COMMISSION STAFF
LEGAL
FROM:SCOTT WOODBURY
DATE:MARCH 24, 2006
SUBJECT:CASE NO. PAC-OS-9 (PacifiCorp)
AMENDED POWER PURCHASE AGREEMENT - SCHWENDIMAN
WIND LLC
On August 15, 2005, PacifiCorp dba Utah Power & Light Company (PacifiCorp;
Company) filed an Application for approval of a Power Purchase Agreement (Agreement) for
the sale and purchase of electric energy between PacifiCorp and Schwendiman Wind LLC
(Schwendiman). On October 4, 2005 , the Commission in Order No. 29880 rejected the filed
Application because the submitted Agreement did not include a "90/110 percent performance
band " a provision that defines the minimum degree of predictability required for published rate
eligibility. In its Order the Commission found that the 90/110 performance band established in
Order No. 29632 or a similarly rigorous requirement is necessary to assure that PacifiCorp
customers will receive the generation product they are paying for. Based on the established
record, the Commission found the Agreement's "mechanical availability guarantee" (MAG) to
be an unacceptable substitute for the 90/110 performance band and one that failed to sufficiently
protect ratepayers from overpaying. An agreement without such a provision, the Commission
found, is neither reasonable nor in the public interest. The Commission provided the parties 14
days to submit an amended Agreement containing a 90/110 performance band. Pursuant to
subsequent filings the deadline for filing an amended Agreement was continued.
Amended Agreement
On January 27, 2006, PacifiCorp and Schwendiman filed a Joint Motion with the
Commission requesting approval of a 20-year amended Power Purchase Agreement (Amended
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Agreement) dated January 27, 2006. Schwendiman proposes to design, construct, install, own
operate and maintain a wind generating facility with a nameplate capacity of 20 MW to
located in Bonneville County, Idaho. Pursuant to the Amended Agreement, Schwendiman will
sell and PacifiCorp will purchase approximately 7.15 aMW of electric energy generated by the
Schwendiman wind facility, a qualified small power production facility (QF) under the Public
Utility Regulatory Policies Act of 1978 (PURP A).
Amended Agreement Paragraph 2.conditions the Amended Agreement's
effectiveness upon a Commission determination that the prices to be paid for energy and capacity
are just and reasonable, in the public interest, and that the costs 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 proportional share of said expenses.Schwendiman s commercial
operation date is scheduled to occur by July 31 , 2007.
Delivery of Energy and Capacity
Pursuant to Amended Agreement, PacifiCorp will purchase the net output of 7.
aMW from the eight 2.5 MW Clipper wind generators comprising the QF. In accordance with
Section 4 of the Amended Agreement Schwendiman will be required to achieve an actual
monthly capacity factor within 10% of its forecasted monthly capacity factor (bandwidth). In the
event Schwendiman is outside the bandwidth, then it will receive the energy-only price (capacity
component removed) for all non-conforming energy delivered during that month.
Under Paragraphs 2.3 and 10.4 of the Amended Agreement Schwendiman will
reimburse PacifiCorp s costs for obtaining replacement power if Schwendiman misses the
scheduled commercial operation date of the plant (up to 120 days), or PacifiCorp terminates the
Agreement in the event of a seller default (up to 12 months). The replacement power price is the
average of the Mid-and Palo Verde firm market price over the defined period of
reimbursement. Schwendiman would be responsible for the positive difference, if any, between
the contract price and the replacement power price for the volume of replacement energy.
Schwendiman will not be compensated for delivering more than 10 aMW in any
given month. As described in Paragraph 5.4 of the Amended Agreement, if the facility delivers
more than 10 aMW on a monthly basis, PacifiCorp will accept the energy but will not purchase
or pay for the portion delivered in excess of 10 aMW.
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Purchase Price
The contract purchase price to be paid Schwendiman for its wind generation are
Idaho s published non-levelized avoided cost rates, as currently established by the Commission
in Order No. 29646 for QFs that deliver less than 10 aMW on a monthly basis. The
Schwendiman facility is expected to have net generation of approximately 62 700 MW hours
annually. Thus, PacifiCorp s average annual energy purchase obligation over the term of the
Amended Agreement will be approximately $4 million, with a total nominal cost of $72.
million. All applicable interconnection charges and monthly operation and maintenance charges
under the generation interconnection agreement with PacifiCorp transmission will be assessed to
Schwendiman.
