20050301Comments.pdf

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DONALD L. HOWELL, II
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES-COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 3366
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Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5983
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
VISTA CORPORATION FOR AUTHORITY
TO IN CL UD E 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-
COMMENTS OF THE
COMMISSION STAFF
COMES NOW the Staff of the Idaho Public Utilities Commission, by and through its
Attorney of Record, Donald L. Howell II, Deputy Attorney General, and submits the following
comments in response to Order No. 29694. As described more fully below, the Staff
recommends that A vista s Application to rate base its purchase of Coyote Springs 2 be granted.
BACKGROUND
On January 19 2005 , Avista Corporation filed an Application requesting authority to
increase its electric rate base by $62.5 million ($22.1 million for the Idaho Jurisdiction) based
upon its recent purchase ofMirant-Oregon s half of the Coyote Springs 2 (CS2) generating plant.
Prior to the purchase, A vista and Mirant-Oregon each owned half of the 280 MW plant. A vista
STAFF COMMENTS MARCH 1 , 2005
calculates that the plant addition will increase the Company s annual revenue requirement by
approximately 1.89%, or $3.235 million. Rather than increasing the rates customers pay, Avista
proposes a $3.235 million reduction in the existing PCA surcharge. Consequently, purchase
the plant would result in no net rate change to customers. If approved, 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.
ST AFF ANALYSIS
Background
A vista s need for additional base load generation has been well documented, beginning
with the 2000 update to its 1997 Integrated Resources Plan (IRP). Exhibit E. In the IRP Update
the Company identified a need for a long-term resource of approximately 300 MW of capacity
and energy beginning in 2004. To address the immediate need for new base load generation
Avista released an all-resource public Request for Proposal (RFP) in December of2000. In 2001
the 280 MW Coyote Springs 2 proj ect was selected as the winning proposal. At the time of the
selection, A vista intended to own 100 percent of the CS2 plant. At that time, Staff agreed with
A vista that the entire plant was needed to serve load. Ownership of the entire plant was
consistent with Avista s system demand documented in the 2000 IRP Update. Moreover
Northwest utilities were in the midst of the extreme price run-up of2000-2001 and were
experiencing the consequences of poor water conditions and forced reliance on market
purchases. In their own IRPs, many utilities retreated from planned reliance on market resources
and returned instead to plans in which most load could be met with company-owned generation.
In December 2001 , the effects of extremely poor water conditions and high market prices
in part caused A vista to experience financial difficulties. Because it was unable to obtain
sufficient financing for the entire plant, A vista 'Yas forced to sell half of the plant to Mirant.
A vista clearly did not sell half of the plant because it did not need it; instead, A vista s financial
challenges made ownership of the entire plant unfeasible.
After selling half of the plant to Mirant, Avista met its growing load by using the half of
CS2 that it still owned and supplementing its generation with several multi-year contract
purchases from the regional power market. These multi-year contract purchases have for the
most part replaced generation that would have otherwise come from the half of CS2 sold to
STAFF COMMENTS MARCH 1 , 2005
Mirant. Several of those multi-year contracts expire in 2006. Meanwhile, Avista s loads have
continued to grow.
Need for the Second Half of Coyote Springs 2
A vista s 2003 IRP identifies seasonal deficits beginning in 2005. As spelled out in its
2003 IRP, the preferred resource acquisition strategy for the period 2004-2013 includes an
additional 149 aMW of gas- fired combined cycle generation as part of a blended portfolio of
wind, coal, and conservation resources. Thus, A vista s acquisition of the 140 MW second half
of CS2 is consistent with its 2003 IRP.
The Company s most recent load-resource balance calculations show annual energy and
capacity deficits beginning in 2006. However, when examined more closely on a monthly basis
Avista s analysis shows energy deficits in 7 of 12 months in 2005. By 2008, the energy deficits
increase to 9 out of 12 months. In terms of capacity, monthly deficits are estimated to begin in
2006. But by 2008, capacity deficits are predicted in 7 of 12 months. See workpapers to Exhibit
Under normal water conditions and forecasted gas and electric prices, A vista s analysis
predicts that the plant will be used immediately to meet the Company s native load in the first
third, and fourth quarters of this year. Application at 15. In the future, the plant's usage would
increase. By 2008 A vista estimates that it would again be deficit most of the year even with the
second half of CS2.
If gas or electric prices deviate from the expected norms or if water conditions are
abnormal, the immediate need for the plant could increase significantly. Under expected prices
and conditions, Staff believes that A vista could meet its load for another year or two without the
plant by making relatively small or moderate purchases from the market. However, indications
so far are that very poor water conditions may persist this year in much of the Northwest. Under
such conditions, Staff believes ownership of the entire CS2 plant will greatly assist Avista in
meeting its forecasted load.
