AVIS1191.docx

1 BOISE, IDAHO, WEDNESDAY, JANUARY 19, 2000, 9:30 A. M.
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4 COMMISSIONER SMITH: Good morning, ladies
5 and gentlemen. This is the time and place set for
6 hearing in Idaho Public Utilities Commission Case
7 No. AVU-E-99-6, also identified as in the matter of the
8 application of Avista Corporation for authority to sell
9 its interest in the coal-fired Centralia power plant.
10 We'll excuse temporarily Commissioner
11 Kjellander who had to be appear before the House State
12 Affairs Committee this morning and he will join us when
13 they've finished with him or what's left of him will join
14 us.
15 We'll start this morning with the
16 appearances of the parties. Let's begin with Avista.
17 MR. DAHLKE: Yes, representing Avista
18 Corporation, my name is Gary Dahlke. I'm with the law
19 firm of Paine, Hamblen, Coffin, Brooke & Miller.
20 COMMISSIONER SMITH: And we'll note,
21 Mr. Dahlke, there's a motion for your admission for the
22 purpose of this hearing by a member of the Idaho Bar,
23 Mr. Tom DeBoer, and the Commission will grant that
24 motion.
25 MR. DAHLKE: Thank you very much.
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CSB REPORTING COLLOQUY
Wilder, Idaho 83676
1 COMMISSIONER SMITH: For the Staff.
2 MR. WOODBURY: Yes, Scott Woodbury, Deputy
3 Attorney General, for Commission Staff.
4 COMMISSIONER SMITH: And Mr. Ward.
5 MR. WARD: Conley Ward of the firm Givens,
6 Pursley for Potlatch.
7 COMMISSIONER SMITH: Okay, and I believe
8 those are all the parties to the case. Are there any
9 preliminary matters that need to come before the
10 Commission before we take the testimony of the
11 witnesses? Mr. Dahlke.
12 MR. DAHLKE: We have no preliminary
13 matters.
14 COMMISSIONER SMITH: All right, would you
15 like to lead off, then?
16 MR. DAHLKE: Our first witness is a policy
17 witness, Mr. Gary Ely.
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CSB REPORTING COLLOQUY
Wilder, Idaho 83676
1 GARY G. ELY,
2 produced as a witness at the instance of Avista
3 Corporation, having been first duly sworn, was examined
4 and testified as follows:
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6 DIRECT EXAMINATION
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8 BY MR. DAHLKE:
9 Q Please state your name.
10 A Gary Ely.
11 Q And please state your employer and your
12 position.
13 A I'm executive vice president of Avista
14 Corp.
15 Q And have you caused to be prefiled in this
16 matter direct testimony?
17 A Yes, I have.
18 Q And do you have that testimony before you?
19 A Yes, I do.
20 Q Do you have any changes or corrections to
21 that testimony?
22 A I do not.
23 Q Before asking you about that testimony, I
24 have a couple of additional questions that I would like
25 to ask you about the Portland General Electric portion of
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CSB REPORTING ELY (Di)
Wilder, Idaho 83676 Avista
1 Centralia which is not included in your direct
2 testimony. Can you tell us, Mr. Ely, what has transpired
3 with regard to the Portland General Electric transaction
4 with Avista Corporation concerning the Portland General
5 Electric two-and-a-half percent share of Centralia?
6 A Yes. Since I filed my prefiled testimony,
7 we have closed that transaction as of December 31, 1999.
8 Q And what will be the disposition of that
9 two-and-a-half percent share of Centralia if the sale to,
10 and I'll use the term TECWA, it's an acronym, T-E-C-W-A,
11 if the sale to TECWA which is the subject of this
12 proceeding closes?
13 A Those properties would also be sold to
14 TECWA.
15 Q And would that sale result in a gain?
16 A Yes, it would.
17 Q Could you tell us what that gain is,
18 approximately, on a systemwide basis?
19 A It's approximately $4.1 million.
20 Q And pending the closing of the sale of that
21 two-and-a-half percent share to TECWA, is it the case
22 that the power from that two-and-a-half percent will
23 remain with Portland General Electric Company?
24 A Yes, we have not integrated that into the
25 system in any way whatsoever. Portland General continues
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CSB REPORTING ELY (Di)
Wilder, Idaho 83676 Avista
1 to manage that as of closing, including the coal supply
2 and other things for that and it will remain that way
3 until such time as either the deal with TECWA closes or
4 it is determined that it won't.
5 Q And can you tell us what proposal, what
6 position rather, Avista Corporation is taking with
7 respect to the gain on the sale of the Portland General
8 Electric two-and-a-half percent share?
9 A It's the corporation's position that the
10 plant was purchased by the shareholders and would be sold
11 by the shareholders and, therefore, in this particular
12 proceeding, we had not previously asked for approval of
13 that process. We would expect to keep the gain and that
14 would go to the shareholders.
15 Q And if the Commission were to feel that
16 some approval of that sale was necessary, would you be
17 requesting that that approval be given as well?
18 A Yes, if it's in the determination of the
19 Commission that we do need approval to make that sale, we
20 would ask that that be given in this order.
21 Q And has the Oregon Public Utilities
22 Commission approved the sale from Portland General
23 Electric to Avista Corporation prior to the closing on
24 December 31st of last year?
25 A Yes. Both the Oregon Commission approved
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CSB REPORTING ELY (Di)
Wilder, Idaho 83676 Avista
1 the sale as well as FERC approved the sale before the
2 transaction closed.
3 Q Thank you. Then with regard to the
4 remainder of your direct testimony, if I were to ask you
5 the questions that are in your direct testimony, would
6 your answers be as contained in the prefiled testimony?
7 A They would.
8 MR. DAHLKE: With that, I would request
9 that Mr. Ely's testimony be spread on the record, there
10 are no exhibits to move for admission, and so we would
11 offer him to be available for cross-examination.
12 COMMISSIONER SMITH: If there's no
13 objection, the prefiled testimony of Mr. Ely will be
14 spread upon the record as if read.
15 (The following prefiled testimony of
16 Mr. Gary Ely is spread upon the record.)
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CSB REPORTING ELY (Di)
Wilder, Idaho 83676 Avista
1 Q Please state your name, business address
2 and present position with Avista Corporation ("Avista").
3 A My name is Gary G. Ely and my business
4 address is East 1411 Mission Avenue, Spokane, Washington.
5 I am employed by Avista as Executive Vice President.
6 Q Would you briefly describe your educational
7 and professional background?
