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.

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.

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.

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.

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.