20031215Decision Memo.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
COMMISSIONER SMITH
COMMISSIONER HANSEN
COMMISSION SECRETARY
COMMISSION STAFF
LEGAL
FROM:SCOTT WOODBURY
DATE:DECEMBER 11, 2003
SUBJECT:CASE NO. AVU-03-7 (A vista)
POWER PURCHASE AND
CORPORATION)
SALE AGREEMENT (POTLATCH
On August 25 , 2003, Avista Corporation dba Avista Utilities (A vista) and Potlatch
Corporation (Potlatch) filed a Joint Petition with the Idaho Public Utilities Commission
(Commission) requesting an Order approving a submitted Power Purchase and Sale Agreement
(Agreement) between Avista and Potlatch dated July 22, 2003. Potlatch operates a wood pulp,
paperboard, tissue and wood product manufacturing facility in Lewiston, Idaho. Potlatch owns
and operates four electric generators at the Lewiston plant that are capable of generating
approximately 130 megawatts (MWs) of energy. The Potlatch electric generators are qualifying
facilities (QFs) pursuant to the Public Utilities Regulatory Policies Act of 1978 (PURP A).
Direct testimony of A vista supporting the Purchase and Sale Agreement was filed with the
Commission on September 26, 2003. Also filed with the Commission on October 10, 2003 is a
related Interconnection Agreement dated September 22, 2003.
Agreement
The submitted Power Purchase and Sale Agreement is for a ten-year term beginning
July 1 , 2003 and ending June 30, 2013. The Agreement is conditioned upon approval by the
Commission of 1) a direct assignment to A vista s Idaho operations of all power purchase costs
paid by A vista to Potlatch under the Purchase and Sale Agreement and 2) deferral and recovery
of 100% of all power purchase costs paid by A vista to Potlatch under the Agreement to A vista
DECISION MEMORANDUM
Idaho Power Cost Adjustment (PCA) mechanism (Schedule 66) or otherwise recovered by
A vista through base rates.
As recited in the Joint Petition of the parties, Avista will be the sole purchaser of
Potlatch's generation and said purchase is intended to satisfy A vista s obligations under PURP A
to purchase power from the qualifying facilities at the Lewiston plant. A vista will pay Potlatch
$42.92 per MWh up to a maximum base generation amount of 543 120 MWh (544 608 during a
leap year) generated by Potlatch during each July 1 through June 30 period (Operating Year) of
the Agreement. This amount is equivalent to 62 average MW and is referred to in the Agreement
as the "Base Generation Amount." Amounts generated by Potlatch in excess of the maximum
Base Generation Amount each Operating Year ("Excess Generation Amount") will either be
purchased by A vista at 85% of the applicable Mid-Columbia Index Price, with a price cap of $55
per MWh, or used by Potlatch to reduce its load requirement from A vista. The purchase of
Potlatch's Excess Generation Amount by Avista is limited to 800 MWh (5 average MW) each
Operating Year.
Additionally, it is noted that Potlatch has the capacity to generate additional amounts
Incremental Generation Amounts ) under certain circumstances. The Purchase and Sale
Agreement provides for the purchase by A vista of Incremental Generation Amounts, under the
terms and conditions specified in the Agreement.
As reflected in the Agreement, Avista will serve Potlatch's load requirement
Lewiston s plant under its Extra Large General Service Schedule 25 rates, including all
applicable rate adjustments, unless the Commission issues an Order in the future authorizing
different billing rates.
A vista and Potlatch request that the Commission issue an Order approving the
Purchase and Sale Agreement as a settlement of all known existing disputes between the parties
including without limitation, Case No. A VU-01-5 (In the matter of the Petition of Potlatch
Corporation for an Order determining the terms and conditions of Potlatch's purchase of
electricity from Avista Utilities) and Case No. A VU-O2-8 (a Potlatch complaint alleging that
A vista was refusing to purchase the cogeneration of Potlatch's PURP A qualifying facilities at its
Lewiston plant).
DECISION MEMORANDUM
On October 2003 the Commission issued Notices of Joint Petition and Modified
Procedure in Case No. AVU-03-7. The deadline for filing written comments was November
2003. The reply deadline was November 2003. (::ommission Staff was the only party to
file comments. No reply comments were filed.
