20040329_793.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
COMMISSIONER SMITH
COMMISSIONER HANSEN
COMMISSION SECRETARY
COMMISSION STAFF
LEGAL
FROM:SCOTT WOODBURY
DATE:MARCH 26, 2004
RE:CASE NOs. IPC-03-16 (Idaho Power); A VU-03-9 (Avista); PAC-03-
(PacifiCorp)
PROPOSED MODIFICATIONS TO PURP A CONTRACT SECURITY
PROVISIONS
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 A 1 Power
Purchase Agreements that contain levelized avoided cost rates. Without risk mitigation, PURP A
Qualifying Facilities (QFs or CSPPs) desiring levelized rates must post liquid funds as security
for the 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-l 006-
292 (-292 Case), Order No. 21690 are (1) the purchase of certain basic insurance policies and (2)
the establishment of certain lien rights. Petition Exhibit 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. Petition Exhibit 2 describes the lien rights ofIdaho Power on
QF projects that receive levelized purchase rates.
Idaho Power reports that in its most recent audit of QF projects to assess whether
those projects continue to conform with the risk mitigation requirements of their specific Power
Purchase Agreements with the Company, the Company identified numerous projects that were in
non-compliance. Some projects carried no insurance while numerous others had insurance that
1 Public Utility Regulatory Policies Act of 1978, Section 292.
DECISION MEMORANDUM
were products standard in the insurance industry but which, in many circumstances, did not
conform with the insurance requirements of the projects ' agreements. Idaho Power states that
notices were sent to the various projects which were non-compliant with respect to the insurance
requirements and three common responses were received by Idaho Power from those projects:
(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 (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. Idaho Power states that it has also
reviewed the potential application of the - Doctrine of Impossibility - and recognizes that it may
be a legitimate claim that may be upheld in legal proceedings.
Regarding liens, the Company reports that the financing arrangements of some
projects preclude a subsequent lien position by Idaho Power 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
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 project is the value of the projected revenues of the energy delivered to
Idaho Power under the levelized rate agreement.
DECISION MEMORANDUM
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. 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 in Petition Exhibit 3 shows, in legislative format, the proposed changes
to the basic business insurance requirements that are now deemed by the insurance industry to be
reasonably available to QFs:
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 .vhichevcr greater
Consistent with current
Insurance Industry Utility
practices for similar
DfoDertv.
Catastrophic Perils Not less than 6G%-80%5% of Plant Cost Consistent
(Earthquake and Flood)equipment cost with current Insurance
Industry Utility practices for a
similar DfoDertv.
Boiler/Machinery Not less than W%-80%0%,equipment cost
equipment cost $25 000
, \',
'hichcver is greater
Consistent with current
Insurance Utility practices for
a similar property.
Loss Income (Business Not less than 75%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 DroDerty.
DECISION MEMORANDUM
All of the above insurance coverages shall be placed with insurance companies with an AM Best
rating of A- or better. Idaho Power contends that changes to the required basic business
insurance coverages can be made by a QF without imposing substantial additional risk in the
event of a default. In addition, the Company contends that by better aligning these requirements
with current insurance industry standards and business practices, enforcement and compliance
with these requirements will be reasonably attainable.
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. The Company also proposes that the requirement for the establishment of secondary
lien rights in favor ofIdaho 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.
On December 5 , 2003 , the Commission issued Notices of Application and Modified
Procedure in Case Nos. IPC-03-, AVU-03-9 and PAC-03-13. The deadline for filing
written comments was January 15, 2004. Timely and out-of-time comments were filed by
Commission Staff, PacifiCorp, Avista and Vern Ravenscroft, a QF developer. On February 13
2004, Idaho Power filed Reply Comments. The filed comments can be summarized as followed:
Commission Staff
Insurance Requirements
Staff in its comments states that it has contacted insurance providers for many Idaho
QFs and confirms the unavailability or extreme high cost of insurance products specified under
the current security requirements for levelized rates.
Staff notes that in its -292 security case the Commission in Order No. 21446 made
the following statement regarding insurance:
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
(nonpayment 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 policyholder.
Order No. 21446
DECISION MEMORANDUM
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 QF projects
with no insurance at all because of changing insurance industry standards that make current
insurance requirements unobtainable or economically impracticable. Current security
requirements, Staff contends, 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 attached (Staff Comments
Attachment 4).
Second Lien
Idaho Power recommends that the second lien requirement for QF projects be
eliminated.Staff objects to this proposed modification.In providing background for its
objection, Staff cites the following Commission findings in the -292 security requirements case:
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
security 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
DECISION MEMORANDUM
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. ...
The lien rights available to secure ratepayer interests 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 or
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), 1. (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-Ievelized rate that would have otherwise been paid. However
DECISION MEMORANDUM
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 by purchasing at high levelized
rates may outweigh any accumulated overpayment liability. Ideally in the event of a 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.