In any case, the opportunity to buy the remainder of the plant exists now, and delaying
the purchase is not an option. Even if Avista does not need the entire capacity ofCS2 now to
serve its native load, the Company s analysis shows that Avista could derive substantial revenue
from off-system sales.
STAFF COMMENTS MARCH 1 , 2005
Purchase Price
As stated in its Application, A vista agreed to a negotiated purchase price of $62.
million. This price compares to $108 million that A vista paid to acquire the identical first half of
the plant. The purchase price for the second half of the plant represents only 58 percent of the
price paid for the first half. This may give the appearance that A vista either overpaid for the first
half or made a very good deal for the second half. However, Staff believes that it is misleading
to directly compare the costs between the two halves. In prior proceedings, Staff agreed that the
$108 million price paid for the first half of CS2 was reasonable under the circumstances at the
time. The price represented exactly half of the cost of the entire plant, the cost of which was
determined for the most part through competitive bidding in the 2000 RFP process. Based on
conditions at that time and reasonable expectations about future gas and electric prices, the initial
purchase price was lower than other alternatives.
Staff contends that the $62.5 million price for the second half of the plant now must be
evaluated under current and future conditions. The current value of the plant depends upon the
cost of today' s available alternatives and current expectations of costs and revenues associated
with purchase and operation of the plant, not conditions that existed four years ago. Several
things have changed that makes the value of the plant significantly less than it was before. One
of the primary differences now is that new generation has been added throughout the West. With
more plants available to be dispatched, the supply-demand balance has shifted. In addition, gas
and electric price forecasts have changed, load forecasts have changed, and the availability of
generation equipment is much greater than before.
To determine the reasonable value of the second half of the plant, Avista performed an
analysis to compute the expected costs and revenue from the plant based on updated load
forecasts and fuel prices. The Company performed two complete studies, one in May and the
other in September of 2004. The Company analyzed eight different scenarios in which different
assumptions were made regarding natural gas prices, electric prices, and transmission
availability. The result of this analysis was a range ofproject values from $43.1 to $116.
million. Avista s base case, or most expected project value, was $66.7 million. Staff has
reviewed the Company s analysis and believes it is reasonable. The wide range of computed
STAFF COMMENTS MARCH 1 2005
project values is an illustration of the uncertainty and risk associated with new, gas-fired
generation.
In addition to conducting its own analysis, Avista hired Navigant Consulting to develop
an independent valuation of the second half ofCS2. Navigant estimated the value of the half
plant to be $67.2 million, which is slightly above Avista s estimate. Navigant's range of values
was from $34.1 to $111.1 million. As an additional check of reasonableness, Navigant compared
the purchase price of the CS2 plant to prices paid for other comparable plants recently bought
and sold. The comparison shows that the $439 per kW price for CS2 is less than the average
price of $569 per kW for other plants in the West and less than the average price of $520 per kW
for plants in the remainder of the country. In addition, the $439 per kW price for CS2 is far
below the new construction cost estimates assumed by Staff in its avoided cost calculations, by
the Northwest Power and Conservation Council, and by other regional utilities in their IRPs.
Based on the analyses performed by A vista, N avigant Consulting and Staff, Staff
concludes that the $62.5 million purchase price for the second half of CS2 is reasonable.
Net Power Supply Costs
In this filing the Company proposes to include in its Idaho rates the cost of adding the
second half of the Coyote Springs 2 CCCT generating station to its resource portfolio. The
Company s current base rates were established in the Company s recent rate case (A VU-04-
and became final and effective on December 2 2004. The current rates include the costs of
owning and operating the first half of Coyote Springs 2. For the purpose of these comments
power supply costs are divided into two groups. The first group of costs are referred to as
Power Supply Costs." This group includes all of the costs that are tracked in the Company
Power Cost Adjustment (PCA) mechanism including fuel expense, purchase power expense and
offsetting secondary sales revenues. The second group of costs are referred to as "Other Power
Supply Costs." In general, these Other Power Supply Costs include return on investment
depreciation expense and taxes (discussed in greater detail below).
In the recent completed rate case, the normalized level of Power Supply Costs was
determined using the "Aurora" power supply model. In this filing the Company has re-run that
model with no changes except those required to include the second half of Coyote Springs 2 as
an A vista-owned resource. The result is a decrease in A vista s annual Power Supply Costs of
STAFF COMMENTS MARCH 1 , 2005
approximately $4.0 million on a total company basis. This result also includes gas
transportation, electric wheeling expense and two other smaller expenses shown in the
Company s Application. However, increases in the "Other Power Supply Cost" group lead to
the net increase in the Company s annual revenue requirement.
The decrease in Power Supply Costs was expected because any new resource that is
economically dispatched to meet load, or for sales to other utilities, reduces the Company
variable costs of supplying power. Of course, any new resource also increases the Company
fixed costs. Staff verified the Company s projected Power Supply Costs by running the Aurora
model including the second half of Coyote Springs 2.