Staff Comments
Staff recommends that the Commission (1) approve the submitted Power Purchase
and Sale Agreement between A vista and Potlatch; (2) approve A vista s proposal to directly
assign to A vista s Idaho jurisdiction all power purchase costs paid by A vista to Potlatch under
the Agreement and all revenues received by A vista for serving the 60 megawatts of Potlatch and
incremental load; and (3) authorize deferral and recovery in the Company s Idaho PCA of 100%
of all power purchase costs paid by A vista to Potlatch under the Agreement or recovery through
base retail rates. Staff comments can be summarized as follows:
Proposed Price for Potlatch Generation
Staff notes that Potlatch's generators have been certified by the Federal Energy
Regulatory Commission (FERC) as PURPA "Qualifying Facilities." As such, Avista has an
obligation under PURP A to purchase power offered for sale at avoided cost rates established by
the Commission. The established method for determining avoided cost rates for projects larger
than 10 megawatts is an Integrated Resource Plan (lRP)-based methodology. The avoided cost
methodology is described in Order No. 26576 and its accompanying Settlement Stipulation. The
rate computed for Potlatch is the first under the IRP-based methodology.
Determination of the Contract Rate for Base Generation
A vista performed an analysis using the AURORA computer model to determine the
value of Potlatch's generation. Also using AURORA, Staff reviewed the analysis and
computations done by A vista, verified the input data and the assumptions and confirmed the rate
offered to Potlatch. Staff believes Avista has correctly followed the methodology for computing
an avoided cost rate as described in Order No. 26576. The rate for Base Generation Amounts of
$42.92 per MWh is a 10-year levelized avoided cost rate from Avista s 2002 IRP. The rate
represents an estimate of future market prices that fully reflects the fixed costs of new
generation.
Another method used by Staff to verify the value established for Potlatch generation
was to compare the purchase price to published avoided cost rates for projects 10 MW and
DECISION MEMORANDUM
smaller. The non-fueled published avoided cost rate for a 10-year contract length and a 2003
online date is $44.43 per MWh. These rates are based on the cost of generating energy using a
gas-fired combined cycle combustion turbine (CCCT). The small difference in these two prices
Staff contends, can be justified based on the different operating characteristics of Potlatch
generation and a CCCT. The 10- year levelized price approved by the Commission and paid by
A vista for Potlatch generation in the 1992 special contract was $41.50 per MWh.
Contract Rate for Excess and Incremental Generation Amounts
Under the Agreement, Excess Generation (i., amounts generated by Potlatch in
excess of the Base Generation Amount) will either be purchased by Avista at 85% of the
applicable Mid-Columbia (Mid-C) index price, with a price cap of $55 per MWh, or used by
Potlatch to reduce its load requirements from A vista. The purchase of Potlatch's Excess
Generation Amounts by A vista is limited to 5 aMW each operating year. Staff believes that a
purchase price equal to 85% of the Mid-C index price is reasonable. In addition, Staff contends
that the rate is consistent with comparable rates paid by other utilities. The price is the same as
the price paid by Idaho Power for the equivalent of excess energy in some of its PURP A
contracts and is also equal to Idaho Power s non-firm energy rate under its electric Schedule 86.
Staff also believes it is reasonable to cap the price paid for excess generation amounts
at $55 per MWh. A price cap of $55 will insure that Avista is not forced to pay excessive
amounts, yet it will provide the Company an opportunity to purchase small amounts of energy at
below market prices when supplies are limited.
Incremental Generation is energy produced by Potlatch that exceeds the Base
Generation Amounts and the Excess Generation Amounts. The rates for Incremental Generation
are either: a) for prescheduled generation, 85% of market price from a unit contingent sale that
A vista is able to make with a third party, or b) on a real-time basis at 80% of market price for the
hour. Staff believes that these rates are reasonable for Incremental Generation. As the
Agreement is structured, both parties will benefit from the sale and purchase of Incremental
Generation. Potlatch will be able to receive additional benefit from its extra generation during
periods when market prices are high, while A vista will be able to benefit by purchasing from
Potlatch at below market prices.
DECISION MEMORANDUM
Service Pricing
Staff notes that the 1992 special contract price for A vista to serve Potlatch was
essentially based on electric prices in the market place. The price of all but the 25 MW of
interruptible load also included floor and ceiling prices. The average cost for non-interruptible
service under the old contract was approximately $42.50 per MWh in 2001.