PacifiCorp
PacifiCorp in its comments states that it is under contract with some 13 separate co-
generators and small power producers (CSPPs) in Idaho. Although only one of the contracts is
subject to the Commission s -292 security Order No. 21692, the Company states that as its
contracts expire it will be faced with many of the same issues addressed by Idaho Power in its
Petition.
PacifiCorp notes that the focus of Idaho Power s Petition is narrow. As such it does
not address all of the myriad issues that must be dealt with in the context of analyzing whether a
contract with a particular CSPP adequately protects the interests of the utility and of its
ratepayers. PacifiCorp expresses its general support for the position taken by Idaho Power in its
Petition. The utility feels, however, that in order to adequately protect PacifiCorp s interest and
those of its shareholders without unduly burdening QFs desiring to enter into contracts for the
sale of power, it is important to add the following classes of insurance coverage to those set out
in Idaho Power s Petition and exhibits: (1) automotive liability coverage with limits of
million/incident; and (2) worker s compensation coverage with limits of $1 million/incident.
Vernon Ravenscroft
Mr. Ravenscroft compliments Idaho Power for recognizing and initiating corrective
action in regard to the current insurance problems. Mr. Ravenscroft offers the final points for
clarification and/or strengthening of the pending Petition:
No.1. Commercial General Liability: No comment.
DECISION MEMORANDUM
No.2. All Risk Property - recommends that the Commission s final Order more
specifically define "80% of cost."Does this category include the "soft costs" such as
engineering, federal licensing, legal expense, contract negotiations, financing expense, finders
fee, etc.? Also, does it include land purchases, long-term land rental contracts and rental rights?
No.3. Catastrophic Perils (Earthquake and Flood)
- "
80% of equipment costs.
Questions whether this is intended to be original cost, current replacement cost or current
depreciated value?
No.4. Boiler Machinery - Same questions as outlined in No.
No.5. Loss of Income (Business Interruption)
a. "75% of estimated daily income" - suggests that this is meaningless
when it is combined with "20% of estimated annual income." E., for the
Ravenscroft project 75% of the estimated daily income would be $482 and 20% of
the estimated average annual income would be $46 955. Mr. Ravenscroft does not
understand the need for the daily figure.
b. Mr. Ravenscroft contends that there is an extreme difference when
you compare the "business interruption" risk between the various independent
projects now operating in Idaho. There are some who have only one generation unit
served by only one penstock and one control valve. Any major breakdown can
cause a total loss of income for several weeks or even months. In comparison, the
Ravenscroft project will soon have four generation units all under computer control
and each with its own penstock and control valve. Interruption loss for the
Ravenscroft proj ect is confined to the 20% of the time (Idaho Department of Water
Resource Flow Duration Data) when we have a flow that exceeds our plant capacity.
Recommends that in the final Order there be some procedures and/or defined basis
whereby this requirement can be adjusted to reflect the differing degrees of risk
from one project to the other.
Secondly, on the same subject, the Ravenscroft project has induction generators
which can be quickly repaired in at least two shops in Twin Falls and vertical shaft
turbines which can be quickly repaired at Yankee Machine Shop in Boise. The
Ravenscroft project does not have a significant business interruption risk.
No.6. Other than the identification of low-risk projects explained above, Mr.
Ravenscroft agrees with the generalized deductible language which reads "consistent with
current insurance industry utility practice for a similar property.
Avista
Avista in its comments notes that in PacifiCorp s comments, PacifiCorp recommends
that classes of liability insurance coverage be added to those listed in Idaho Power s Petition and
DECISION MEMORANDUM
exhibits to wit: (1) automobile liability coverage and (2) worker s compensation coverage.
While not disputing the prudence of coverage related to automobile liability and worker
compensation, Avista notes that the insurance requirements to which Idaho Power s Petition
relate are those that secure the financial capacity of a PURP A project to discharge its contract
obligations to the purchasing utility purchase contract, when the purchase contract provides for a
levelized rate. Avista submits that it would be prudent for each utility to individually develop its
requirements for personal injury and property damage, and individually negotiate such
requirements with PURP A projects. The Commission has not, heretofore, required uniform and
standardized liability insurance requirements for PURP A developers. A vista contends that it
would not be appropriate to deal with personal injury and property damage liability insurance in
the docket, which only addresses the security requirements for PURP A projects that receive
payments at levelized avoided cost rates.
Other than the foregoing comments with respect to property and personal injury
liability insurance requirements, Avista states that it has no objection to the comments of Staff
or PacifiCorp in this matter.
