20040223Peterson Direct.pdf

ILEO
KELLY O. NORWOOD
VICE PRESIDENT, STATE AND FEDERAL REGULATION ,; LitAVISTA CORPORATION ()IILi i jE~
'-
i:or-\j-1ISSION
O. BOX 3727
1411 EAST MISSION AVENUE
SPOKANE, WASHINGTON 99220-3727
TELEPHONE: [phone]
FACSIMILE: [phone]
2GUliFEB 23 Arlll: 07
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF A VISTA CORPORATION FOR
AN ORDER APPROVING THE SALE OF ITS
INTEREST IN THE SKOOKUMCHUCK
HYDROELECTRIC PLANT AND FOR EWG
DETERMINATIONS
CASE NO. A VU-04- iL.J..,
DIRECT TESTIMONY
RONALD R. PETERSON
FOR A VISTA CORPORATION
--- --- ,
I. INTRODUCTION
Please state your name, employer and business address.
My name is Ronald R. Peterson. I am employed as Vice President of Energy
Resources and Optimization by Avista Corporation at 1411 East Mission Avenue, Spokane
Washington.
Please briefly describe your educational background and professional
experience.
I am a 1975 graduate of Washington State University with degrees in business
administration and accounting. I joined the Company in 1975. I passed the Washington
State CPA examination in 1976 and worked as a staff accountant in a variety of positions
until 1987 when I became supervisor of the Company s corporate accounting function. In
1991 , I was selected customer service manager, and in 1992, was elected Treasurer. I was
elected Controller and assumed the director of information service responsibilities in 1996.
In 1998, I was elected Vice President and Treasurer. In September 2001 , I was also named
Vice President of Finance for Avista Utilities. I assumed my present position as Vice
President of Energy Resources and Optimization in April 2003.
What is the scope of your testimony in this proceeding?
I describe the proposed sale of the Skookumchuck Hydroelectric Plant
Skookumchuck") and the reasons for the proposed sale. I briefly discuss the Company
request for the Commission to issue determinations required for the purchaser to qualify as an
Exempt Wholesale Generator ("EWG") under Section 32 of the Public Utility Holding
Company Act of 1935 ("PUHCA"). I also address the proposed ratemaking treatment of the
Peterson, Di
A vista Corporation
. 1
--- --- ,
proposed sale, including the allocation of the gain between ratepayers and shareholders and
the Company s proposal that the ratepayer share of the after-tax gain be added to the balance
of the deferred gain on the Centralia Power Plant, which is currently being passed on to
ratepayers.
Please briefly describe the assets to be sold.
Skookumchuck is a small earth-fill dam and hydroelectric generating plant
located in the vicinity of Centralia, Washington on property adjacent to the Centralia Power
Plant. The Skookumchuck dam was constructed in 1973 as a water storage facility for the
Centralia Power Plant. In 1991 , a hydroelectric unit with a capacity of approximately one
megawatt was installed at the dam. The Skookumchuck plant being sold includes real
property and associated easements and water rights, as well as various equipment.
Skookumchuck was granted an exemption from licensing as a hydropower facility by the
Federal Energy Regulatory Commission ("FERC") pursuant to 16 US.C. 92705(d), which
allows exemptions for facilities less than five megawatts.Skookumchuck is, however
subj ect to dam safety regulation by the FERc.
Who are the current owners of Skookumchuck?
Skookumchuck is jointly owned by seven public and private owners
(collectively, the "Owners ): PacifiCorp; Avista; Public Utility District No.1 of Snohomish
County, Washington; Puget Sound Energy, Inc.; City of Tacoma, Washington; City of
Seattle, Washington; and Public Utility District No.1 of Grays Harbor County, Washington.
PacifiCorp is the majority owner with a 47.5% ownership share. Avista is a minority owner
with a 17.5% ownership share.
Peterson, Di
A vista Corporation
---- ---
Who is the purchaser?
The purchaser is 2677588 Washington LLC ("Washington LLC"), a limited
liability company formed by TransAlta USA Inc. ("TransAlta ). Washington LLC is a
Washington limited liability company and a direct, wholly-owned subsidiary of TransAlta.
TransAlta is the indirect owner of the Centralia Power Plant, a coal-fired generating plant
and the Centralia Coal Mine. In 2000, the Owners sold the Centralia Power Plant to a direct
wholly-owned subsidiary of TransAlta TECW A Power Inc., and PacifiCorp sold the
Centralia Coal Mine to another direct wholly-owned subsidiary of TransAlta, TECW A Fuel
Inc. TECW A Power, Inc. owns and operates the Centralia Power Plant as an EWG.
Please describe the proposed sale.
