20050127Notice of Application Order No 29694.pdf

Office of the Secretary
Service Date
January 27 2005
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF A VISTA CORPORATION FOR
AUTHORITY TO INCLUDE IN BASE RATES
THE OWNERSHIP AND OPERATING
COSTS OF THE REMAINING SHARE OF
THE COYOTE SPRINGS 2 GENERATING
PLANT AND TO REDUCE THE POWER
COST ADJUSTMENT (PCA) SURCHARGE
TO OFFSET THE INCREASE IN BASE
RATES
CASE NO. AVU-O5-
NOTICE OF APPLICATION
NOTICE OF MODIFIED
PROCEDURE
ORDER NO. 29694
On January 19, 2005, Avista Corporation filed an Application requesting authority to
increase its Idaho electric rate base by $62.5 million based upon its recent purchase of Mirant-
Oregon s half of the Coyote Springs 2 generating plant. Prior to the purchase, A vista and
Mirant-Oregon each owned half of the plant. Avista calculates that the addition to rate base
would increase the Company s annual revenue requirement by approximately 1.89%, or $3.235
million. Rather than increasing its rates, A vista proposes a $3.2 million reduction in the
customer PCA surcharge. Consequently, purchase of the plant would result in no net rate change
to customers. The proposed reduction in the PCA surcharge would extend recovery of the
deferred power cost balance by approximately 12 months to September 2007. Application at 7.
BACKGROUND
Coyote Springs 2 is a 280 MW natural gas-fired, combined-cycle combustion turbine
plant located in Morrow County, Oregon. The Coyote Springs site was originally developed by
Portland General Electric (PGE) and was designed for two gas-fired units. Coyote Springs 1 was
completed in 1995 and is owned and operated by PGE. Avista began construction of the
adjacent Coyote Springs 2 in January 2001 in conformance with its 2000 Integrated Resource
Plan (IRP). A vista has an operating agreement with PGE for PGE to operate both units at
Coyote Springs. Application at 11-12.
Like other hydro-based electric utilities in the West, A vista experienced extremely
low water conditions coupled with unprecedented high wholesale market prices in 2000-2001.
The combination of these conditions created serious financial challenges for A vista.
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NOTICE OF MODIFIED PROCEDURE
ORDER NO. 29694
particular, the Company was not able to secure financing for Coyote Springs 2. It subsequently
entered into an Agreement with Mirant Corporation to sell half of the Coyote Springs 2 project to
Mirant-Oregon.In their Agreement, Mirant agreed to pay one-half of the capital costs of
building the plant. A vista s costs for its half of Coyote Springs 2 were $108 million. Id. at 13;
ll.
Although Coyote Springs 2 was originally scheduled to begin commercial operation
in June 2002, operation of the project was delayed until July 2003 "because of the Enron
bankruptcy, and problems with the generator step-up transformer Id. at 13 (footnote omitted).
After replacement of the transformer, Avista claims that Coyote Springs 2 has operated with a
high availability factor of 97.6% and a forced-outage rate of less than 2%. Recent tests
conducted in December 2004 also showed a favorable heat rate of 6 814 Btu/kWh. To avoid re-
occurrence of problems with the step-up transformer, A vista has purchased a spare transformer
from a different manufacturer. The spare transformer is now located at the plant and is included
in Avista s incremental investment of Coyote Springs 2. Id.
NOTICE OF APPLICATION
A. The Purchase Transaction
YOU ARE HEREBY NOTIFIED that in July 2003 , Mirant filed for Chapter 11
bankruptcy protection. Mirant and Avista subsequently entered into discussions about Avista
purchasing Mirant's half of the plant. Id. at 14. Avista and Mirant-Oregon executed a Letter of
Intent and subsequently executed a Purchase and Sales Agreement on October 13 , 2004. Id.;
Exh. L. As set out in greater detail in the Purchase and Sale Agreement, the negotiated purchase
price is $62.5 million. According to A vista, the $62.5 million purchase price equates to a cost of
$439/kWh of installed capacity (140 MW). This price represents approximately 58% of Mirant's
equivalent cost, i.$108 million. Id. at 20. To satisfy bankruptcy concerns, the Purchase
Agreement also contained a competitive auction provision that allowed other parties to bid for
Mirant's half of the project. No other bids were submitted. The bankruptcy court approved
Avista s $62.5 million bid for the plant on December 15 2004. Id. at 26.
