20050412Final Order No 29752.pdf

Office of the Secretary
Service Date
April 12 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 RA TES
CASE NO. A VU-O5-
ORDER NO. 29752
On January 19, 2005 , Avista Corporation filed an Application requesting authority to
increase its electric rate base by $62.5 million based upon its recent purchase of Mirant Oregon
half of the Coyote Springs 2 generating plant. A vista calculated that the addition to Idaho rate
base l would increase the Company s annual revenue requirement in Idaho by approximately
1.89%, or $3.235 million. Rather than increasing its rates, Avista proposed 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 Power Cost Adjustment (PCA)
surcharge would extend recovery of the deferred power cost balance by approximately 12
months to September 2007.
On January 27, 2005, the Commission issued a Notice of Modified Procedure
requesting interested persons submit comments no later than March 1 , 2005. In response to the
Notice, the Commission received timely comments from customers, the Commission Staff, and
Potlatch Corporation. Avista filed timely Reply Comments on March 15 , 2005. After reviewing
the Application and the comments, the Commission ~pproves the Application as described in
greater detail below.
THE COYOTE SPRINGS 2 PLANT
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
1 "Rate base" is the total capital investment in operating plant (less depreciation) upon which a public utility is
authorized to earn a return or profit.
ORDER NO. 29752
completed in 1995 and is owned and operated by PGE. Construction of the adjacent Coyote
Springs 2 in January 2001 was in conformance with A vista s 2000 Integrated Resource Plan
(IRP). A vista has an operating agreement with PGE for PGE to operate both Coyote Springs
units. Application at 11-12.
In 2000-2001 , the Company experienced difficulty in securing adequate financing to
construct Coyote Springs 2. It subsequently entered into an Agreement with Mirant Corporation
to sell half of the Coyote Springs 2 project (140 MW) to Mirant Oregon.2 In their Agreement
Mirant agreed to pay one-half of the capital costs of building the plant. Avista s cost for its half
of Coyote Springs 2 was $108 million. Id. at 13; n.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 show 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 A vista s incremental investment of Coyote Springs 2. Id.
THE APPLICATION
A. The Purchase Transaction
In July 2003, Mirant filed for Chapter 11 bankruptcy protection. Mirant and Avista
subsequently entered into discussions about A vista purchasing Mirant's half of the plant (140
MW). 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 Sales Agreement, the negotiated purchase price is $62.
million. According to A vista, the $62.5 million purchase price equates to a cost of $439/kWh of
installed capacity (for the 140 MW). This price represents approximately 58% of Mirant's
original 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
2 Mirant Oregon LLC is a subsidiary of Mirant and was the actual half-owner of Coyote Springs 2.
ORDER NO. 29752
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.
In November 2004, Avista submitted a Section 203 petition to the Federal Energy
Regulatory Commission (FERC) requesting permission to transfer the plant from Mirant to
Avista. No person commented or intervened in the FERC proceeding. Consequently, FERC
approved the transfer from Mirant to Avista on December 30, 2004. On January 20, 2005
A vista assumed ownership of the entire plant. Id.
B. Benefits from the Purchase
Avista maintained the purchase of the plant is very advantageous to ratepayers.
A vista retained N avigant Consulting to conduct an analysis of the transaction. App. at Exh. 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 Avista s cost of $439/kW for Mirant's share.
Application at 6; Table at 24. Navigant also determined that Avista s purchase price was below
the economic value of the plant that was calculated to be approximately $67 million.
A vista asserted the purchase is 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. Avista also supplied updated load and
resource (L&R) data to support the purchase. Based upon the Company s most recent
August/September 2004 L&R data, acquisition of Mirant's share of Coyote Springs 2 mitigates
the forecasted supply deficits identified in the first, third, and fourth quarters (Ql , Q3 , and Q4) of
CY s 2005-2007. Id. at 15-19; Exh. H. Thus, acquiring the remaining half of Coyote Springs is
consistent with both the Company s 2003 IRP long-term resource strategy and its updated 2004
L&R data. Application at 14-15.