The Owners propose to sell and transfer to Washington LLC the Skookumchuck
dam, powerhouse, water rights, land, easements and other related assets, including certain
fixtures, contracts and other rights. The sale and transfer is governed by the Skookumchuck
Facilities Purchase and Sale Agreement between the Owners and Washington LLC, dated
November 25, 2003 (the "Sale Agreement"). A copy of the Sale Agreement is attached as
Appendix 1 to Avista s Application. The aggregate sale price of the transaction is $7.
million, adjusted for changes in PacifiCorp s Net Book Value of the Facilities from
September 30 2003 to the Closing Date. See Section 2.3(a) of the Sale Agreement. Avista
share of the sales price is 17.5%, or $1.32 million on a system basis prior to closing costs.
How will the plant be operated by the purchaser?
Washington LLC has indicated that their intention is to continue operation of
Skookumchuck to provide cooling water supply to the Centralia Power Plant, and that it will
Peterson, Di
A vista Corporation
, 3
--- ---- ,
produce power from Skookumchuck either as an EWG or as a qualifying facility under the
Public Utility Regulatory Policies Act of 1978.None of the electrical output of
Skookumchuck has been or will be used to serve Avista s retail customers, except perhaps
indirectly through the wholesale power markets.
When the Centralia Steam Plant was sold in 2000, why was the
Skoomchuck Project retained by the Owners?
A Flood Control Committee formed by Lewis and Grays Harbor Counties
Washington and the cities of C entrali a, Chehalis and Aberdeen, Washington (the
Committee ) had expressed an interest in acquiring the Skookumchuck Dam and reservoir.
The Committee had been working with the US. Army Corps of Engineers to develop a
comprehensive flood control plan for the basin.In June 1999, a Memorandum of
Understanding ("MOU") between the Owners and the Committee was signed reflecting the
Committee s intent to purchase the facilities. This MOU expired in December 1999, but the
Owners understood that the Committee s intent to acquire the facilities had not changed.
This desire by the Committee to purchase the facilities and the Committee s stated intent to
operate the facilities in a manner that would not be in conflict with the continued operation of
the Centralia Steam Plant caused the Owners to withhold the Skookumchuck Project from the
sale of the Centralia Steam Plant.
Please explain the EWG determination that is being requested.
To qualify as an EWG, Washington LLC must be engaged exclusively in the
business of owning or operating an "eligible facility" and selling electric energy at wholesale.
If the costs of a generation facility were included in the rates of a regulated utility on October
Peterson, Di
A vista Corporation
. 4
- ---
, 1992 (the date of enactment of section 32 of PUHCA), then in order for the facility to be
considered an "eligible facility," every state commission having jurisdiction over such rates
must specifically determine that allowing the facility to become an eligible facility (1) will
benefit consumers, (2) is in the public interest, and (3) does not violate State law. 15 U.
9 79z-5a(c). Thus, the IPUC and each of PacifiCorp s other state regulatory commissions
which include Avista s other state regulatory commission, the Washington Utilities and
Transportation Commission, would be required to make these determinations regarding the
sale and transfer of the Skookumchuck facilities.
Please explain how the sale will benefit Avista s customers.
A vista proposes to sell Skookumchuck to Washington LLC because a sale
results in lower costs to Avista Utilities ' customers than continuing to invest in and operate
and maintain the facility.Skookumchuck has an electrical capacity of 1 MW, but because
the facility is operated for purposes of supplying cooling water to the Centralia Power Plant
it has relatively low energy output. Over the last eight years, the average annual production
has been 3 000 megawatt-hours. Skookumchuck's bus bar cost in PacifiCorp s fiscal year
2003 (twelve months ending March 31 , 2003) was approximately $250 per MWh. With
regard to this cost per MWh, it is important to remember that the dam was originally built to
provide water supply for the coal plant, and therefore the energy produced by the
hydroelectric generator does not reflect the total value of the project. Skookumchuck is
interconnected with the system of Puget Sound Energy, Inc. ("PSE") and historically all of
the power from Skookumchuck has been sold to PSE.
Peterson, Di
Avista Corporation
, 5
--- ---
As one of the Owners of Skookumchuck, Avista must pay its proportionate share of
the costs of the facilities.Net plant related to Avista s share of its investment in
Skookumchuck is included in the Company s rate base. The Company s analysis indicates
that its customers will not be harmed by the proposed transaction and will in fact benefit from
it. The forecast of the market price of power is substantially below the cost of power
generated from Skookumchuck. Hence, the Company s revenue requirement will be lower as
a result of the sale of Skookumchuck.
In addition, the proposed transaction eliminates the risk that the Owners will be
required to fund future expenditures for ensuring the structural integrity of the
Skookumchuck dam. The benefits from the proposed sale outweigh the risks and costs of
continuing to own and operate Skookumchuck.
Moreover, the sale will not harm the public interest because competitive markets will
be unaffected by the sale. A 1 MW plant with only 3 000 MWhs of annual production would
not have a measurable impact on western electricity supply or any impact on wholesale
electricity prices.
Please explain the proposed ratemaking treatment of the sale.