Under the proposed Agreement, A vista will provide service to Potlatch under the
terms and conditions of the Company s existing Extra Large General Service Schedule 25. This
schedule requires Potlatch to pay an average base rate of $31.71 per MWh, generating
approximately $27.7 million per year in base revenues. Potlatch will also be subject to the Tax
Adjustment Schedule 58, the Temporary Rate Adjustment Schedule 65 , the Power Cost
Adjustment Schedule 66 and the Energy Efficiency Rider Adjustment Schedule 91. When the
rate from non-tax Schedules 65 , 66 and 91 are added to the base rate, the 2003 price paid by
Potlatch for service averages $38.65 per MWh. Although Potlatch's 100 MW of load exceeds
the Schedule 25 limit of approximately 25 MW, Schedule 25A which is part of Schedule 25
states:
Customers whose demand from all such meters exceeds 000 KV A (25
MW) may be served under special contract wherein the rates, terms and
conditions of service are specified and approved by the IPUc. If customer
requires service during either the contract negotiation or resolution period
service will be supplied under this rate schedule. . . .
Potlatch, Staff notes, is by far Avista s largest single customer and electric Schedule
25 has the largest load requirement currently approved by the Commission for Avista. Absent an
analysis to specifically identify Potlatch service costs, Staff contends that Schedule 25 is the
most appropriate proxy to reflect Potlatch embedded cost of service. Given that current
Schedule 25 rates are based on the embedded cost to serve a group of industrial customers that
are much smaller than Potlatch, Staff speculates that it is likely that specific embedded costs to
serve Potlatch could be lower than those used to set Schedule 25 rates. The Agreement allows
either party in the context of a future proceeding to argue that the cost to serve Potlatch justifies
rates that are either higher or lower than those found in .Schedule 25. Staff believes the rates
proposed to both purchase power from Potlatch and sell power to Potlatch were appropriately
derived and reasonably supported.
DECISION MEMORANDUM
Jurisdictional Allocation
The methodology approved by the Commission to historically allocate cost between
Avista s various jurisdictions includes an allocation of all generation costs based on the
jurisdictional weighting of demand and energy. Revenue, on the other hand, has always been
directly assigned to the jurisdiction where the customer resides.
Prior to 1992, A vista paid nothing for Potlatch generation and received revenue from
Potlatch based upon the net load served after Potlatch used its generation to partially offset its
load. Revenues from this service arrangement remained in the Idaho jurisdiction and generation
costs associated with serving the net load were allocated among the Idaho and Washington
jurisdictions.
Under the 1992 special contract, A vista purchased all Potlatch generation at a pre-
established price and received revenue from Potlatch based on its total load. The effect of this
service arrangement under traditional jurisdictional allocation methodology was simply an
increase in generation costs allocated to other jurisdictions. This is due to a traditional allocation
methodology that adds generation cost to the system on the margin but allocates increased
system generation costs to Idaho on the average (i., treating Potlatch load that was previously
self-generated as having an entitlement to embedded cost resources). Allocation of all revenues
on a situs basis compounded the problem. To counteract this effect, the 1992 contract approval
included allocation of 60 MW of Potlatch revenues as well as purchase power costs of 60
megawatts of Potlatch generation on a jurisdictional basis. This adjustment was a compromise
that balanced costs allocated to the various jurisdictions with offsetting revenues and worked
fairly well because revenues from 60 megawatts of Potlatch load were fairly close to the costs of
purchasing 60 megawatts of Potlatch generation.
Under the new Agreement, the cost of purchasing 60 megawatts of Potlatch
generation is significantly higher than the revenue generated from serving 60 megawatts of
Potlatch load. Consequently, the Company is proposing yet another jurisdictional allocation
method. A vista proposes to directly assign all revenues and costs associated with the 60
megawatts of Potlatch load and generation to Idaho. This allocation methodology places the net
cost of buying 60 megawatts from Potlatch and selling 60 megawatts back to Potlatch on the
Idaho jurisdiction. All other jurisdictions are held harmless by this transaction.
DECISION MEMORANDUM
Although no other generation costs are jurisdictionally allocated in this fashion, the
Company believes it is appropriate in this case because the Agreement provides the opportunity
for additional benefits to Idaho customers and Idaho is the primary beneficiary of "secondary
benefits. A vista states also that it does not believe the Washington Utilities and Transportation
Commission (WUTC) would accept the ratemaking consequences of the Agreement using
traditional allocation methodology. Nor the Company states does it believe that Avista
shareholders should bear the additional costs deemed unacceptable by the WUTC.
Company believes the Agreement is "an Idaho solution to an Idaho problem.
Revenue Impact
The
For the purposes of this case, Staff evaluated Idaho revenue impact by comparing net
revenues/costs included in base rates under the 1992 contract to revenues/costs that will be
included in rates under the new Agreement. Until the new jurisdictional allocation methodology
and revenues/costs of the new Agreement are included in base rates as part of a general rate case
the Company proposes to account for the changes through the PCA. The comparison also
reflects that Potlatch is subject to the PCA under the new Agreement but was not subject to the
PCA under the old contract.