A vista next insisted full ownership of Coyote Springs 2 improves the Company
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. As of January 20, 2005 , Avista asserted that 90% of any margins
earned from the recently purchased half will be credited to customers through the annual PCA
mechanism.
ORDER NO. 29752
C. No Net Change in Rates
The Company stated in its Application that it "is not seeking an increase in overall
rates presently in effect." Application at 2. A vista maintained 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, A vista proposes to decrease the present PCA surcharge by $3.182 million or
9%. These offsetting adjustments would allow the Company to earn its authorized rate of
return of 9.25% (approved in the Company s 2004 rate case, Case No. A VU-04-1). Reducing
the PCA surcharge would extend recovery of the deferred power costs by about 12 months to
September 2007.
THE COMMENTS
A. Public Comments
The public commenters opposed the Company s Application for a number of reasons.
Two commenters argued that the purchase of an Oregon generating facility should not result in a
rate increase for Idaho customers. Other customers questioned the need for power given the
existence of federal and private utility generating resources in the Northwest. Other customers
questioned whether a rate increase was necessary and asserted the Company should achieve
operating efficiencies through better management of the Company. Finally, three commenters
opposed the Application because the offsetting PCA rate adjustment extends the period of the
PCA recovery for an additional 12 months.
B. Staff Comments
The Staff recommended that A vista s request to rate base the purchase of Coyote
Springs 2 be granted for several reasons. First, the Staff observed that A vista s 2003 IRP
identifies seasonal deficiencies beginning in calendar year 2005. The Company identified a
preference to purchase an additional 149 aMW of gas-fired, combined cycle generation as part of
its blended portfolio. The Staff also noted that in terms of capacity, the Company s updated load
and resource data projects monthly deficits to begin in 2006 and such capacity deficits are
predicted in 7 out of 12 months by 2008. Staff Comments at 3.
Second, Staff stated that very poor water conditions are projected for this year in the
Pacific Northwest. Drought water conditions produce two adverse consequences for Avista.
First, the Company produces less generation through its hydroelectric facilities and
consequently, must make more wholesale power purchases. Second, reduced regional hydro
ORDER NO. 29752
flows may result in higher electric prices in the wholesale market. "Under such conditions; Staff
believes ownership of the entire Coyote Springs 2 plant will greatly assist A vista in meeting its
forecasted load.Id. Even if Avista does not need the entire capacity of Coyote Springs 2, the
Company s analysis shows that Avista could derive substantial revenue from off-system sales
which would benefit customers in the annual PCA calculations.
Next, the Staff determined that the $62.5 million purchase price for the second half of
Coyote Springs 2 is reasonable. Staff asserted the purchase price for the second half of the plant
must be evaluated under current and future conditions Id. at 4 (emphasis added). Staff
reviewed the financial analyses performed by Avista and Navigant Consulting and concluded
that the purchase price was reasonable. Id. at 5. Staff also noted that both the A vista and
Navigant studies found the purchase price was less than the value of the plant. Id. at 4-
Finally, Staff audited the Company s calculations and concluded that adding the
second half of Coyote Springs 2 to Idaho rate base would result in an increase of $21.642
million. This addition would produce a need for an additional revenue requirement of $3.235
million per year (based on the Company s authorized rate of return of 9.25%). While the Staff
was reluctant to prolong recovery of the already booked PCA surcharge balances in the face of
another year of potentially poor water conditions, Staff agreed with the Company s rate proposal.
Staff noted that "rate stability is important to customers and the Company s proposal achieves
this objective, which ... offsets the negative aspect of prolonging the (PCA) recovery period.
Staff Comments at 7.