Avista projects that the sale of Skookumchuck will result in a small after-tax
gaIn. The Idaho jurisdictional share of the after-tax gain is projected to be approximately
$216 000. Actual figures will not be known until the transaction closes. Avista proposes
allocate the after-tax Skookumchuck gain between jurisdictions and between ratepayers and
shareholders in the same manner as Avista s after-tax gain on the sale of the Centralia Power
Plant was allocated in Order No. 28297 in Case No. A VU-99-6. The Idaho jurisdiction
Peterson, Di
A vista Corporation
--- ---- ,
would receive an allocation of 33.01 % of the after-tax gain, or approximately $216 000.
Applying the methodology for allocating proceeds set forth in the orders approving the sale
of the Centralia Power Plant to the estimated Idaho share of the Skookumchuck after-tax gain
of approximately $216 000 yields an allocation to ratepayers of approximately $151 000
(69.70%) and an allocation to shareholders of approximately $65 000 (30.30%).Plant
balances being retired and the calculation and allocation of the estimated gain are included in
Exhibit 1.
A vista is proposing that the estimated portion of the Skookumchuck after-tax gain
allocated to ratepayers of approximately $151 000 be deferred and added to the deferred gain
on the Centralia Power Plant which is currently being passed on to ratepayers through a rate
credit on Schedule 65 - Temporary Rate Adjustment. The Centralia gain rate credit was
originally put into effect on August 1, 2000 and will expire when the deferred gain has been
passed on to customers.
A portion of the Skookumchuck facilities was treated as thermal property since it
provided a cooling water source to the Centralia Power Plant and was retired as part of the
Centralia Power Plant when that plant was sold. Hence, the gain recognized on the sale of
the Centralia Power Plant was slightly lower than it would have been if none of the
Skookumchuck facilities had been retired at that time.The gain on the sale of the
Skookumchuck facilities is now slightly higher due to the earlier, partial retirement.
In the IPUC's order approving the sale of the Centralia Power Plant it adopted a
methodology to allocate the gain between ratepayers and shareholders based on the ratio
Peterson, Di
A vista Corporation
- ---
accumulated depreciation to gross plant. This methodology resulted in an allocation of
69.7% of the gain to ratepayers and 30.3% to shareholders.
The ratio of accumulated depreciation to gross plant of the Skookumchuck plant
currently being retired is approximately 39%. Applying 39% to the after-tax gain on the
proposed sale of Skookumchuck would result in a lesser amount of gain being allocated to
ratepayers than the allocated gain that results from using the 69.70% Centralia allocation.
The Company is proposing to use the higher 69.70% Centralia allocation to ratepayers in the
interest of minimizing the issues in this case regarding the allocation of the gain.
Is the Company asking for expedited treatment for EWG findings and
approval of the sale?
Yes. The Company is asking the Commission to consider the EWG issues and
approval of the sale on an expedited basis.
Does that conclude your prefiled direct testimony?
Yes.
Peterson, Di
A vista Corporation
. 8
-- ---
KELLY O. NORWOOD
VICE PRESIDENT, STATE AND FEDERAL REGULATION
A VISTA CORPORATION
O. BOX 3727
1411 EAST MISSION AVENUE
SPOKANE, WASHINGTON 99220-3727
TELEPHONE: [phone]
FACSIMILE: [phone]
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF A VISTA CORPORATION FOR
AN ORDER APPROVING THE SALE OF ITS
INTEREST IN THE SKOOKUMCHUCK
HYDROELECTRIC PLANT AND FOR EWG
DETERMINATIONS
CASE NO. A VU-04-11 J.,
EXHIBIT No.
RONALD R. PETERSON
FOR A VISTA CORPOR T A TION
- ---
Avista Corporation
Assignment of Gain on Sale of Skookumchuck
State of Idaho
Allocated Using Methodology Set Forth in
Order No. 28297/ Case No. AVU-99-
AssiQnment of Gain
Avista Idaho Ratepayers Shareholders
Total 17.50%33,01 %69,70%30.30%
570,373 $1,324 815 437 321
000 602
304 815 430,719
578,916 191,100
725,899 239,619
254 614 048
980,513 323 667
980,513 323,667
324 302 107,052
222 329 73,391
082,486 357 328
37.37.
405,932 133 998
168 26,794
324 764 107 204
$655,749 $216,463 $150,875 $65,588
Line
No.
Plant Sale Price
Projected Closing Costs
Projected Plant Sale Proceeds
Note: The tax rate shown above is 37.5% to reflect the impact of both federal and state income taxes,
Gross Assets Sold
Plant in Service (g) 3/31/04 (estimate)
Book Gain Before Income Taxes
Appreciation on Assets Sold (Line 3 - Line 4)
Accumulated Depreciation (g) 3/31/04 (estimate)
Total Book Gain
Income Taxes
Book Gain on Sale of Plant (Line 7)
Net Plant-Books
Net Plant-Tax
Taxable Gain
Tax Rate
Tax on Gain on Sale of Plant
DFIT Expense-MACRS Reversal
Total Income Tax (Lines 13+14)
16 Book Gain net of Income Tax (Line 7 - Line 15)
EXHIBiT No.
R. Peterson
Avista Corporation
- ---