20040419Decision Memo.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
COMMISSIONER SMITH
COMMISSIONER HANSEN
COMMISSION SECRETARY
COMMISSION STAFF
LEGAL
FROM:SCOTT WOODBURY
DATE:APRIL 16, 2004
RE:CASE NO. A VU-04-2 (A vista)
SALE OF SKOOKUMCHUCK HYDROELECTRIC PLANT
EWG DETERMINATION
On February 23, 2004, Avista Corporation (Avista; Company) filed an Application
with the Idaho Public Utilities Commission (Commission) regarding the proposed sale by Avista
of its ownership interest in the Skookumchuck dam, hydroelectric plant and related facilities
(Skookumchuck). Skookumchuck is a I-megawatt (MW) generation facility located in the
vicinity of Centralia, Washington on property adjacent to the Centralia Power Plant, a large coal-
fired generating facility. Skookumchuck is co-owned by Avista Corporation, PacifiCorp, Public
Utility District No. I of Snohomish County, Puget Sound Energy, Inc., City of Tacoma, City of
Seattle, and Public Utility District No. of Grays Harbor County (collectively the "Owners
Avista requests Commission approval of the Company s sale of its minority
ownership interest in Skookumchuck, seeks a Commission Order making certain public interest
findings required in order for Skookumchuck to qualify as an exempt facility and for the new
owner/operator to qualify as an Exempt Wholesale Generator (EWG) under Section 32 of
PUHCA, and seeks approval of proposed accounting treatment of the gain on the sale.
Purchase and Sale Agreement
A vista has entered into a Purchase and Sale Agreement to sell its interest in the
Skookumchuck hydroelectric plant to 2677588 Washington, LLC, a Limited Liability Company
formed by TransAlta USA Inc. (TransAlta). Washington LLC intends to operate
DECISION MEMORANDUM
Skookumchuck as an Exempt Wholesale Generator (EWG) within the meaning of Section 32 of
the Public Utility Holding Company Act of 1935 (PUHCA).
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 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. TransAlta
Centralia Generation LLC, a direct wholly-owned subsidiary of TECW A Power, Inc., owns and
operates the Centralia Power Plant as an EWG.
Skookumchuck is a small earth-filled 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 generating plant with a capacity of approximately 1 MW was installed at the
dam. The project was granted an exemption from licensing as a hydropower facility by the
Federal Energy Regulatory Commission (FERC) pursuant to 16 U.C. ~ 2705(d), which allows
exemptions for facilities less than 5 MW. The project is, however, subject to dam safety
regulations by the FERC.
A vista proposes to sell and transfer to Washington LLC the dam, powerhouse, water
rights, land, easements and other assets of Skookumchuck, including certain fixtures, contracts
and other rights. The sale and transfer of Skookumchuck is governed by the Skookumchuck
Facilities Purchase and Sale Agreement between the Owners and Washington LLC, dated
November 25 2003
, ("
Sale Agreement"), which is included in Appendix I to the Application.
The aggregate sale price of the transaction is approximately $7.57 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 s share of this amount is 17.
or approximately $1.32 million on a system basis prior to closing costs.
Avista is informed that the new owner/operator will continue operation of the Project
to provide cooling water supply to the Centralia Power Plant and to 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 will be used to serve
A vista s retail customers, except perhaps indirectly through the wholesale power markets.
DECISION MEMORANDUM
EWG Determinations
To qualify as an EWG, the owner/operator must be engaged exclusively in the
business of owning or operating an "eligible facility" and selling electric energy at wholesale.
the costs of a generation facility were included in the rates of a regulated utility on October 24
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 (I) will
benefit consumers, (2) is in the public interest, and (3) does not violate state law. 15 US.
~ 79z-5a(c). Thus, the Commission and each of Avista s other state regulatory commissions
must make these determinations regarding A vista s sale and transfer of Skookumchuck.
Benefits of Transaction
A vista proposes to transfer its interest in Skookumchuck to Washington LLC because
the sale is a lower cost option than continuing to invest in and operate and maintain
Skookumchuck.