C. Potlatch Comments
Potlatch asserted the Company s Application to rate base the second half of the
Coyote Springs 2 plant is neither cost effective nor reasonable. Potlatch argued that focusing on
the purchase price in relationship to either the Avista and Navigant Consulting studies, or
Mirant's initial cost , is misplaced. Instead, Potlatch maintained the relevant question is whether
the plant is needed to serve the utility s ratepayers and whether Coyote Springs 2 "is the least
cost alternative for meeting any need that does exist." Potlatch Comments at 2.
Potlatch insisted that A vista has had no need for additional generating resources for a
number of years. Potlatch points to A vista s 2003 IRP which states that A vista "is in a surplus
capacity position through 2009.Id. citing Avista 2003 IRP at 7 (April 30, 2003). Although
Potlatch acknowledged that the 2003 IRP forecasts that A vista s energy surplus will be
ORDER NO. 29752
eliminated in 2008, Potlatch stated that this forecast is premised on an overly rigorous 80%
confidence interval. Id. Under average conditions, the IRP projects annual energy surpluses
through 2009 as well.Id. at 2. Thus, Potlatch questions the need for Avista acquiring this
generating resource.
Potlatch next' argued that A vista s analysis of resource deficiencies by calendar
quarters is a marked departure from traditional IRP planning based on whole years. Id. at 3.
Potlatch insisted that A vista s own documents demonstrate that the Coyote Springs 2 acquisition
is not cost effective for meeting any quarterly deficit that may occur prior to 2011. In particular
Potlatch points to A vista s Exhibit I, pages 7 and 8 which purportedly shows that the rate impact
of the Coyote Springs 2 acquisition will be "negative" until 2011. Moreover, Potlatch insists that
the "break even point" (where early rate increases are offset by later cost savings) will not occur
until early 2018. Id. at 4.
Even if A vista needs additional generating resources, Potlatch argued that A vista has
failed to adequately demonstrate that the resource deficiency could not be met with "smaller and
less expensive incremental purchases of (demand-side management) DSM, small power
production, or other resources.Id. Avista s filing does not contain any comparative analysis of
the present value of any resources except for gas-fired plants. In other words, instead of looking
at the entire range of available resources on a cost-efficient basis, A vista merely focuses on gas-
fired plants.
VISTA REPLY COMMENTS
1. Resource Need In its Reply Comments Avista takes exception to Potlatch'
comments. A vista asserted that Potlatch's argument that Coyote Springs 2 generation is not
necessary to serve A vista s customers, is erroneous.Avista argued that Potlatch's "IRP
argument" is based upon stale 2003 data, rather than on the "more current information" from
2004. Reply Comments at 4. A vista explained that its 2003 IRP was based on 2002 load and
resources (L&R) data. In the present Application, A vista utilized August/September 2004 L&R
data. Id. The 2004 L&R data shows "an increasing need for resources beginning in 2006 on an
annual average energy basis when compared to the 2003 IRP, which was based on 2002 L&R
data.Id. Avista maintained that Potlatch's reliance on the 2003 IRP "fails to take into account
current information" contained in the Company s Application. Id. at 5.
ORDER NO. 29752
A vista also asserted that Potlatch has "misread" A vista s L&R positions. A vista
asserted that its quarterly L&R deficiencies "are, in fact, significant and justify the acquisition of
the second half of Coyote Springs 2.Id. at 6. The Company recognized that its L&R data does
not show deficiencies in the second quarter of the year primarily due to hydro generation during
the spring runoff period. However, A vista maintained its 2004 data shows that the second half of
Coyote Springs 2 will address "significant deficits in Ql , Q3, and Q4.Id. at 6 (emphasis
original).
A vista next defended its use of the 80% confidence interval for its resource planning.
Avista stated that it has used the 80% confidence interval as the appropriate measure to analyze
generation and load in both its Idaho and Washington IRPs.A vista observed both state
commissions have reviewed and accepted the confidence interval methodology for determining
A vista s resource needs. Id. at 7. A vista noted that it has not used "average or normal" water
conditions for the determination of long-term resource needs in its IRP.
