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<title>August 2006: Idaho PUC Rejects Challenge To Wind QF Compensation
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<p align="left"><strong><small><font face="Arial">About The Author:</font></small></strong></p>
<p align="left"><font face="Arial" style="font-size: 9pt">Robert A. Olson is a partner in the law firm of
Brown, Olson & Gould, P.C. which maintains a nationwide practice in energy law,
public utility law and related commercial transactions.</font></p>
<p><small><font face="Arial"><font style="font-size: 9pt">He can be reached at:</font><br>
<br>
<b><font color="#0000FF">Brown, Olson & Gould, PC</font></b><br>
2 Delta Drive<br>
Suite 301<br>
Concord, NH 03301<br>
<a href="mailto:[email protected]">[email protected]</a><br>
(603) 225-9716<br>
<a href="mailto:[email protected]"></a></font></small></p>
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<p ALIGN="left"><b><u><br>
<br>
August 2006</u></b><font size="6"><b><br>
</b></font></p><b>
<font size="6">
<p>IDAHO PUC REJECTS CHALLENGE TO <br>
WIND QF COMPENSATION MECHANISM</p>
<p align="left"></font><strong>by Robert Olson and
</strong>David J. Shulock<strong> -- Brown, Olson and Wilson, P.C.<font size="6"><br>
</font>
</strong>
</b><font size="6"><font face="Arial" size="2">(<em>originally published by PMA OnLine Magazine:
2006</em>/10/27)</font></p>
</font><center>
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</font></p>
<p ALIGN="LEFT">The federal Public Utility Regulatory Policies Act (“PURPA”)
requires regulated utilities to buy renewable power generated by qualifying
small power production facilities (“QFs”) at an “avoided cost rate,” i.e., a
rate that reflects the cost the utility avoids by not having to generate the
electricity itself or buy the electricity from some other source. It also
requires state authorities to publish standard avoided cost rates that apply
to small QFs. In implementing its standard avoided cost rates as applied to
small QFs that sell wind-generated power (“Wind QFs”), the Idaho Public
Utilities Commission (the “PUC”) applies a so-called “90/110 performance
band” requirement to address the intermittent nature of wind generation and
resulting costs to utilities. In the Matter of the Petition of Magic Wind
LLC to Determine Exemption Status, Case No. IPC-E-05-34, Order No. 30109,
slip op. at 10-11 (Idaho PUC, August 15, 2006) (the “Order”), citing Order
No. 29632 in Case Nos. IPC-E-04-8 and 04-10. Under that requirement, to
ensure that it receives the standard avoided cost rate, a Wind QF must
deliver between 90% and 110% of its monthly commitment to the purchasing
utility. If a Wind QF fails to deliver at least 90% of its monthly
commitment, all of the delivered energy is priced at the lesser of 85% of
the market rate or the standard avoided cost rate. Similarly, if a Wind QF
delivers in excess of 110% of its monthly commitment, the excess is priced
at the lesser of 85% of the market rate or the standard avoided cost rate.
The PUC recently rejected arguments that this compensation mechanism
threatens wind project financing and violates PURPA. Order at 11.</p>
<p ALIGN="LEFT">Magic Wind, a Wind QF, petitioned the PUC to require Idaho
Power to accept a contract term under which Magic Wind would be paid for
“nonconforming deliveries,” i.e., energy deliveries outside the 90/110
performance band, at fixed prices rather than at 85% of the market rate. The
PUC had previously approved such an arrangement where both the Wind QF and
the purchasing utility had agreed to the fixed prices and the prices were
reasonable. Order 2, citing Order No. 3000 in Case No. PAC-E-05-6. Magic
Wind sought a modified version of the fixed prices that had been approved in
the earlier case, but unlike the earlier case, the purchasing utility was
not in agreement. <br>
<br>
Magic Wind argued that the market-based method of compensation for
nonconforming deliveries made it difficult to obtain financing for wind
projects, because “the relative unpredictability of future market prices
creates a risk that is difficult to quantify, thus making [the] investment
less certain of recovery.” It also argued that “a reduction of market price
by a seemingly arbitrary 15% results in payments less than avoided cost, and
in violation of PURPA.” In addition, interested third-party Wind QFs argued
that the market-based method violated PURPA regulations that give QFs in
long-term power purchase agreements a choice of compensation methods. Under
PURPA regulations, such QFs may require compensation based on either (1)
avoided cost calculated at the time of delivery or (2) a projected avoided
cost. See 18 C.F.R. � 292.304(d)(2). The Wind QFs argued that the PUC’s
approach deprived Wind QFs of this option, instead forcing Wind QFs to
accept a hybrid of both options. Specifically, deliveries within the 90/110
performance band are priced at published avoided cost rates, which is an
example of projected avoided costs, but nonconforming deliveries are priced
based on market rates, and thus are priced at an avoided cost calculated at
the time of delivery.</p>
<p ALIGN="LEFT">With respect to the argument that the PUC’s approach
threatens wind project financing, Idaho Power countered that 14 out of the
22 power purchase agreements it had signed since the PUC adopted the 90/110
performance band were with Wind QFs. With respect to PURPA compliance, Idaho
Power countered that the market-based mechanism as applied to nonconforming
deliveries was not a computation of avoided costs, but rather was a
measurement of damages for failure to perform under the contract. As long as
a Wind QF performs as agreed, it argued, the Wind QF receives compensation
at published rates based on projected avoided costs. </p>
<p ALIGN="LEFT">In rejecting Magic Wind’s petition, the PUC stated that the
record did not support the claim that Wind QFs would be unable to obtain
financing unless market-based pricing for nonconforming deliveries were
change to fixed pricing. With respect to PURPA compliance, the PUC did not
address the specific arguments presented by the parties, but stated that the
PUC had approved the 90/110 performance band requirement in a fully
litigated proceeding and that the argument that the market-based pricing for
nonconforming deliveries violates PURPA was “misplaced and unpersuasive.”
Interested parties have until September 5, 2006, to petition for
reconsideration.</p>
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<blockquote>
<p align="left"><font face="Arial">
<small>Robert A. Olson is a partner in the law firm of Brown, Olson &
Gould P.C.
which maintains a nationwide practice in energy law, public utility law and related
commercial transactions. He can be reached at:</small></font><p align="center">
<font face="Arial"><small><font color="#0000FF"><b>Brown, Olson & Gould, PC</b></font><br>
2 Delta Drive, Suite 301<br>
Concord, NH 03301 <br>
<br>
<a href="mailto:[email protected]">[email protected]</a> | (603) 225-9716<a href="mailto:[email protected]"></a></small></font>
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