8 A I am a graduate of Brigham Young
9 University. I have participated in several executive
10 level courses including the Public Utility Executive
11 Course sponsored at the University of Idaho,
12 post-graduate courses through the Stanford Graduate
13 School of Business, Edison Electric Institute Leadership,
14 and Kidder Peabody School of Financial Management. I
15 have held offices in various organizations including
16 chairman for both the Gas Management Executive Committee
17 and Marketing Executive Committee for the Pacific Coast
18 Gas Association. I have served on the board of the
19 Northwest Electric Light and Power Association and on the
20 executive board of the Spokane Valley Chamber of
21 Commerce. I served as president of the board of the
22 Northwest Gas Association and was a member of the State
23 Building Code Council which developed the State Energy
24 Code. I am currently a board member of the Pacific Coast
25 Gas Association and am the clearance officer for the
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Ely, Di 1
Avista
1 corporation.
2 Q How long have you been employed by Avista
3 and what are your present duties?
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Ely, Di 1a
Avista
1 A I was first employed by Avista in 1967. As
2 Executive Vice President I am responsible for further
3 advancement of operations, growth and strategies in the
4 energy and power business.
5 Q Have you previously testified before this
6 Commission?
7 A Yes. I have testified before this
8 Commission in several prior proceedings.
9 Q What is the scope of your testimony in this
10 proceeding?
11 A I am the policy witness for Avista in this
12 proceeding. My testimony provides background information
13 related to the sale of Avista's 15% share of the
14 Centralia Power Plant to TECWA Power, Inc. ("TECWA"), a
15 Washington corporation and a subsidiary of TransAlta
16 Corporation, headquartered in Calgary, Alberta, Canada.
17 I also discuss why the sale of the Centralia Power Plant
18 is in the public interest.
19 Q Would you please provide a brief summary of
20 the testimony of the other witnesses representing Avista
21 in this proceeding?
22 A Yes. In addition to myself, the following
23 witnesses are presenting direct testimony on behalf of
24 Avista:
25 George Perks: As Superintendent, Thermal
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Ely, Di 2
Avista
1 Operations, he provides a description of the property
2 being sold, the factors leading up to the sale and the
3 terms of the sale.
4 William G. Johnson: As Power Contract Analyst, he
5 provides an economic analysis comparing the estimated
6 cost of continued operation of the plant to the projected
7 cost of replacement power. He also discusses replacement
8 power options.
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Ely, Di 2a
Avista
1 Thomas D. Dukich: As Manager of Rates and Tariff
2 Administration, he explains the basis for Avista's
3 proposal relating to the disposition of the book gain
4 resulting from the sale of Centralia.
5 Ronald L. McKenzie: As Senior Rate Accountant, he
6 provides a calculation of the gain on the sale of the
7 plant and provides proposed accounting entries related to
8 the sale and discusses the disposition of the gain.
9 Q Would you please describe the process that
10 led up to the proposed sale of the Centralia Power Plant
11 to TECWA?
12 A Yes. Continued operation of the Centralia
13 Power Plant requires the installation of sulfur dioxide
14 scrubbers and low nitrogen oxide burners to meet emission
15 standards ordered by the Southwest Washington Pollution
16 Control Authority. Portland General Electric ("PGE"), as
17 well as some other co-owners, did not support the
18 installation of scrubbers at the plant. On the other
19 hand, closure of the plant would result in mine closure
20 costs, reclamation costs and plant dismantling costs.
21 Given the fact that capital decisions require unanimous
22 agreement under the applicable contract, the divergent
23 views of the owners created a difficult situation. The
24 co-owners of the plant agreed that a single owner could
25 more effectively deal with issues pertaining to continued
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Ely, Di 3
Avista
1 operation of the plant and adjacent coal mine. In
2 October 1998 the co-owners put the plant up for sale
3 under an auction process. TECWA was selected as the
4 winning purchaser. Details related to the sale price and
5 the Company's investment in the plant are provided in
6 Mr. McKenzie's testimony.
7 Q Are there provisions in the Centralia Plant
8 Purchase and Sale Agreement regarding the installation of
9 emission control equipment?
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Ely, Di 3a
Avista
1 A Yes. The terms of the Agreement require
2 the plant owners to have contracted by the end of May
3 1999 for the installation of required emission control
4 equipment and to continue the installation of such
5 equipment until the sale closes.
6 Q Did any co-owner object to the installation
7 of the required emission control equipment?
8 A Yes. PGE wished to avoid investment in the
9 emission control equipment and the risk of not recovering
10 such investment in the event that the sale to TECWA did
11 not close. Thus, to enable the sale to TECWA to proceed,
12 on May 5, 1999 Avista agreed to purchase PGE's 2.5%
13 interest in the Centralia Power Plant. Avista will sell
14 the 2.5% share purchased from PGE to TECWA. Avista also
15 entered into an agreement with Snohomish PUD to purchase
16 their 8% share of the plant in the event that the sale to
17 TECWA does not close. If the sale to TECWA does not
18 close, Avista will own a 25.5% interest in the power
19 plant (15% original Avista + 2.5% PGE + 8% Snohomish
20 PUD).
21 Q Why did Avista elect to increase its
22 ownership share of Centralia at the same time it was
23 proposing to sell to TECWA?
24 A As explained above, Avista purchased PGE's
25 2.5% interest in order to facilitate the sale to TECWA.
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Ely, Di 4
Avista
1 In addition, it agreed to purchase Snohomish PUD's 8%
2 share if the sale does not close. If the sale closes,
3 the Company and its customers will benefit through
4 reduced exposure to mine reclamation costs and by
5 enabling Avista to conduct resource optimization
6 strategies more independently. If the sale does not
7 close, Avista will have aggregated ownership shares by
8 reducing the number of existing owners
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Ely, Di 4a
Avista
1 from eight to six, and streamlining somewhat the
2 decision-making process at the plant. Either way, Avista
3 is better off than it was before.
4 Q Would you please explain why the sale of
5 the Centralia Power Plant to TECWA is in the public
6 interest?
7 A Yes. The sale to TECWA will eliminate
8 uncertainties to Avista and its customers regarding mine
9 reclamation costs, as such costs will be borne by TECWA.
10 Moreover, the sale enables Avista to conduct resource
11 optimization strategies more independently. The
12 Company's analysis shows that power costs to customers,
13 as a result of the sale, will be reduced by approximately
14 $7.7 million on a present value basis over the next 20
15 years.
16 On a broader scale, the planned
17 installation of emission control equipment will place the
18 power plant among the cleanest coal-fired plants in the
19 United States. TECWA will be positioned to continue to
20 employ the majority of the some 675 employees at the
21 plant and mine. The region will retain a valuable
22 1340-megawatt resource, enough power for a city the size
23 of Seattle.
24 Q Is the sale of Centralia in the public
25 interest from the standpoint of "no harm" to customers?
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Ely, Di 5
Avista
1 A Yes. As stated earlier, the Company's
2 analysis shows that over the 20-year study period, the
3 costs to customers would be lower with the sale, as
4 compared to the absence of the sale. The analysis
5 provided by Mr. Johnson shows, on a present value basis,
6 that customers would save approximately $7.7 million over
7 the 20-year period.