Changes to Original Agreement
As reflected in the Joint Motion description of changes to the original Agreement, the
Amended Agreement contemplates an estimated annual sale and purchase of 62 723 088 kW
hours compared to the 54 882 702 kW hours contemplated in the original Agreement. The
difference arises because Schwendiman proposes to add an additional turbine to the facility
thereby increasing its nameplate capacity from 17.5 MW to 20.0 MW.
The Amended Agreement omits provisions related to guaranteed mechanical
availability. Consequently, provisions related to seller s minimum availability obligations in
Sections 4 and 5 of the original Agreement have been deleted, as have the defined terms
Availability,
" "
Cut-in Speed
" "
Minimum Availability Obligation
" "
Output Shortfall " and
Sufficient Wind.
The Amended Agreement adds the term "Non-Conforming Energy" to describe
energy delivered in excess or deficit of the seller s monthly delivery obligation. As required by
Order No. 29880 the Amended Agreement requires seller to deliver between 90% and 110% of
its scheduled delivery on a monthly basis and provides that seller receive the energy only price
for all Non-Conforming Energy. These provisions are added to Sections 4 and 5 ofthe Amended
Agreement.
The Amended Agreement measures monthly performance using a Monthly Capacity
Factor. The Monthly Capacity Factor is subject to adjustment for periods of excusable non-
delivery, using a process purportedly analogous to the adjustment process contained in
Commission approved Power Purchase Agreements filed by Idaho Power Company.
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In Section 6.4, the Amended Agreement clarifies the formula for calculating
PacifiCorp s liquidated damages in the event of termination due to seller s default.
The Amended Agreement revises the construction milestones in Section 2.2
postponing the Scheduled Commercial Operation Date from July 15, 2006 in the original
Agreement to July 31 , 2007 in the Amended Agreement. The cap on seller s potential liability
for daily delay damages, to be assessed in the event of unexcused delay in Commercial
Operation, has been extended from 90 days to 120 days.
In Order No. 29880 (pp. 11 , 12), the Commission stated that an acceptable published
avoided cost Power Purchase Contract should: (1) measure QF production on a monthly basis;
(2) differentiate the price paid for energy based on its reliability and predictability; and (3)
provide a similarly rigorous and reasonable equivalent to the 90/110 performance band
established in Order No. 29632. PacifiCorp and Schwendiman contend that the Amended
Agreement addresses all three of these concerns.
Grandfathering Treatment
In Order No. 29880, the Commission found that the "grandfathering" provisions set
forth in Order No. 29839 did not apply to the Application in Case No. P AC-05-9 because the
original Agreement was signed and dated July 19, 2005 - well before the August 4, 2005
effective date that reduced eligibility for PURPA contract rates from 10 aMW to 100 kW.
PacifiCorp and Schwendiman assert that the Amended Agreement should be accorded similar
grandfathering treatment because the Schwendiman project was sufficiently mature at the time of
Order No. 29839 and thus entitled to published rates. Additionally, the contract parties contend
that the Amended Agreement, which was negotiated to meet the Commission s objections to the
original Agreement, may properly be viewed as an extension of the original Agreement and it
should therefore be subject to the same rules as the original Agreement.
On February 8 , 2006, the Commission issued Notices of Filing and Modified
Procedure in Case No. PAC-05-9. The deadline for filing written comments regarding the
Amended Power Purchase Agreement and related Joint Motion was March 8, 2006. Timely
comments were filed by Commission Staff, Idaho Power Company, and a number of interested
parties including the Idaho Farm Energy Association. Reply comments were subsequently filed
by both PacifiCorp and Schwendiman. Disapproval of the Agreement was recommended by
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only one party, an individual in Idaho Falls who believes that the proposed wind farm is not a
profitable venture and that the Commission and PacifiCorp should wait to see whether the
Wolverine Creek Energy LLC project proves to be successful. The remaining comments can be
summarized as follows:
Commission Staff
Staff contends that the Amended Agreement 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. Staff recommends
that the Amended Agreement be approved.
Staff believes that the non-conforming energy prices are a reasonable proxy for Mid-
C market index prices and represent a fair price to be paid for energy that cannot be delivered
predictably. Staff does not view the non-conforming energy prices in the Agreement as
necessarily establishing a precedent to be followed in other contracts. Staff does believe
however, that the approach used here could provide a reasonable alternative for future wind
contracts for PacifiCorp, Idaho Power and A vista.
The Amended Agreement clarifies a formula for calculating liquidated damages in
the event of termination due to sellers default. Staff notes that the Commission has never
adopted rules requiring payment of liquidated damages for small QF projects that are delayed or
failed to materialize. However, Staff states that it is not opposed to such provisions and believes
they should be permitted.