The Company used the projected power supply costs to estimate the base power supply
costs used in calculating the Company s monthly PCA deferrals. The Company s calculations
are located in Exhibit M, Page 3. If the Company were to add CS2 without updating the base
power supply costs used in the PCA computation, the PCA would incorrectly capture a benefit to
customers. This occurs because, as previously discussed, a new resource should reduce
normalized Power Supply Costs. If this base cost reduction is not included in the PCA
calculation, surcharge deferrals are smaller and rebate deferrals are larger than they should be.
The proper matching of the costs and benefits of a new Company-owned resource is achieved
when base rates and PCA methodology are updated to reflect the new resource. This is what the
Company is proposing to do in this filing and Staff agrees that it is appropriate.
Coyote Springs 2 Costs and Accounting Treatment
Staffs examination of this filing included a review of Exhibits A and B (Pro Forma
Results and Proposed Rates, respectively). In Avista s recent rate case, Staff examined in detail
the underlying documents supporting the inclusion in rate base of A vista s initial half of CS2, as
well as the incremental cost to be included in rates associated with the operation of the plant.
that time, the supporting .documents covered the entire Coyote Springs proj ect, both A vista s half
and Mirant's half. Staffhas examined the calculations supporting the Company s request to
include the second half of the CS2 project in rate base and rates and finds them acceptable. The
information included in this filing is consistent with Staff s audit findings in the last rate case.
The calculations included in Company Exhibit A are acceptable to Staff.
STAFF COMMENTS MARCH 1 , 2005
Exhibit A shows the recently authorized and the proposed electric operating results and
rate base for A vista s Idaho electric operations, as well as the calculation of the proposed revenue
requirement in this filing. This Exhibit shows the impact on A vista s authorized Idaho net
operating income and rate base including the power supply operations and the capital investment
associated with the addition of the second half of the CS2 project as well as the spare transformer
for the plant. Staff has examined this exhibit and has found it to be correct.
The addition of the second half of CS2 increases sales for resale by $9.5 million, and
increases total electric expenses by $10.2 million. The overall impact to net operating income
after taxes, is a decrease in net operating income of $0.66 million. Increases in "plant in service
occur in the production and transmission accounts. After accounting for accumulated
depreciation and deferred income taxes, the total Idaho rate base increase is $21.642 million.
The additional revenue required, after accounting for the increase in rate base and the decrease in
net operating income, is $3.235 million. This increase in revenue allows the Company to
maintain its authorized overall rate of return of 9.25% set in the rate case.
Rates
The Company proposes to increase its Idaho base rates by $3.235 million per year. As
previously discussed, Staff proposes no adjustment to this amount. To offset the increase in base
rates, the Company also proposes to decrease PCA rates by the same amount so there is no net
change in rates. The Company estimates that its proposal will delay complete recovery of the
currently deferred PCA balance for approximately one year, until September 2007. Company
Exhibit B shows the proposed increase in base rates and the decrease in the present PCA
surcharge rates by class. Staff finds the calculations to be correct and consistent with approved
PCA methodology.
In the face of another year of potentially poor water conditions, the Staff is reluctant to
prolong the recovery of already booked PCA surcharge balances. However, Staff agrees with the
Company s rate proposal. Rate stability is important to customers and the Company s proposal
achieves this objective, which Staff believes, offsets the negative aspects of prolonging the
recovery period.
STAFF COMMENTS MARCH 1 , 2005
Staff has reviewed the Company s rate calculations and has verified that the tariff sheets
filed for Commission approval in this case (a portion of Company Exhibit C) do offset a base
rate increase with a PCA rate decrease.
RECOMMENDATION
Staff recommends that the Company s Application be approved. The Company has
requested an effective date of April 15, 2005. The Staff concurs with the proposed effective
date.
Respectfully submitted this 4 Sf
J. day of March 2005.
Donald L. Ho ell, II
Deputy Attorney General
Technical Staff:Kathy Stockton
Rick Sterling
Keith Hessing
i:umisc/comments/avueO5.ldhksrpskh comments
ST AFF COMMENTS MARCH 1 , 2005
CERTIFICATE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS 1ST DAY OF MARCH 2005
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN
CASE NO. AVU-05-, BY MAILING A COpy THEREOF POSTAGE PREPAID
THE FOLLOWING:
DAVID J. MEYER
SR VP AND GENERAL COUNSEL
VISTA CORPORATION
PO BOX 3727
SPOKANE WA 99220-3727
E-mail dmeyer~avistacorp. com
KELLY NORWOOD
VICE PRESIDENT - STATE & FED. REG.
AVIS T A UTILITIES
PO BOX 3727
SPOKANE W A 99220-3727
E-mail Kelly.norwood~avistacorp.com
JilxrASECRET
CERTIFICATE OF SERVICE