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Ely, Di 5a
Avista
1 As to service quality and reliability, the
2 replacement resource options being evaluated by the
3 Company would provide for service quality and reliability
4 at a level equal to or greater than that provided by
5 Centralia.
6 Thus, the sale of Centralia by the Company
7 is in the public interest from the standpoint of no harm
8 to customers.
9 Q What is the dollar amount of the book gain
10 on the sale?
11 A The after-tax gain on the sale for Avista's
12 15% share of the project will be approximately $29.6
13 million. As Mr. McKenzie explains in his testimony, this
14 figure is an estimate and the final figure will be
15 dependent upon the closing date of the sale, as well as
16 other factors explained in his testimony. The final
17 number, however, should not be significantly different,
18 and, therefore, the $29.6 million represents a reasonable
19 figure to use in discussing the disposition of the gain.
20 Q Is it necessary to include the book gain on
21 the sale in the analysis in order to demonstrate a
22 no-harm condition for customers?
23 A No. Mr. Johnson's analysis showing a
24 present value of cost savings to customers of $7.7
25 million excludes the book gain on the sale. Therefore,
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Ely, Di 6
Avista
1 the book gain represents additional value over and above
2 the no-harm standard. Mr. Dukich addresses the Company's
3 proposal regarding the disposition of the gain on the
4 sale of Centralia.
5 Q Would you please summarize your testimony?
6 A Yes. In this case the Company is
7 requesting that the Commission approve the sale of its
8 share of the Centralia Power Plant. The sale of
9 Centralia was accomplished through a competitive bidding
10 process with TECWA as the winning bidder. We can only
11 assume that the winning
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Ely, Di 6a
Avista
1 bid submitted by TECWA reflects the risks and rewards,
2 both quantitative and qualitative, associated with the
3 ownership and operation of the power plant and the coal
4 mine.
5 The Company's decision to sell the plant
6 took into consideration both the quantitative and
7 qualitative factors surrounding continued ownership of
8 the plant, versus the sale of the plant at the price
9 offered by the buyer, together with the projected
10 replacement power costs. The Company's decision to sell,
11 especially with regard to the qualitative factors, also
12 involved business judgement.
13 We believe that this transaction for the
14 sale of Centralia is in the best interest of the Company
15 and its customers, and that the sale is in the public
16 interest. The Company requests that the Commission
17 approve the sale of the plant, and the disposition of the
18 gain on the sale as proposed in the testimony of Mr.
19 Dukich.
20 Q Does that conclude your direct testimony in
21 this proceeding?
22 A Yes, it does.
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Ely, Di 7
Avista
1 (The following proceedings were had in
2 open hearing.)
3 COMMISSIONER SMITH: Mr. Ward, do you have
4 questions?
5 MR. WARD: No questions. Thank you.
6 COMMISSIONER SMITH: Mr. Woodbury.
7 MR. WOODBURY: Thank you, Madam Chair.
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9 CROSS-EXAMINATION
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11 BY MR. WOODBURY:
12 Q Good morning, Mr. Ely.
13 A Good morning, Mr. Woodbury.
14 Q With respect to your further direct on PGE,
15 am I to understand that that was purchased by Avista
16 Utilities and not any of your unregulated affiliates?
17 A It was actually purchased by Avista Corp.
18 and it was not held in any of the unregulated
19 subsidiaries, that is correct.
20 Q Okay, and it would be the Company's -- it's
21 my understanding that it's the Company's proposal that
22 any gain with respect to the sale of PGE to TECWA should
23 be distributed to shareholders?
24 A That would be correct.
25 Q Do I also understand that you would be the
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CSB REPORTING ELY (X)
Wilder, Idaho 83676 Avista
1 witness who will stand for cross-exam on questions
2 regarding the sale agreement as presented by Mr. Perks?
3 A I will stand for questioning on part of
4 that. Some of it I may refer from a technical nature to
5 some of the other witnesses.
6 Q Okay. The sales agreement dated May 6th of
7 '99 which was filed with the Company's application,
8 Exhibit 1 in the application, we had -- does this
9 represent the agreement between the parties?
10 A This represents the agreement between the
11 parties and TECWA as the buyer, yes.
12 Q Okay. Schedule 3.3(b) of that indicates
13 sellers' government consents that were required and it
14 envisions regulatory filings in Oregon, Washington, Utah,
15 California, Wyoming and Idaho and also FERC. Are you
16 familiar with the status of the regulatory proceedings?
17 A Only those in Washington, Idaho and Oregon.
18 Q And do you know when the FERC filing was
19 made?
20 A Well, the FERC filing for Portland
21 General's share was made last year and we received
22 approval late in December of '99, and I'm not sure on the
23 others what the current status is.
24 Q Section 11.3 speaks to modification of
25 terms and indicates that --
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CSB REPORTING ELY (X)
Wilder, Idaho 83676 Avista
1 A Which section was that, Mr. Woodbury?
2 Q 11.3 -- and indicates that any modification
3 would be written, must be written. Has there been any
4 written modification to the agreement since May 6th?
5 A No, not that I'm aware of.
6 Q Is there any modification under present
7 consideration by the parties?
8 A Not that I'm aware of.
9 Q Section 11.1 speaks of termination and
10 indicates there will be a 180-day period from the filing
11 after the date hereof of all applications for approval.
12 Do you know what the date of the last regulatory filing
13 was which would trigger that 180 days?
14 A I don't know the exact date, but I know
15 what the end date was. It was Puget in the State of
16 Washington and it ended up with an end date of March 7th
17 of 2000 and you'd have to work it backwards through the
18 days to come up with the actual date of filing.
19 Q Okay. Sections 8.5, 8.5 and 9.5, deal with
20 no restraint and pertains to any filings to obtain an
21 injunction, restraining order, restrained prohibition,
22 action, suit, law or penalty regarding the transaction.
23 Do you know whether there have been any restraint-type
24 filings?
25 A May I just review quickly?
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CSB REPORTING ELY (X)
Wilder, Idaho 83676 Avista
1 Q I can't --
2 A May I just review it quickly?
3 Q Yes.
4 A I don't believe there has been any
5 certainly involving the parties at this point.
6 Q Section C of that states any action by any
7 government body that would threaten the imposition of any
8 penalty or material economic detriment if the transaction
9 was consummated. How are the parties defining "material
10 economic detriment" and do any of the proposals in this
11 case qualify as economic detriment if approved by the
12 Commission?
13 A I think when it says "material," I think
14 that would have to be determined by the parties at the
15 time that those orders were made to evaluate whether or
16 not they were material to the ongoing operation of the
17 business.
18 Q Well, with respect to Avista, you're
19 familiar with the recommendations of the parties in this
20 case?
21 A Yes, I am.
22 Q And if the Commission were to approve any
23 of those recommendations, would in the Company's mind
24 that constitute material economic detriment?