2. Cost Effectiveness and Alternatives. A vista next asserted that Potlatch's argument
about the cost effectiveness of acquiring the second half of Coyote Springs 2 is incorrect. Avista
used a net present value analysis over the life of the proiect to calculate the cost effectiveness of
the project. Avista maintains that Potlatch's analysis is "fundamentally flawed" because it
unreasonably focuses on only a portion of the plant's net present value over the 20-year life of
the plant. Avista explained that its net present value analysis was based upon the entire 20-year
life of the project. Avista conceded that a capital project will typically have higher front-end
costs but will have typically lower costs over the latter portion of its life as the project is
depreciated. Reply Comments at 9. "The net present value approach captures the value of
project benefits or costs regardless of where they occur throughout the life of the project and
appropriately discounts those values to the extent they occur in the future. Id. Rather than
examining the net present value over the 20-year useful life, Potlatch arbitrarily focuses on the
first 13-year period. Avista contended that Potlatch made the same flawed analysis regarding
ratepayer costs and savings in evaluating Avista s Exhibit I, pages 7 and 8.
Finally, Avista disputed Potlatch's assertion that less expensive DSM, small power
production or other resources might be a more reasonable alternative than purchasing the second
half of Coyote Springs 2. Avista calculated that acquiring the second half of Coyote Springs 2
for $62.5 million results in an installed cost per kilowatt of $439. Avista observed that Staff
ORDER NO. 29752
agreed this price is less than the average price for other combined cycle plants in the Pacific
Northwest and below the Commission s avoided cost calculation ($736/kW). Reply Comments
at 12. Moreover, Avista said it continues to evaluate and acquire cost-effective DSM and other
resources. It anticipated acquiring an additional 25 aMW of DSM resources over the next five
years. Id. at 13. In 2004, Avista acquired 35 MW of wind resource capacity and purchased
approximately 7 aMW of small hydro from the City of Spokane. Id. A vista also stated that it
plans to upgrade several of its hydroelectric facilities over the next seven years which would
result in an increase of 26 MW of capacity and 8 aMW of energy. Id.
DISCUSSION AND FINDINGS
After having reviewed the Application and the comments submitted in this case, we
find it is reasonable and in the public interest for A vista to increase its Idaho electric rate base to
reflect the purchase of the remaining half of the Coyote Springs 2 generating facility.
Potlatch suggested in its comments, we begin our analysis by examining whether Avista needs
additional resources to serve its ratepayers. Based upon the evidence contained in the record, we
find that A vista has adequately demonstrated a need for additional generating resources to meet
its projected load. Although Potlatch observed that Avista s 2003 IRP states that Avista "is in a
surplus capacity position through 2009 " we find Potlatch's reliance on the 2003 IRP is
misplaced and ignores more current data. As A vista and the Staff note in their comments, this
Application utilizes August/September 2004 load and resource (L&R) data instead of the 2002
L&R data used as the basis for the 2003 IRP. Avista s 2004 data shows an increasing need for
generating resources. More specifically, the 2004 data shows that the Company will experience
energy deficits in the first, third, and fourth quarters beginning in 2005. The data also shows that
additional capacity will be needed in 2006. In other words, Avista s updated information shows
that the Company will experience supply deficiency. Thus, we find that A vista has adequately
demonstrated a need for additional generating resources.
Having determined that A vista will be resource deficient, our next task is to
determine whether the purchase of the remaining half of Coyote Springs 2 is a reasonable
response to meet the projected deficiency. Based upon our review of the record, we find there
are several reasons why purchase of the remaining half of Coyote Springs is an appropriate
response. First, Avista, Navigant Consulting, and the Staff determined that purchase of the plant
is reasonable. Avista s purchase cost of $439/kW compares favorably to other natural gas plants
ORDER NO. 29752
in the region and the western United States. Staff also noted that this cost per kilowatt is well
below the Commission s avoided cost calculation of $736/kW. The purchase price was also
below the plant's value as calculated by Navigant.