The simplest way to evaluate the impact of the new Agreement is to compare the net
cost of the two contracts on a system basis. The old contract had annual system expenses of
$28.8 million and annual system revenues of $26.2 million for a net annual cost of $2.6 million.
The new Agreement has annual system expenses of $31.25 million and annual revenues of $27.
million for a net system cost of $3.6 million. Therefore, the new Agreement increases annual net
costs by approximately $1 million on a system basis.
However, the change proposed in the jurisdictional allocation shifts most of the costs
to the Idaho jurisdiction. Under the jurisdictional allocation methodology approved with the old
contract, the net cost allocated annually to Idaho is actually a benefit of $296 000. Under the
allocation methodology proposed with the new Agreement, Idaho costs increase by $4.1 million
from a $296 000 allocated net benefit to a $3.8 million directly assigned net cost. The Company
proposes to pass this annual expense increase through the PCA until costs are included in base
rates. A $4.1 million increase in base rates represents a 2.3% overall increase in Idaho revenue
requirement on a permanent basis. On the other hand, Staff notes that Potlatch will contribute
approximately $5.3 million during the current year as a Schedule 25 customer subject to the
DECISION MEMORANDUM
PCA. Therefore, the net effect of the new Agreement during the 2003 PCA period is a $1.2
million reduction in costs borne by other Idaho customers.
Staff notes that there is a possibility that the net cost of the Agreement could increase
in the future if rates applied to serve Potlatch are reduced. Moreover, there will be no offsetting
revenue through the PCA from Potlatch under normal water and power supply conditions to
offset the effect of higher base rates. In fact, during high water conditions, Potlatch will receive
some of the PCA credit that would otherwise go to other Idaho customers. However, because the
rate paid to Potlatch for generation is fixed, Staff contends that it is likely that the cost
differential between the cost to serve Potlatch and the cost to buy its generation will ultimately
decline.
Conclusions
Staff has spent considerable time and effort evaluating the proposed prices to
purchase Potlatch generation and serve Potlatch load in concludes that they are reasonable. The
proposed price paid by Avista for Potlatch generation of$42.35 per MWh is slightly less than the
Company s published avoided cost rate over the 10-year period of $44.25 and corresponds to the
avoided cost rate calculated in the Company s latest IRP. The annual cost for A vista to purchase
Potlatch generation is only $420 000 more than it was under the old contract and will remain in
effect over the entire life of the new Agreement. Staff also accepts A vista s proposal to allow
100% recovery of the purchase power costs through the PCA.
The proposed price charged by A vista for electrical service to Potlatch is the existing
Schedule 25 rate for large industrial customers. By agreeing to apply Schedule 25 rates to
Potlatch's entire 100 MW load, Staff concedes a Potlatch entitlement to embedded cost rates.
The financial effect of approving the rates with the proposed allocation is a
permanent 2.3% base rate increase for Avista s other Idaho customers. Potlatch will be subject
to the PCA under the proposed Agreement so Idaho customers will experience relatively lower
PCA rates during surcharge periods but will also share credits with Potlatch during refund
periods.
Staff understands A vista s desire to specify allocation conditions in order to agree to
the rates described above. The fact is, the net cost of the Agreement increases under the
proposed rates because expenses exceed revenues. For Avista to be made whole under the
jurisdictional allocation previously approved for the old contract, the Company must collect a
DECISION MEMORANDUM
large portion of the excess costs from Washington customers. From a practical standpoint
someone must pay the difference between serving Potlatch at embedded cost and purchasing
Potlatch generation at marginal cost. Staff recognizes that Potlatch is an Idaho customer
providing employment and taxes in Idaho. If rates are appropriately established and benefits
accrue primarily to Idaho, Staff believes it is reasonable to recover costs from Idaho customers.
Staff does not oppose the proposed Agreement rates nor the proposed cost recovery conditions.
Commission Decision
A vista and Potlatch have submitted a Power Purchase and Sale Agreement for
Commission approval. Staff supports the Agreement and proposed method of cost recovery.
Does the Commission continue to find it reasonable to process this case pursuant to Modified
Procedure? Does the Commission find the contract terms, pricing, jurisdictional allocation and
proposed recovery method to be reasonable and acceptable?
Scott D. Woodbury
bls/M:A VUEO307 sw
DECISION MEMORANDUM