25 A We would have to evaluate that in light of
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CSB REPORTING ELY (X)
Wilder, Idaho 83676 Avista
1 the Washington orders and look at the long-term
2 consequences of the mine reclamation, the plant closure
3 costs and other things that may fit in the overall
4 scheme. In other words, we couldn't just look and say
5 based on this piece that that would make a determination
6 one way or another. It would be all the pieces together
7 would have to be evaluated in order to make a
8 determination.
9 Q Okay. Section 8.8 deals with condemnation
10 and do you know whether there's been any threatened
11 condemnation or eminent domain proceedings with respect
12 to Centralia?
13 A There have been none that I'm aware of.
14 Q And with respect to Section 3.16, Y2K
15 readiness, I'm assuming that you survived January 1st?
16 A Yes, everything went well under our Y2K
17 scenarios. It's still running.
18 Q Related to your direct testimony, page 3,
19 you speak of the sale of Centralia to TECWA and that it
20 was a competitive bidding process. Were there other
21 bidders -- were there bidders other than TECWA for
22 Centralia?
23 A Yes, there were.
24 Q And how many other bids were submitted?
25 A Under a confidentiality agreement that we
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CSB REPORTING ELY (X)
Wilder, Idaho 83676 Avista
1 have with the banker that put the deal together, we're
2 not allowed to disclose the number of bids, who the bids
3 were or what the prices were.
4 Q Okay. Are you familiar with the 22-year
5 history of Centralia?
6 A Yes, I am.
7 Q And you state that one of the reasons for
8 the sale was, I guess, the refusal of some of the
9 co-owners, their unwillingness to incur the debt with the
10 capital expense and scrubbers and can you recall any
11 other instances where capital investment was not made
12 because of a lack of unanimous consent regarding
13 Centralia?
14 A That plant is required to have unanimous
15 consent by all eight owners and over the period of the
16 history of that plant, there had been numerous times when
17 there have been projects delayed beyond what was, I
18 think, a recommended or prudent time frame simply because
19 all the owners would not agree to take and spend the
20 capital. There has been at least three that I'm aware of
21 where there was delays in either upgrading equipment
22 and/or doing various other things that would have
23 affected the plant's operation.
24 Q The co-owner agreement, does that provide
25 for a method of handling those instances where there's
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CSB REPORTING ELY (X)
Wilder, Idaho 83676 Avista
1 not initial unanimous consent?
2 A No, it does not. It says that it will be
3 unanimous consent for capital expenditures.
4 Q It doesn't throw it into arbitration or
5 anything?
6 A It does not.
7 Q Page 5 of your direct testimony you
8 represent that the proposed sale is in the public
9 interest and identify -- you make some representations
10 for the Commission to consider as satisfying that
11 criteria and you state that it eliminates uncertainties
12 regarding mine reclamation costs. Will it eliminate the
13 uncertainties or, as you talk about on page 4, just
14 reduce exposure to mine reclamation costs?
15 A From our standpoint, it would eliminate it
16 from our customers' responsibility. I think there is
17 still an unclear picture of how that mine reclamation
18 will be handled over the long term. If it's in TECWA's
19 hands, they have the responsibility to fund that and to
20 take care of the liabilities on it.
21 Q Will Avista have remaining exposure once
22 this sale closes?
23 A No. If the sale goes to TECWA, we will
24 have no remaining liability whatsoever. They take on
25 full obligation.
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CSB REPORTING ELY (X)
Wilder, Idaho 83676 Avista
1 Q And do you know what the Company's present
2 exposure is?
3 A We know an estimate of the mine reclamation
4 costs, an estimate of plant closure costs, and then of
5 plant demolition costs which could be in excess of
6 $400 million. Currently there are reserve funds that
7 each of the owners have or reclamation funds that each of
8 the owners have to take and fund that over a period of
9 time, but there's only enough dollars there if the plant
10 continues to run into the future and so that continues to
11 be collected.
12 Q And that $400 million figure is a figure
13 that the Company would be looking at a percentage of
14 should the sale not close?
15 A That is correct. Ours would be 15 percent
16 of that.
17 Q You also state that one of the benefits of
18 the sale is that the Company will have the ability to
19 conduct resource optimization strategies more
20 independently. Do you mean without consent of other
21 Centralia owners?
22 A Yes, that's correct. We would be able to
23 follow a path independent of the other owners that would
24 be in the best interests of our customers.
25 Q You're not speaking of your -- are you
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CSB REPORTING ELY (X)
Wilder, Idaho 83676 Avista
1 speaking of your resource optimization department there?
2 A I'm speaking of whether it's to build or
3 buy resources that would be not tethered to the other
4 owners as far as how they're operated or what capital
5 requirements might be as we move forward into the future.
6 Q You would agree with the Company witness
7 Johnson that the sale of a dispatchable resource reduces
8 to some degree the flexibility of the Company?
9 A It does if you replace it only with a
10 contract. If you decide to take and build, for instance,
11 a gas-fired generating plant, then you will receive that
12 flexibility back, in fact, probably additional
13 flexibility because you have a shorter lead time as far
14 as on and off and in fact, you can run those during heavy
15 and light load hours and so it actually gives you more
16 flexibility.
17 Q The Company has made no decision to
18 construct another generation resource at this time?
19 A Not at this time. We will make that
20 decision depending on what the outcome of this case is.
21 Q One of your other stated reasons for the
22 sale being in the public interest is that power costs to
23 customers will be reduced by approximately $7.7 million
24 on a present value basis over 20 years. Would you agree
25 that that number is largely speculative?
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CSB REPORTING ELY (X)
Wilder, Idaho 83676 Avista
1 A I wouldn't say that it is speculative.
2 What I would say is it's a point-in-time analysis of
3 forward pricing curves and those vary from day to day and
4 so it's no different than, I guess, if you would say
5 interest rates going forward is speculative what they're
6 going to be or cost of living increases are speculative,
7 I would agree with that statement, but for the most part,
8 they're studies and analyses that Mr. Johnson has done
9 based on current, forward pricing markets at a point in
10 time.
11 Q But Mr. Johnson's testimony is to the
12 extent -- well, it states that once you get out beyond
13 ten years, it's highly speculative.
14 A I think any time you get out beyond ten
15 years in today's economy and environment, no matter what
16 it is, it's highly speculative.
17 Q On page 5 you speak of the
18 no-harm-to-customers standard.
19 A Yes.
20 Q You've characterized it as a standard, and
21 you state that service quality and reliability with
22 replacement resource options will be at a level greater
23 than or equal to that presently provided by Centralia.
24 Are there any service quality and reliability
25 deficiencies with the Centralia plant other than the
29
CSB REPORTING ELY (X)
Wilder, Idaho 83676 Avista
1 co-ownership?
2 A Well, there has been, as I think you're
3 aware of, over the years difficulty in mining the coal at
4 Centralia. There's just from the standpoint of the coal
5 field itself, there are a number of months when we can be
6 flooded out of mining coal there, so there's an issue
7 around a physical piece as well as long-term air quality
8 issues that will have to be addressed.