Second, we also find that the "net present value" analysis performed by A vista and
Navigant over the entire 20-year life of the plant shows a positive benefit to ratepayers. We
agree with A vista that the net present value analysis is a reasonable approach for determining the
value of a long-lived utility resource. In this case, there is a positive net present value to
acquiring the plant over its 20-year life.
Third, Avista s full ownership of Coyote Springs 2 also provides other benefits.
More specifically, full ownership allows A vista to make unilateral dispatching decisions based
upon its own day-to-day needs. Staff also noted the impending poor water conditions for the
Pacific Northwest this year. Purchase of Coyote Springs 2 will significantly shore-up Avista
supply resources if drought conditions persist this year and in the near-term. Finally, given the
operating efficiencies of the plant, any off-system sales from Coyote Springs 2 would be credited
to customers through the Company s PCA mechanism.
Having found that the purchase and rate basing of Coyote Springs 2 is reasonable and
in the public interest, the Commission further finds that it is appropriate for A vista to increase its
Idaho electric rate base by $21.642 million. This increase in rate base results in an increase to
Avista s annual revenue requirement in base rates of $3.235 million predicated upon its
authorized rate of return of9.25%. See Order No. 29602. Although the Commission is reluctant
to extend power purchase costs until 2007, we further find that it is reasonable to decrease the
PCA surcharge by $3.2 million. The offsetting reduction in the PCA surcharge results in no net
rate change to customers.
CONCLUSIONS OF LAW
The Commission has jurisdiction over A vista Corporation and this Application
pursuant to Title 61 of the Idaho Code and specifically Idaho Code ~ ~ 61-129, 61-523 and 61-
622. The Commission finds that it is reasonable and appropriate for A vista to purchase the
second half of Coyote Springs 2 based upon the purchase price of $62.5 million.
The Commission further finds that the purchase transaction will increase Avista
Idaho electric rate base by $21.642 million. Following the purchase, the Commission further
finds that the Company s current rates will not provide A vista a fair and reasonable return on its
ORDER NO. 29752
added investment. Allowing the Company to increase its annual base rates and charges by
$3.235 million will provide it with the opportunity to earn a fair and reasonable return.
The Commission further finds that it is reasonable and in the public interest for
A vista to reduce its PCA rates by a corresponding $3.2 million. Consequently, rate basing of the
plant will not result in any net change in Idaho rates. Finally, the tariffs and schedules contained
in the Company s Exhibit C adequately reflect the authorized changes in base rates and PCA
rates.
ORDER
IT IS HEREBY ORDERED that Avista Corporation s Application to increase its
Idaho electric rate base attributable to the purchase of the second half of the Coyote Springs 2
generating plant is approved. Avista may increase its Idaho electric rate base by $21.642
million.
IT IS FURTHER ORDERED that Avista shall increase its base rates by $3.235
million as proposed in its tariffs and schedules accompanying the Application in Exhibit C. The
increase in Idaho electric base rates shall be offset by a corresponding decrease of $3.2 million in
the Idaho PCA surcharge revenues.
IT IS FURTHER ORDERED that the proposed tariffs and schedules contained in
Exhibit C to the Application shall become effective April 15, 2005.
IT IS FURTHER ORDERED that A vista may extend recovery of its deferred PCA
power costs.
THIS IS A FINAL ORDER. Any person interested in this Order (or in issues finally
decided by this Order) or in interlocutory Orders previously issued in this Case No. A VU-05-
may petition for reconsideration within twenty-one (21) days of the service date of this Order
with regard to any matter decided in this Order or in interlocutory Orders previously issued in
this Case No. A VU-05-Within seven (7) days after any person has petitioned for
reconsideration, any other person may cross-petition for reconsideration. See Idaho Code ~ 61-
626.
ORDER NO. 29752
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this / /J-
t1-
day of April 2005.
MARSHA H. SMITH, COMMISSIONER
, DENNIS S. HANSEN, COMMISSIONER
ATTEST:
Commission Secretary
bls/O:A VUE0501 dh2
ORDER NO. 29752