Skookumchuck has an electrical capacity of I MW, but because it is operated for
purposes of supplying cooling water to the Centralia Power Plant, A vista states that it has
relatively low energy output. The Company contends that the sale will not harm the public
interest because competitive markets will be unaffected by the sale. Over the last eight years, the
average annual production of Skookumchuck has been 3 013 MWh. Skookumchuck's bus-bar
cost in fiscal year 2003 (12 months ending March 31 2003) was approximately $255 per MWh.
The facility is interconnected with the distribution system ofPuget Sound Energy, Inc. (PSE) and
historically all of the power from Skookumchuck has been sold to PSE.
As one of the owners of Skookumchuck, A vista must pay its proportionate share of
the costs. Net plant related to Avista s share of its investment in Skookumchuck is included in
the Company s rate base. The Company contends that customers will not be harmed if the
project is sold because the cost of power generated from Skookumchuck substantially exceeds
the projected cost of market power. Hence, the Company s revenue requirement will be lower as
a result of the sale of Skookumchuck.
The proposed transaction eliminates the risk that A visa will be required to fund its
share of future expenditures for ensuring the structural integrity of the Skookumchuck Dam.
A vista contends that the benefits from the proposed sale outweigh the risks of rising costs of
DECISION MEMORANDUM
continuing to own and operate Skookumchuck. Continued operation of Skookumchuck as a
hydroelectric project, the Company contends, would be uneconomic, and such operation would
not be in the public interest.
A vista contends that the transfer of Skookumchuck to Washington LLC is in the
public interest because it will benefit A vista s customers by lowering the Company s cost of
providing electrical service. In addition, the transfer will give TransAlta greater control of the
water flows in the Skookumchuck River for providing cooling water to the Centralia Power
Plant, thus increasing the electrical output of the Centralia Power Plant for the benefit of all
electricity consumers.
Because Skookumchuck assets are located in the State of Washington, A vista
contends that Idaho s property transfer statute Idaho Code ~ 61-328, is not applicable to the
contemplated sale. Should the Commission, however, decide to exercise its authority over the
proposed sale, A vista requests that the Commission approve the sale.
Proposed Ratemaking Treatment
A vista projects that the sale of Skookumchuck will result in a small after-tax gain.
The Idaho jurisdictional share (33.01 %) of the after-tax gain is projected to be approximately
$216 000. Avista proposes to allocate the after-tax Skookumchuck gain between jurisdictions
and between ratepayers and shareholders in the same manner that A vista s after-tax gain on the
sale of the Centralia Power Plant was allocated in Case No. A VU-99-Applying the
depreciation reserve method (the ratio of accumulated depreciation to gross plant) of 69.70% for
allocating proceeds to ratepayers set forth in the Order 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 and an allocation to
shareholders of approximately $65 000. The calculation and allocation of the estimated gain is
attached as Exhibit No.1 to the testimony of Ronald R. Peterson.
Avista 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.
DECISION MEMORANDUM
Timing of Approval
The new owner/operator of Skookumchuck, the Company contends, cannot process
its EWG application with the FERC until all of the Company s regulatory commissions have
made the three determinations required by Section 32 ofPUHCA. Accordingly, Avista requests
that the Commission process its Application expeditiously.
Appendices to Application
Attached to the Company s Application are the following Appendices:
(1) The Skookumchuck Facilities Purchase and Sale Agreement;
(2) The Skookumchuck Dam Management Agreement; and
(3) The prefiled direct testimony of Ronald R. Peterson, Avista Vice President of
Energy Resources and Optimization describing the proposed sale and the reasons for the sale; the
request for Commission EWG determinations; the proposed ratemaking treatment of the sale
including the allocation of the gain between ratepayers and shareholders; and the Company
proposal that the ratepayers' 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.