9 Q How much of the fuel for the Centralia mine
10 is on site or what percentage?
11 A Basically, all of the fuel is on site for
12 Centralia. We have tried to bring in from Powder River
13 Basin some blending and do some different things to meet
14 various air quality requirements. One of the
15 difficulties we have is with the railroads and the
16 tariffs that are charged to move it there, it's cheaper
17 to burn the on-site coal and actually put on the
18 scrubbers, but one of the studies that was done when we
19 were looking at retrofitting the plant with the current
20 scrubbers that are being built, was it cheaper just to
21 bring outside coal that met the requirements or to go
22 ahead and mine and it was determined that it's cheaper to
23 go ahead and mine.
24 Q When you speak of pricing inventory, coal
25 inventory, by the last 100,000 tons of coal brought in by
30
CSB REPORTING ELY (X)
Wilder, Idaho 83676 Avista
1 rail, are you speaking of Centralia mine coal or are you
2 speaking of Powder River coal?
3 A Well, that that was brought in by rail is
4 Powder River coal, but the coal inventory itself, they
5 actually mine it and then inventory it at the plant site
6 because of the water problems and the flooding problems
7 they have at the mine that certain times they can't
8 mine. There are months, or least there's been at times
9 months, when they could not mine the coal and, therefore,
10 they would use out of the inventory pile.
11 Q So the coal will be priced based on Powder
12 River coal adjusted for some thermal?
13 A No. The coal is actually -- and it's
14 probably a question that goes better to either
15 Mr. Johnson or Mr. McKenzie.
16 Q Okay, I'll ask him.
17 A Yes.
18 Q You state that the Company's decision to
19 sell took into consideration projected replacement power
20 costs, on page 7 of your direct, but you would agree that
21 the Company has not made a decision with respect to
22 replacement power at this time?
23 A Long-term replacement power, that is
24 correct.
25 Q And short term being one to three years you
31
CSB REPORTING ELY (X)
Wilder, Idaho 83676 Avista
1 would be going to the market?
2 A Yes.
3 Q The fuel supply agreement with the
4 Centralia for coal, does that include some degree or
5 element of mine reclamation costs in the pricing?
6 A Yes, it does.
7 Q But it was envisioned that that would not
8 be total exposure of the parties?
9 A Well, it was envisioned that if the plant
10 ran through the life of the plant that, yes, it would,
11 but the question is in today's environment, is there
12 going to be additional requirements that would place it
13 above what has been so far reserved and, secondly, if you
14 close the plant today, not only do the mine reclamation
15 costs come today and you haven't had the additional years
16 to take and build up that reserve, but you also have a
17 mine closure cost to PacifiCorp in addition to then the
18 mine demolition costs of taking the plant out.
19 MR. WOODBURY: Thank you, Mr. Ely. I have
20 no further questions.
21 COMMISSIONER SMITH: Commissioner Hansen.
22 COMMISSIONER HANSEN: I have no questions.
23
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25
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CSB REPORTING ELY (X)
Wilder, Idaho 83676 Avista
1 EXAMINATION
2
3 BY COMMISSIONER SMITH:
4 Q Welcome to Idaho, Mr. Ely.
5 A Thank you, Commissioner Smith.
6 Q It's been a long time since we've seen
7 you.
8 A I know, this is a whole new room. It looks
9 very nice in here.
10 Q Thank you. I was just curious, I guess,
11 mostly if you know about the status of the applications
12 that needed to be made and have been made with regard to
13 the sale on behalf of the other partners, like PacifiCorp
14 or Puget.
15 A All of the applications have been made. As
16 far as the status, we have completed our hearings in
17 Washington and final briefings, I believe, are due the
18 end of next week and then an order will be issued after
19 that.
20 Q Okay, and then for the publics like
21 Seattle, Tacoma, Snohomish, Grays Harbor, do they do
22 anything besides get their board of directors' approval?
23 A No, and all they have to do is get their
24 commissioners' or board of directors' approval and that
25 was done a number of months ago, shortly after it was
33
CSB REPORTING ELY (Com)
Wilder, Idaho 83676 Avista
1 signed.
2 Q I guess I was trying to get a sense of
3 things that can't be known, like when they'll all be
4 finished and if approval was likely.
5 A That's a good question.
6 Q Because I see that the Company also has an
7 agreement to purchase the Snohomish County's share should
8 the sale fail to close.
9 A Yes, that is correct. Maybe just a little
10 background on that. When we went into the bid opening
11 meetings in Seattle in May, there was a lot of discussion
12 around whether or not people wanted to continue to put
13 money into the plant to put the scrubbers in, but that
14 was a requirement of the bid of TECWA is that we would
15 continue to fund the scrubber investment so that the
16 plant would be operable when the sale closed.
17 At that meeting there were a number of
18 parties that were concerned about and one party that was
19 unwilling to continue to put money in which said they
20 would just as soon close the plant, pay whatever costs
21 they had to pay to clean it up and reclaim it and
22 whatever and that was Portland General, and I had made
23 the offer to all of that group that if they wanted to
24 step away from the table, we would for a dollar, I would
25 pick up their liability and continue to fund the scrubber
34
CSB REPORTING ELY (Com)
Wilder, Idaho 83676 Avista
1 costs.
2 Snohomish stepped forward and that night
3 before we broke up said they wanted to see me and they
4 said that we would like to take you up on that offer only
5 if the deal doesn't go through because they said we do
6 not want to continue to invest. We will invest in order
7 to get the gain for our customers, but if the deal does
8 not go through, then we're not going to fund any more,
9 would you be willing to pick it up, plus what we had put
10 in between that date and the date we find out that it
11 either closes or not closes, so that's the deal that we
12 wrote with Snohomish.
13 Portland General decided that they did not
14 want to be in it. They tried levering the other
15 companies. We finally agreed to keep the thing on
16 schedule was to buy their part of the plant at cost and
17 if the deal goes through, then we pay them an additional
18 $1.1 million. If the deal doesn't go through, then we
19 bought the plant at cost, their two-and-a-half percent.
20 COMMISSIONER SMITH: Thank you. That's
21 helpful.
22 Do you have redirect, Mr. Dahlke?
23 MR. DAHLKE: Yes.
24
25
35
CSB REPORTING ELY (Com)
Wilder, Idaho 83676 Avista
1 REDIRECT EXAMINATION
2
3 BY MR. DAHLKE:
4 Q Mr. Ely, you may not recall, but I thought
5 I saw an order from FERC approving the sale to TECWA, not
6 the EWG order now, but just the general order approving
7 the sale. If I neglected to send that to you, I guess
8 you wouldn't recall, but do you recall seeing that order
9 or not?
10 A I don't recall seeing it.
11 MR. DAHLKE: Fine, thank you. I'll find a
12 different way to apprise everyone.
13 COMMISSIONER SMITH: Thank you for your
14 help, Mr. Ely.