YOU ARE FURTHER NOTIFIED that in November 2004, Avista submitted a
Section 203 petition to FERC requesting permission to transfer the plant from Mirant to A vista.
1 Mirant-Oregon LLC is a subsidiary of Mirant and was the actual half-owner of Coyote Springs 2.
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NOTICE OF MODIFIED PROCEDURE
ORDER NO. 29694
No person commented or intervened in the FERC proceeding. Consequently, FERC approved
the transfer to Avista on December 30, 2004. On January 20, 2005 , Avista assumed ownership
and began operating the entire plant. Id.
B. Benefits from the Purchase
YOU ARE FURTHER NOTIFIED that A vista maintains the purchase of the plant is
very advantageous to ratepayers. Avista retained Navigant Consulting to conduct an analysis of
the transaction. Exhibit K. As part of its analysis Navigant reviewed other comparable
transactions of combined cycle plants and determined that the average value of comparable
natural gas plants in the western United States was $569/kW - well in excess of A vista s cost of
$439/kW for Mirant's share. Application at 6; Table at 24. Navigant also determined that
A vista s purchase price was below the economic value of the plant, which was in the range of
$67 million.
YOU ARE FURTHER NOTIFIED that Avista asserts the purchase is also in
compliance with the Company s most recent IRP from April 2003. In its IRP, the Company
identified a need to acquire approximately 149 aMW from natural gas-fired combined-cycle
resources. Thus, acquiring the remaining half of Coyote Springs (140 MW) is consistent with
the Company s 2003 IRP long-term resource strategy. Application at 14-15. In terms of the
Company s annual loads and resources, acquisition of Mirant's share of Coyote Springs 2
mitigates the forecasted supply deficits identified in the first, third, and fourth quarters of CYs
2005-2007. Id. at 15-19; Exh. H.
YOU ARE FURTHER NOTIFIED that Avista insists full ownership of Coyote
Springs 2 improves the Company s ability to economically operate the plant. Full ownership
allows A vista to now make unilateral dispatching decisions days and months ahead of actual
operations. In addition, decisions can be made faster in the event of unexpected plant outages or
in the event capital upgrades or repairs are necessary. Id. at 21.
YOU ARE FURTHER NOTIFIED that as of January 20, 2005, Avista asserts that
90% of any margins earned from the recently purchased half will be credited to customers
through the PCA. The proposed operating results and net power supply expenses, are contained
in Exhibits A and M, respectively.
NOTICE OF APPLICATION
NOTICE OF MODIFIED PROCEDURE
ORDER NO. 29694
C. No Net Change in Rates
YOU ARE FURTHER NOTIFIED that the Company states in its Application that it
is not seeking an increase in overall rates presently in effect." Application at 2. A vista
maintains that adding the $62.5 million purchase price to rate base would increase its annual base
rates by $3.235 million, or 1.89%. To offset this increase, Avista proposes to decrease the
present PCA surcharge by $3.182 million or 1.9%. These offsetting adjustments would allow the
Company to earn its authorized rate of return of 9.25% (recently approved in the Company
2004 rate case, Case No. A VU-04-1).
D. Transmission
YOU ARE FURTHER NOTIFIED that Coyote Springs 2 is physically interconnected
to the transmission system of the Bonneville Power Administration (BP A) which wheels power
to Avista s system. In its Application Avista notes that at present no additional annual long-term
firm transmission capability is available from BP A to move more power from Coyote Springs 2
to the Company s system. This transmission constraint is primarily limited to the second quarter
of each year when BP A's spring hydroelectric run-offs are at high levels. However, the
Company reports that transmission capacity is generally available in the first, third and fourth
quarters of the year when A vista normally needs generation. Id. at 22.
YOU ARE FURTHER NOTIFIED that Avista notes it has the option to acquire
Mirant's higher position in BP A's queue for long-term transmission requests. Avista has also
made its own long-term firm transmission request to BPA. Avista plans to participate in BPA'
2005 open season for upgrade to the John Day-McNary Transmission Line that connects Coyote
Springs 2 to Avista s system. Avista does not foresee problems with acquiring sufficient natural
gas transportation.