The Amended Agreement in addition reqUIres Schwendiman to meet monthly
estimates of capacity factor rather than monthly estimates of generation. Because monthly
capacity factor and monthly energy generation are mathematical derivations of each other, Staff
believes that the change is not material.
Idaho Power Company
Idaho Power in its comments contends that the procedure for computing "liquidated
damages" contained in the Amended Schwendiman Agreement has a greater tendency (when
market prices are lower than the fixed price) to shift the costs of QF non-performance away from
QF developers and onto utility customers than does the market-based liquidated damage
provisions contained in the multiple QF contracts the Commission has approved for Idaho
Power. Idaho Power does not object to PacifiCorp seeking approval of a QF contract that
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includes terms and conditions that are different from those that the Commission has approved for
Idaho Power QF contracts so long as Idaho Power is not required to include Schwendiman terms
and conditions in existing or future Idaho Power QF contracts. Idaho Power recognizes that
PacifiCorp operates in several jurisdictions and desires to utilize a pricing structure for liquidated
damages in its QF contracts that provide state-to-state uniformity. Idaho Power notes with
concern that since the filing of the Schwendiman Agreement, QF developers have represented to
the Company that if the terms in Schwendiman are found to be reasonable that they believe they
are entitled to the same terms under an Idaho Power contract.
Idaho Power believes that its liquidated damages provisIOn and its 90%/110%
performance band are somewhat more rigorous than the equivalent provisions in the
Schwendiman Agreement. Idaho Power requests that the Commission confirm that the 90/110
performance band and liquidated damage provisions for generation outside that band that the
Commission has approved in multiple Idaho Power QF contracts is fair, just and reasonable, and
that Idaho Power can continue to utilize that pricing arrangement in its contracts with QF
developers seeking to sell QF power to Idaho Power.
Idaho Farm Energy Association
The Idaho Farm Energy Association (IFEA) supports approval of the Schwendiman
Amended Agreement and views its modified 90/110 banding mechanism as a significant
improvement over the prior version of the band. IFEA contends, however, that the methodology
used to separate the capacity and energy price components in the Amended Agreement contain
an important error which must be corrected if these new contract terms are to be applied to other
projects. In addition the Association believes that the 90/110 performance band remains an
unjustified reduction from full avoided cost prices. It also objects to the failure of the
methodology to recognize that deliveries below the 90% band still have capacity value. Rather
than persisting with the 90/110 banding requirement, IFEA believes that all parties would be
better served by requiring that wind projects provide forecasts from pre-approved advanced
forecasting services.
The "non-conforming energy price set forth in the Schwendiman Amended
Agreement is too low, IFEA contends, because it fails to include the full value of variable
operations and maintenance costs for the Surrogate Avoided Resource. A portion of variable
O&M costs, it states, were included in the capacity component of the published rates, which has
DECISION MEMORANDUM
the effect of reducing the energy component, and thus the non-conforming energy price. IFEA' s
analysis is set forth in its comments together with the supporting analysis of its consulting
economist, Don C. Reading of Ben Johnson Associates, Inc.
Dr. Reading states in his analysis:
There is a theoretical flaw in PacifiCorp s avoided cost calculation
methodology. The Company includes variable O&M in the SCCT's fixed
costs. While this is consistent with the way PacifiCorp calculates avoided
capacity prices in Utah and Oregon, it is simply incorrect. In economic
terms, the task here is to determine the change in cost due to a change in
demand (kW). Operating costs (kWh) are not part of this calculation. The
change in variable O&M due to a change in kW is zero. There is no
justification for treating variable O&M costs differently than variable fuel
costs.
In both Oregon and Utah, the avoided capacity price is simply used to
allocate total avoided costs between time periods. Therefore PacifiCorp
methodology does not reduce total avoided costs. It only shifts a minor
amount of avoided costs between on-peak and off-peak periods. In the
Schwendiman case, this flawed methodology reduces the price of Non-
Conforming Energy. Therefore, it causes an unfair loss to the projects that
will be subject to this approach.
Other Comments
Other commenting parties offer criticism of the underlying 90/110 banding
requirement.It is not, one states, an assurance of better forecasting or an incentive for
performing and delivering power. Trying to provide an accurate wind forecast, a professor of
mechanical engineering states, is difficult, if not impossible, beyond 48 to 72 hours. For a
forecast three months in advance, the best approach is to use statistical data and statistical
averages - but such data is influenced by phenomena such as EI Nino and climate change
dynamics. A better system, another contends, is one that incorporates day-ahead and hour-ahead
forecasting for wind power production. It is those timeframes, he contends, that are most
important for operation and balancing of generation and the power grid. If the 90/110 banding is
retained, it is recommended by a commenter that a larger error band be considered or that the
financial incentives be changed.