Idaho Power Reply Comments
Insurance Requirements
Idaho Power agrees with A vista s characterization of the limited purpose of Idaho
Power s Petition and supports the comments set forth by Avista. Idaho Power only seeks to
revise certain security components of its agreements with QFs who have levelized avoided cost
contracts with the Company. Except to the extent that certain insurance is required by the QF to
conform with Commission required risk mitigation provisions, Idaho Power is not seeking
direction with respect to general insurance requirements for QF projects in this docket. Idaho
Power concurs with the Commission Staff s recommended clarifications and modifications to
the insurance requirements as proposed by the Company and respectfully requests that proposed
Insurance requirements as illustrated in Commission Staff Comments, Attachment , be
approved.
Second Lien Rights
Future QF Agreements:
Idaho Power admits to mixed feelings on the subject of second liens. On the one
hand, the Company s experience in enforcing second liens has not been good. On the other
DECISION MEMORANDUM
hand, the prospect of "loaning" CSPP developers millions of dollars by levelized rates without
any security is not consistent with good business practice.
Should the Commission accept Staff s recommendation and continue to reqUIre
second lien security rights, Idaho Power informs the Commission that it will retain outside
counsel to complete the paperwork required to establish those lien rights. The estimated legal
fee for establishing a second lien on a QF project is $1 000 to $1 500. Idaho Power requests that
the Commission permit the Company to collect its cost of establishing a second lien directly
from QFs electing to be paid levelized rates. Alternatively, the Company requests that it be
authorized to include those legal expenses as part of the cost of qualifying facility purchases in
the Company s annual PCA.
Pre-existing QF Projects:
Should the Commission accept Staff s recommendation, the Company expects that
pre-existing QF projects with levelized contracts that are currently required to meet the -292 case
security requirement will continue to conform to those requirements. The only change in these
requirements will be any Commission approved modifications to the -292 case "basic insurance
provisions. QF's with a levelized avoided cost rate contract who have not been able to obtain
Commission-required valued loss of income insurance at commercially reasonable rates would
be expected to comply with the -292 case "basic insurance" component as requested by the
Company in its Petition and as adjusted by Staff but would not be obligated to either continue to
seek valued loss of income insurance or to grant a second lien in favor of Idaho Power on their
projects.
In conclusion, the Company requests that the Commission issue an Order:
1. Finding that the modified insurance requirement shown in the Attachment
4 to the Commission Staff Comments be accepted as the "basic business
insurance" coverages for purposes of risk mitigation as established in
Order No. 21690, as amended, for future CSPP agreements for pre-
existing CSPP proj ects as their current insurance is renewed;
2. Finding, for pre-existing CSPP projects with levelized contracts who have
not been able to obtain Commission-required valued loss of income
insurance and who have not granted a second lien in favor of Idaho
Power, that those projects be required to comply with the -292 case "basic
insurance" component as shown in Attachment 4 to the Commission Staff
comments but that those projects now be obligated to either continue to
DECISION MEMORANDUM
seek valued loss of income insurance or to grant a second lien in favor of
the Company; and
3. Finding that, if the Commission determines if Idaho Power shall obtain a
second lien on all new CSPP projects with whom it enters into levelized
rate agreement, then the Company is authorized to collect the reasonable
attorney s fees and cost of establishing the second lien directly from the
CSPPs or, in the alternative, that the Company be authorized to include
those legal expenses as a part of the cost of Qualifying Facility purchases
in the Company s PCA.
Commission Decision
Idaho Power in its Petition in Case No. IPC-03-, as extended to both Avista and
PacifiCorp, requests approval of modifications to security provisions required in QF levelized
rate contracts. Idaho Power recommends that Staff proposed modifications to insurance
requirements be accepted and that PacifiCorp s proposed expansion of insurance requirements to
include automobile and worker s compensation coverage be denied.Staff notes that Mr.
Ravenscroft's comments were filed prior to Notice in this case. Does the Commission wish to
provide any of the clarifications requested by Mr. Ravenscroft? Does the Commission find that
Staff proposed modifications to the -292 security provision insurance requirements acceptable?
Regarding lien rights, Idaho Power recommends that the second lien requirement be
eliminated. Staff objects to this proposed modification and notes that without a second lien the
methodology for QFs requesting levelized rates requires the posting as liquid security 35% of the
estimated overpayment liability amount. Idaho Power admits mixed feelings and recommends
that should the Commission continue with the second lien requirement, that the Company be
permitted to collect the cost from the QF or alternatively recover the expense as part of its annual
PCA filing. How does the Commission wish to treat the Company s Application regarding
elimination of second lien rights?
Scott Woodbury
Vld/M:IPCEO316 A VUEO309 _P ACEO3 1 3
DECISION MEMORANDUM
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 utili
practices for a similar property
All Risk Property Not less than 9G%-80%5% of Plant Cost or $25 000
Plant Cost the current v/hichever 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 6G%-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 9G%-80%0% of equipment cost or
equipment cost the current $25 000, v;hiche'/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 oflikekind age and quality.
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