20050125Decision Memo.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
COMMISSIONER SMITH
CO MMISSI 0 NER HANSEN
COMMISSION SECRETARY
COMMISSION STAFF
FROM:DON HOWELL
DATE:JANUARY 20 2005
RE:A VISTA'S APPLICATION TO INCLUDE ITS RECENT PURCHASE OF
COYOTE SPRINGS 2 FROM MIRANT IN ITS IDAHO RATE BASE, CASE
NO. A VU-O5-
On January 19, 2005 , Avista filed an Application requesting authority to increase its
Idaho electric rate base by $62.5 million based upon its recent purchase of Mirant-Oregon shalf
of the Coyote Springs 2 generating plant. Prior to the purchase, A vista and Mirant-Oregon each
owned half of the plant. A vista 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, Avista 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
A. The Plant and Initial Operations
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 adjacent
Coyote Springs 2 in January 2001 in conformance with its 2000 Integrated Resource Plan (mF).
A vista has an operating agreement with PGE for PGE to operate both units at Coyote Springs.
Application at 11-12.
DECISION MEMORANDUM
In November 2004, Avista also submitted a Section 203 petition to 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 to A vista on December 30
2004. On January 20, A vista assumed ownership and began operating the entire plant. ld.
C. Benefits from the Purchase
As previously stated, A vista maintains that the purchase of the plant was 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 Avista s cost of $439/kW for
Mirant's share. Application at 6; Table at 24. Navigant also concluded that Avista s purchase
price was below the economic value of the plant which was in the range of $67 million.
Avista asserts that 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 covers the forecasted supply deficits identified
in the first, third, and fourth quarters ofCYs 2005-2007. ld. at 15-19; Exh. H.
Next, Avista insists full ownership of Coyote Springs 2 improves the Company
ability to economically operate the plant. Full ownership allows Avista to now make 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.
ld. at 21.
Finally, as of January 20, 2005 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.
D. No Net Change in Rates
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 base rates by $3.235 million, or 1.89%. To offset
DECISION MEMORANDUM
Finally, A vista does not seek any net increase to its existing rates because the Company intends
to offset the proposed increase in base rates by an equal decrease in its PCA surcharge. Given
these factors, the Staff believes it is reasonable for the Commission to process this case via
Modified Procedure.
In summary, Avista requests authority to: (1) increase its Idaho rate base and
expenses associated with the purchase; (2) increase its base rate tariffs to reflect the purchase; (3)
modify its PCA tariff to reflect a corresponding decrease in rates (so there is no net change in
rates).
COMMISSION DECISION
1. Does the Commission wish to process this case under Modified Procedure?
2. Although there is no proposed net rate increase, does the Commission desire for
the Staff to conduct workshops to disseminate information regarding the Company
App licati on?
3. Does the Commission find the suggested extended comment cycle reasonable?
4. Does the Commission wish to require anything else?
Don Howell
VldlM:AVUEO501 dh
DECISION MEMORANDUM