15 THE WITNESS: Thank you.
16 (The witness left the stand.)
17 MR. DAHLKE: The next witness that Avista
18 Corporation was going to call is Mr. George Perks and we
19 conferred with counsel and determined that there were no
20 cross-examination questions for Mr. Perks. He was needed
21 at an owner's meeting of Colstrip today and so we had
22 asked that he could be excused personally and that his
23 testimony, his direct testimony, be spread on the record
24 as though he were here and those questions were asked of
25 him, so at this time I'd like to address whether that's
36
CSB REPORTING ELY (Di)
Wilder, Idaho 83676 Avista
1 acceptable to the parties and to the Commission.
2 MR. WOODBURY: Well, it was my actual
3 understanding that the Company's other witnesses,
4 Mr. Ely, would stand for cross on Mr. Perks' testimony,
5 not that we didn't have any questions.
6 MR. DAHLKE: I'm sorry, we did discuss that
7 others would respond on cross areas where Mr. Perks
8 otherwise would have been the witness, yes.
9 COMMISSIONER SMITH: Is there any objection
10 to Mr. Perks not personally appearing?
11 MR. WARD: I have no objections and have no
12 cross.
13 COMMISSIONER SMITH: I just had one
14 question. It was with the 180 days and what's the
15 drop-dead date, but I don't know if Mr. Ely's testimony
16 is that that was March 7th because I had calculated
17 February 6th, so if Mr. Ely's answer is March 7th, then
18 that's it. My question is answered.
19 MR. DAHLKE: It's March 7th.
20 COMMISSIONER SMITH: Thank you. All right,
21 then I will take that as a motion that Mr. Perks'
22 prefiled direct testimony be spread upon the record as if
23 read and so ordered.
24 (The following prefiled testimony of
25 Mr. George Perks is spread upon the record.)
37
CSB REPORTING COLLOQUY
Wilder, Idaho 83676
1 Q Please state your name, business address
2 and present position with Avista Corporation ("Avista").
3 A My name is George Perks and my business
4 address is East 1411 Mission Avenue, Spokane, Washington.
5 I am employed by Avista as Superintendent, Thermal
6 Operations.
7 Q Would you briefly describe your educational
8 and professional background?
9 A I am a graduate of the MEBA Marine
10 Engineering School, Baltimore MD. And also have an A.S.
11 degree in Industrial Education from Centralia College. I
12 have participated in several utility seminars and courses
13 including Electric Utility System Operation, General
14 Electric Large Steam Turbine Seminar and Westinghouse
15 Turbine Users Conferences.
16 Q How long have you been employed by Avista
17 and what are your present duties?
18 A I was first employed by Avista in 1981 as
19 Plant Superintendent of the Kettle Falls Generating
20 Station. I am currently Superintendent, Thermal
21 Operations and am responsible for the ownership
22 representative duties at the Centralia and Colstrip
23 Projects and am the purchaser representative on the
24 Mid-Columbia Projects for Avista.
25 Q What is the scope of your testimony in this
38
Perks, Di 1
Avista
1 proceeding?
2 A I describe the Centralia Power Plant
3 property being sold, the factors leading up to the sale
4 and the terms of the sale.
5 Q Would you please describe the Centralia
6 Power Plant property being sold?
7 A Yes. Avista owns a 15% interest in the
8 Centralia Power Plant, a
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Perks, Di 1a
Avista
1 1340-megawatt, coal-fired plant located near Centralia,
2 Washington. The other seven co-owners and their
3 ownership shares are: PacifiCorp 47.5%, City of Seattle
4 8.0%, City of Tacoma 8.0%, Snohomish PUD 8.0%, Puget
5 Sound Energy 7.0%, Grays Harbor County PUD 4.0%, and
6 Portland General Electric 2.5%. PacifiCorp is the sole
7 owner of the Centralia Mine which supplies coal under a
8 fuel supply agreement to the Centralia Power Plant. Both
9 the Centralia Power Plant and the Centralia Mine are
10 being sold to TECWA Power Inc. ("TECWA") a subsidiary of
11 TransAlta Corporation, headquartered in Calgary, Alberta,
12 Canada.
13 Q Would you please describe the factors
14 leading up to the sale?
15 A Management of Centralia is often difficult
16 due to the fact that there are eight owners with
17 different business reasons for their individual decisions
18 on issues. In years past this was not such a
19 significant problem, but as competition in the market has
20 increased, these differences have become more of a
21 problem. Since capital projects at the plant require
22 unanimous approval of all co-owners, this can lead to
23 difficulty in making decisions. There have been a number
24 of different opinions among the co-owners regarding
25 continued operation of the plant and the installation of
40
Perks, Di 2
Avista
1 emission control equipment. In October 1998 the
2 co-owners put the Centralia Power Plant and the Centralia
3 Mine up for auction. The co-owners believed that a
4 single owner, emerging from the auction, could deal most
5 effectively with the issues pertaining to continued
6 operation of the plant and the mine. Mr. Ely, a previous
7 Avista witness, addresses the selection of TECWA as the
8 winning purchaser.
9 Q Would you please generally describe the
10 terms of the sale?
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Perks, Di 2a
Avista
1 A Yes. TECWA has agreed to pay $454,698,000
2 for the Centralia Power Plant. Avista's 15% share
3 amounts to $68,204,700. The purchase price is reduced by
4 $2,100,000 for employee benefit obligations with Avista's
5 15% share amounting to $315,000. The purchase price is
6 further reduced by the amount of expected reclamation
7 accruals with Avista's share amounting to $8,610,000. In
8 addition, TECWA will be purchasing the supplies inventory
9 and the coal inventory. TECWA will reimburse the owners
10 for plant additions which occur subsequent to May 31,
11 1999. TECWA will also reimburse the owners for costs
12 incurred for the installation of emission control
13 equipment.
14 Q What factors will affect the amount of
15 proceeds Avista is to receive as a result of the sale to
16 TECWA?
17 A Avista's share of the proceeds is subject
18 to an adjustment which will be determined based on what
19 PacifiCorp's actual breakeven price of the mine turns out
20 to be in comparison to the sales price of the mine. Coal
21 inventory is being purchased at a price determined by the
22 cost of the last 100,000 tons of coal delivered by rail
23 adjusted by the heating value of the coal in inventory
24 delivered from the mine. The closing date of the sale
25 will also affect the gain as depreciation will continue
42
Perks, Di 3
Avista
1 to be accrued during the period of time Avista continues
2 to own the plant.
3 Q What is the termination date for closing
4 contained in the contract with TECWA?
5 A The termination date for closing as
6 contained in Section 11.1(d) is twelve months from the
7 May 6, 1999 signing of the contract or May 5, 2000.
8 Q Is there also an option to terminate the
9 contract in the case that timely orders are not issued
10 approving the sale?