PacifiCorp Reply Comments
PacifiCorp in reply comments disagrees with Idaho Power s contention that the
pricing methodology for non-conforming energy (in the Schwendiman PP A) shifts financial risk
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from the QF developer to PacifiCorp ratepayers. PacifiCorp s non-conforming energy price is
based upon removing the fixed capital and fixed O&M costs for a SCCT from the total avoided
cost price as computed using the Commission-approved SAR methodology. This modification
to the SAR methodology, PacifiCorp contends, is a prudent and reasonable approach to
determine the energy-only price to be paid for non-conforming energy. PacifiCorp states that
Idaho Power s conclusion that its market-based pricing approach for non-conforming energy is
better for customers is based upon several subjective assumptions that cannot be substantiated or
verified.
1. It is not always appropriate, PacifiCorp contends, to assume that the
market prices from the last several years are indicative of future market
prices. E., energy crisis of 2000-2001.
2. Idaho Power s conclusion also assumes that the QF's behavior (e.
scheduling algorithm and risk management strategies) will be identical
under the two approaches - another unverifiable assumption. PacifiCorp
believes that Schwendiman s montWy delivery estimates will be more
accurate under the Schwendiman PP A, because the added risk for using
index prices for non-conforming energy in the Idaho Power PP A would
cause Schwendiman to low-ball estimates in order to avoid under-
delivery price risk.
For both reasons PacifiCorp believes it is more accurate to say that its approach changes the
allocation of risks associated with under or over deliveries compared to Idaho Power s PP A;
whether the net result of this difference favors PacifiCorp s or the QF, however, PacifiCorp
states , is unknowable.In PacifiCorp s opinion, the important point is that its pricing
methodology for non-conforming energy, like Idaho Power , gives the QF a strong incentive to
accurately schedule its net output while limiting the maximum potential liability of the ratepayer.
While Commission Order No. 29880 makes clear that an Idaho electric utility must
include the 90/110 performance or similarly rigorous requirement in its standard contract, the
Order, PacifiCorp notes, does not require that non-conforming energy must be priced based upon
a market index.
PacifiCorp also objects to Idaho Power s characterization of the non-conforming
energy price as "liquidated damages.PacifiCorp believes a more accurate term is "non-
conforming energy price adjustment." The reduced payments for non-conforming energy,
PacifiCorp contends, are intended to reflect the lesser value of the energy delivered, not a
DECISION MEMORANDUM
monetary sum for breach of contract that a contracting party agrees to pay. PacifiCorp and
Schwendiman both understand, PacifiCorp contends, that deliveries outside the 90/110 band are
not a breach of the Agreement.
Regarding IFEA's comments, PacifiCorp recommends that the Commission
acknowledge that IFEA "supports approval of the Schwendimen Amended Agreement" and
ignore the remainder of its comments regarding variable O&M and critique of the 90/110 band
as beyond the scope of this proceeding.
Schwendiman Reply Comments
Schwendiman by way of reply makes clear that it seeks no modification of the
Amended Agreement's pricing terms.Schwendiman notes that in its negotiations with
PacifiCorp it was well aware of the variable O&M issue discussed in the IFEA comments.
Should the issue need further study with respect to other contracts in the future, Schwendiman
contends that it should not be done in the context of this contract approval proceeding.
Regarding Idaho Power s comments contrasting the two pricing methods
Schwendiman contends that the future energy price being unknown, the ratepayer is equally
likely to benefit from either PacifiCorp and Idaho Power s band mechanism. Schwendiman, as
did PacifiCorp, also objects to Idaho Power s characterization of the payments for energy
delivered outside the 90/110 band as liquidated damages. The phrase "liquidated damages
Schwendiman contends, necessarily implies a breach of contract. Deliveries outside the 90/110
band are not a breach, Schwendiman maintains. The reduced payments are rather intended to
reflect a lesser value of the energy delivered.
COMMISSION DECISION
Tendered for Commission consideration is an Amended Power Purchase Agreement
between Schwendiman and PacifiCorp. Does the Commission find it reasonable to approve the
Agreement as submitted? Does the Commission wish to address any of the collateral issues
raised by other commenting parties?
Scott D. Woodbury
bls/M:PAC-O5-09 sw2
DECISION MEMORANDUM