On March 10, 2004, the Commission issued Notices of Application and Modified
Procedure in Case No. A VU-04-2. The deadline for filing written comments was April I
2004. Comments were filed by Commission Staff and an interested party. The commenting
party questions the wisdom of selling off power generating facilities to gain short-term profits at
a time when more regional power is needed. The party suggests that the Commission require
A vista to show how the utility intends to replace the power generating capacity of
Skookumchuck before it is allowed to abandon the facility. If a utility can sell off small facilities
today, what will they try to sell off next, he queries?
Commission Staff recommends approval of the Company s Application to transfer its
Skookumchuck to Washington LLC. In addition, to allow the project to become an "eligible
facility" within the meaning of Section 32 of PUHCA, Staff recommends that the Commission
Order specifically state that the sale (I) will benefit customers, (2) is in the public interest, and
(3) does not violate Idaho state law. Staff also recommends that the final accounting entries be
filed with the Commission within 45 days of closing.
DECISION MEMORANDUM
Based on Staff s review of the Idaho Code, Staff represents that it has discovered no
Idaho laws that address the issues raised by A vista s request, and none prohibit or limit the
authority of Washington, LLC as an EWG to operate Skookumchuck as a wholesale facility.
Staff notes further that although the project is located in Washington, the transaction complies
with the intent and meets the standards of Idaho Code ~ 61-328. In compliance therewith, Staff
represents:
a. That the transaction is consistent with the public interest;
b. That the cost of and rates for supplying service will not be increased by
reason of such transaction; and
c. That the applicant for such acquisition or transfer has the bonafide intent
and financial ability to operate and maintain said property in the public
servIce.
Staff agrees with the Company s contention that the benefits from the proposed sale
outweigh the risks of rising costs of continuing to invest in and operate and maintain
Skookumchuck.
...
The cost of power generated from Skookumchuck substantially exceeds the
projected cost of market power. The proposed transaction eliminates the risk that the Company
will be required to fund its share of expenditures for ensuring the continued structural integrity of
the Skookumchuck dam.Skookumchuck has an electrical capacity of only I MW and is
operated for principal purposes of supplying cooling water to the adjacent Centralia power plant.
As a result, Skookumchuck has a relatively low energy output and a very low capacity factor.
Finally, the project no longer represents a "core business" asset to Avista or any of the current
Owners because the Owners no longer have an ownership interest in the Centralia Steam plant.
Staff agrees with Avista s contention that Avista s ratepayers will not be harmed by
the sale and that continued operation of Skookumchuck by A vista would be uneconomic and not
in the public interest.
Avista projects that the sale of Skookumchuck will result in a small after-tax gain.
The Idaho jurisdictional share (33.01 %) of the after-tax gain is projected to be approximately
$216 000. Avista proposes to allocate the after-tax Skookumchuck gain between jurisdictions
and between ratepayers and shareholders in the same manner that A vista s after-tax gain on the
sale of the Centralia power plant was allocated in Case No. A VU-99-6. Avista is proposing
that the estimated portion of the Skookumchuck after-tax gain allocated to ratepayers be deferred
DECISION MEMORANDUM
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. Staff concurs
with the Company-proposed ratemaking treatment and recommends that A vista be directed to
file the final accounting entries associated with the sale within 45 days of closing. Any revenue
requirement reduction from not operating the project will be reflected in Avista s results of
operation. As such, Staff represents that this change should be reflected in the current A vista
rate proceeding.
COMMISSION DECISION
A vista requests a Commission Order requesting the sale of its minority ownership
interest in Skookumchuck and seeks a Commission Order making certain public interest findings
required in order for Skookumchuck to qualify as an exempt facility and for the new
owner/operator to qualify as an exempt wholesale generator (EWG) under Section 32 of
PUHCA, and seeks approval of proposed accounting treatment of the gain on the sale. Staff
recommends that the Company s Application be approved and recommends that the Company be
directed to file the final accounting entries associated with the sale within 45 days of closing.
Does the Commission agree?
Scott Woodbury
Vld/M:A VUEO402-sw2
DECISION MEMORANDUM