11 A Yes. Section 11.1(b) of the contract
12 allows for termination if regulatory approvals are not
13 received within 180 days of filing. In its Application
14 in
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43
Perks, Di 3a
Avista
1 this proceeding Avista has requested expedited treatment
2 for approval of the sale. Avista requests that the
3 Commission approve the sale as soon as possible.
4 Q Does that conclude your direct testimony in
5 this proceeding?
6 A Yes, it does.
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Perks, Di 4
Avista
1 (The following proceedings were had in
2 open hearing.)
3 MR. DAHLKE: The next witness that we would
4 call is Mr. William Johnson.
5
6 WILLIAM G. JOHNSON,
7 produced as a witness at the instance of Avista
8 Corporation, having been first duly sworn, was examined
9 and testified as follows:
10
11 DIRECT EXAMINATION
12
13 BY MR. DAHLKE:
14 Q Please state your name and position.
15 A My name is William Johnson. I'm a power
16 contracts analyst in the resource optimization department
17 of Avista.
18 Q And have you caused prepared testimony to
19 be filed in this matter?
20 A Yes, I have.
21 Q Do you have that testimony with you?
22 A Yes.
23 Q Do you have any corrections or changes to
24 your prefiled testimony?
25 A No, I do not.
45
CSB REPORTING COLLOQUY
Wilder, Idaho 83676 Avista
1 Q And you are also sponsoring two exhibits;
2 is that correct?
3 A That's correct.
4 Q And they've been premarked as Exhibits
5 Nos. 1 and 2?
6 A That's correct.
7 Q If I were to ask you the questions
8 contained in your prefiled testimony, would your answers
9 today be the same?
10 A Yes.
11 MR. DAHLKE: With that, we'd request that
12 Mr. Johnson's testimony be spread on the record and that
13 Exhibits numbered 1 and 2 be admitted.
14 COMMISSIONER SMITH: If there's no
15 objection, it is so ordered.
16 (Avista Corporation Exhibit Nos. 1 & 2
17 were admitted into evidence.)
18 (The following prefiled direct
19 testimony of Mr. William Johnson is spread upon the
20 record.)
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22
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46
CSB REPORTING COLLOQUY
Wilder, Idaho 83676 Avista
1 Q Please state your name, business address,
2 and present position with Avista Corporation ("Avista").
3 A My name is William G. Johnson. My business
4 address is East 1411 Mission Avenue, Spokane, Washington,
5 and I am employed by the company as a Power Contracts
6 Analyst in the Resource Optimization Department.
7 Q What is your educational background?
8 A I graduated from the University of Montana
9 in 1981 with a Bachelor of Arts Degree in Political
10 Science/Economics. I obtained a Master of Arts Degree in
11 Economics from the University of Montana in 1985.
12 Q How long have you been employed by the
13 company and what are your duties as a Power Contracts
14 Analyst?
15 A I started working for Avista in April 1990
16 as a Demand Side Resource Analyst. I joined the Resource
17 Optimization Department as a Power Contracts Analyst in
18 June 1996. My primary responsibilities include the
19 evaluation of the company's long term electricity supply
20 and wholesale opportunities.
21 Q What is the scope of your testimony in this
22 proceeding?
23 A My testimony will examine the future cost
24 of owning and operating the Centralia plant and the cost
25 of replacement power options.
47
Johnson, Di 1
Avista
1 Q Are you sponsoring any exhibits to be
2 introduced in this proceeding?
3
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Johnson, Di 1a
Avista
1 A Yes. I am sponsoring Exhibit No(s). 1 and
2 2, as previously marked for identification, which were
3 prepared under my supervision and direction.
4 Q What is the projected cost of continued
5 operation of the Centralia plant under the current
6 ownership arrangement?
7 A The total cost of the Centralia plant is
8 estimated to be $26.45/MWh in 2000 increasing to
9 $35.50/MWh in the year 2020 as shown on page 1 of Exhibit
10 No. 1. This cost includes fuel, operation and
11 maintenance, and the return of and return on both
12 existing and future capital expenditures. The cost also
13 includes transmission expense and the expense to fund
14 future mine reclamation costs. Current plans for the
15 plant include the installation of scrubbers to bring the
16 plant into compliance with the Clean Air Act, which is
17 expected to be completed by 2003. The total plant cost
18 shown on page 1 of Exhibit No. 1 includes the cost of
19 scrubbers and other required capital expenditures.
20 Q What are the replacement power options for
21 the Centralia plant?
22 A The company has several options available
23 to replace power from the Centralia plant. In the
24 short-term, 1 to 3 years, replacement power will most
25 likely come from short-term market purchases or a 1 to 3
49
Johnson, Di 2
Avista
1 year purchase from the new plant owner's power marketing
2 group, TransAlta Energy Marketing (U.S.) Inc. Any power
3 purchase agreement with TransAlta would not begin before
4 and would be contingent on the sale of the plant.
5 In the long-term, replacement power could
6 come from purchases, new generation facilities, and/or
7 demand side options. Avista
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Johnson, Di 2a
Avista
1 is exploring several options for new combined cycle
2 combustion turbine plants. Given construction lead
3 times, a new plant would not be available until after
4 2002.
5 Q How does the cost of replacement power
6 compare with the cost of continued operation of the
7 Centralia plant?
8 A Since no replacement power options have
9 been finalized the actual cost is not known. Based on
10 current estimates, short-term purchases of replacement
11 power at the Mid Columbia would cost in the range of $25
12 to $30/MWh for a 1 to 3 year firm energy product with a
13 monthly shape similar to Centralia's average monthly
14 generation. Page 2 of Exhibit No. 1 shows the estimates
15 of replacement power costs.
16 A new combined cycle combustion turbine
17 plant is estimated to cost around $30/MWh in 2003 based
18 on a projected natural gas price of $2.50/MMBtu. Future
19 turbine costs would fluctuate depending on the cost of
20 natural gas.
21 Replacement power may be somewhat lower
22 cost than the total cost of operating Centralia in the
23 near-term, however, the incremental cost of operating the
24 plant (fuel and O&M) will likely be lower than market
25 rates. Also, the Centralia plant is dispatchable,
51
Johnson, Di 3
Avista
1 meaning it can be shut down or operated at lower output,
2 when market prices are lower than the incremental costs
3 of operating the plant. Market purchases are not
4 dispatchable, making market purchases less advantageous
5 from a resource flexibility perspective. Because
6 Centralia's total plant cost will probably increase at a
7 slower rate than market prices, the plant is estimated to
8 have total costs close to market rates around the
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Johnson, Di 3a
Avista
1 year 2010. Exhibit No. 2 compares total plant costs and
2 the variable costs of the plant to projected replacement
3 power rates.
4 Have you calculated the benefits of
5 replacement power versus plant cost?
6 A Yes I have. Based on the total cost of the
7 Centralia plant and the medium case projection of
8 replacement power the 20 year present value benefit of
9 replacement power is $7.7 million. For perspective, the
10 present value of total plant cost is around $380 million
11 over the same period.