E. Request for Modified Procedure
YOU ARE FURTHER NOTIFIED that Avista maintains that this Application
represents a single-issue case. The Company also notes this case follows closely on the heels "
a thorough examination of the Company s books and records in the context of its just-completed
rate case.Id. at 8. Consequently, Avista requests that this Application be processed under
Modified Procedure. The Company proposes an extended comment period until March 1 and a
two-week reply period for the Company. The extended comment period would allow interested
NOTICE OF APPLICATION
NOTICE OF MODIFIED PROCEDURE
ORDER NO. 29694
parties to also conduct discovery. The Company states it "stands ready to quickly respond to
discovery requests. To this end, A vista invites Staff and Interested Parties to immediately
provide any discovery requests to A vista.Id. at 9.
NOTICE OF MODIFIED PROCEDURE
YOU ARE FURTHER NOTIFIED that the Commission has reviewed the
Application and has preliminarily determined that the public interest may not require a hearing to
consider the issues in this case.Consequently, the Commission intends to process this
Application under Modified Procedure, IDAPA 31.01.01.201-204. The Commission notes that
Modified Procedure and written comments have proven to be an effective means for obtaining
public input and participation.
YOU ARE FURTHER NOTIFIED that any person desiring to state a position on this
Application may file a written comment in support or opposition with the Commission no later
than Tuesday" March I" 2005 The comment must contain a statement of reasons supporting
the comment. Persons desiring a hearing must specifically request a hearing in their written
comments. Written comments concerning this Application shall be mailed to the Commission
and the Applicant at the addresses reflected below:
Commission Secretary David J. Meyer, Esq.
Idaho Public Utilities Commission Chief Counsel for RegulatoryPO Box 83720 and Governmental Affairs
Boise, ID 83720-0074 A vista Corporation
PO Box 3727
1411 E. Mission Avenue, MSC-
Spokane, W A 99220-3727
Mail: david.meyer(f!2avistacorp.com
Street Address for Express Mail:
472 W. Washington Street
Boise, ID 83702-5983
Kelly Norwood
Vice President - State and Federal Regulation
A vista Corporation
PO Box 3727
1411 E. Mission Avenue, MSC- 7
Spokane, W A 99220-3727
Mail: kelly.norwood(f!2avistacorp.com
These comments should contain the case caption and case number shown on the first page of this
document. Persons desiring to submit comments via e-mail may do so by accessing the
NOTICE OF APPLICATION
NOTICE OF MODIFIED PROCEDURE
ORDER NO. 29694
Commission s home page located at www.puc.idaho.gov. Click the "Comments and Questions
icon, and complete the comment form, using the case number as it appears on the front of this
document. These comments must also be sent to the Applicant at the e-mail addresses listed
above.
YOU ARE FURTHER NOTIFIED that if no written comments or protests are
received within the time limit set, the Commission will consider this matter on its merits and
enter its Order without a formal hearing. If written comments are received within the time limit
set, the Commission will consider them and, in its discretion, may set the same for formal
hearing.
YOU ARE FURTHER NOTIFIED that Avista may file reply comments with the
Commission no later than March IS" 2005
YOU ARE FURTHER NOTIFIED that the Application, supporting workpapers and
exhibits have been filed with the Commission and are available for public inspection during
regular business hours at the Commission offices. The Application and supporting documents
are also available on the Commission s Website at www.puc.idaho.gov under the "File Room
Icon.
YOU ARE FURTHER NOTIFIED that all proceedings in this case will be held
pursuant to the Commission s jurisdiction under Title 61 of the Idaho Code and specifically
Idaho Code 99 61-307, 61-336, 61-503, 61-523, and 61-622.
YOU ARE FURTHER NOTIFIED that all proceedings in this matter will be
conducted pursuant to the Commission s Rules of Procedure, IDAPA 31.01.01.000 et seq.
ORDER
IT IS HEREBY ORDERED that this Application be processed under Modified
Procedure. Persons interested in submitting written comments regarding this matter should do so
no later than March 1 , 2005.
IT IS FURTHER ORDERED that A vista may file a response to comments no later
than March 15 2005.
NOTICE OF APPLICATION
NOTICE OF MODIFIED PROCEDURE
ORDER NO. 29694
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this ryp..
day of January 2005.
MARSHA H. SMITH, COMMISSIONER
IS S. HANSEN, COMMISSIONER
ATTEST:
~D.
n D. Jewell
Commission Secretary
bls/O:A VUE050 1 dh
NOTICE OF APPLICATION
NOTICE OF MODIFIED PROCEDURE
ORDER NO. 29694