12 Q Would you please summarize your testimony?
13 A Yes. The projected cost of replacement
14 power is slightly less than the cost of continued
15 operation of the Centralia power plant. The 20 year
16 present value savings of replacement power is estimated
17 to be $7.7 million.
18 Q Does that conclude your direct testimony?
19 A Yes.
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53
Johnson, Di 4
Avista
1 (The following proceedings were had in
2 open hearing.)
3 MR. DAHLKE: I apologize, Commissioners, I
4 forgot to ask Mr. Johnson about his rebuttal testimony.
5 I think that we would propose that we take rebuttal and
6 direct together.
7 COMMISSIONER SMITH: Mr. Dahlke, that's at
8 your pleasure if you choose to do that.
9
10 DIRECT EXAMINATION
11
12 BY MR. DAHLKE: (Continued)
13 Q Mr. Johnson, did you also prepare prefiled
14 rebuttal testimony for this proceeding?
15 A Yes, I did.
16 Q And if I were to ask you the questions
17 contained in your prefiled rebuttal testimony, would your
18 answers be the same as contained therein?
19 A Yes.
20 Q Were there any exhibits to your prefiled
21 rebuttal testimony?
22 A No, there weren't.
23 MR. DAHLKE: Then we would request that
24 both the direct and prefiled rebuttal testimony of
25 Mr. Johnson be spread on the record and that Exhibits
54
CSB REPORTING JOHNSON (Di)
Wilder, Idaho 83676 Avista
1 numbered 1 and 2 be admitted.
2 COMMISSIONER SMITH: Okay. Just looking at
3 page 1 of Mr. Johnson's rebuttal on line 20, did you mean
4 to indicate that that's an answer and not a question?
5 MR. DAHLKE: Yes, he did.
6 COMMISSIONER SMITH: All right, with that
7 correction, then, we would spread the prefiled rebuttal
8 testimony of Mr. Johnson upon the record as if read.
9 (The following prefiled rebuttal
10 testimony of Mr. William Johnson is spread upon the
11 record.)
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55
CSB REPORTING JOHNSON (Di)
Wilder, Idaho 83676 Avista
1 Q Please state your name, business address,
2 and present position with Avista Corporation ("Avista").
3 A My name is William G. Johnson. My business
4 address is East 1411 Mission Avenue, Spokane, Washington.
5 I am employed as a Power Contracts Analyst in the
6 Resource Optimization Department.
7 Q Have you previously provided direct
8 testimony in this proceeding?
9 A Yes.
10 Q What is the scope of your rebuttal
11 testimony in this proceeding?
12 A My testimony will respond to issues raised
13 by Mr. Lobb's direct testimony on behalf of Idaho Public
14 Utilities Commission staff.
15 Q Are you sponsoring any exhibits with your
16 rebuttal testimony?
17 A No.
18 Q On page 9, line 11, Mr. Lobb answers yes to
19 his question asking if the economic benefit of the sale
20 demonstrated in the company's analysis is unreliable. Do
21 you agree with his assertion and explanation of why the
22 benefits of the economic analysis are unreliable?
23 A No. Mr. Lobb correctly points out that
24 changes in critical assumptions change the results of the
25 analysis. I wholeheartedly agree that long-term
56
Johnson, Reb 1
Avista
1 projections of energy and fuel prices are highly
2 uncertain. Mr. Lobb provides examples of why the
3 benefits of the sale may be reduced, including: lower
4 coal cost escalation, higher market prices for
5 electricity, and higher natural gas prices that would
6 cause combustion turbine costs and market prices to
7 increase. These examples are all possibilities.
8 However, it is also possible that
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Johnson, Reb 1a
Avista
1 the benefits of selling the plant may be greater than
2 anticipated. For example, the effective coal cost at
3 Centralia could increase faster than expected due to
4 environmental reasons related to mine reclamation costs.
5 It is also possible that market energy prices will not
6 increase at the rate of inflation as has been assumed in
7 the company's analysis. History has shown that
8 continuously increasing market electricity prices is not
9 necessarily a valid assumption. Market energy prices
10 actually decreased from 1985 to 1998. Currently, the
11 forecast is for market prices to increase, but that was
12 also the projection for energy prices in forecasts
13 produced in the 1980s.
14 In the past, energy price forecasts,
15 showing continuously escalating prices, have been subject
16 to extreme errors. For example, in 1990 BPA forecast the
17 New Resource/Surplus Firm power rate, representing a
18 proxy for the market price and new resources, to be
19 $57.10/MWh in 2000 rising to $115.90/MWh in 2011. Actual
20 market/new resource rates are less than one-half that in
21 the year 2000. Looking back, there may be plausible
22 explanations for why prices didn't increase, but it is
23 very unlikely that anyone in 1985 would have predicted
24 prices to be lower in 1998.
25 Uncertainties in the long-term projections
58
Johnson, Reb 2
Avista
1 of plant costs and the cost of alternatives mean that the
2 economic benefits of selling the plant could be either
3 better or worse than estimated in the company's analysis.
4 I don't believe that anyone can definitively determine
5 that the risks of selling outweigh the risks of keeping
6 the plant. The fact that long-term projections are
7 subject to a high degree of uncertainty does not
8 necessarily make the company's analysis of the economic
9 benefits of selling the plant unreliable or the risk of
10 selling the plant greater than the potential benefit.
11
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15
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17
18
19
20
21
22
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25
59
Johnson, Reb 2a
Avista
1 Q On page 11, line 23, Mr. Lobb recommends
2 that the gain on the sale be shared with ratepayers to
3 sufficiently demonstrate that customers are not harmed by
4 the transaction. Do you agree with that recommendation?
5 A No I do not. We know that in the next few
6 years the cost of the Centralia plant is going to go up
7 related to compliance with air quality requirements.
8 Based on market price quotes for longer-term power
9 purchases (through 2010), Avista believes that
10 replacement power will be less costly than projected
11 plant costs over the next 10 years. We have more
12 confidence in our projections of costs and prices over
13 the next ten years then in the period beyond 10 years.
14 So for at least the next 10 years we believe customers
15 will either benefit or be held harmless from a sale of
16 the plant. Beyond 10 years both the cost of the plant
17 and the cost of replacement alternatives are speculative.
18 Q Is there precedent for focusing on the next
19 10 years with regard to resource planning?
20 A Yes there is. In Avista's last Integrated
21 Resource Plan (IRP) in 1997, the company was allowed by
22 the Idaho Public Utilities Commission to conduct a
23 10-year plan. The company proposed this change primarily
24 because there is so much uncertainty beyond 10 years.
25 Beyond 10 years there is a lot of uncertainty regarding
60
Johnson, Reb 3
Avista
1 the structure of the industry, what our load obligations
2 might be, future generation technologies, fuel costs and
3 environmental regulation. While it may not be
4 appropriate to limit the evaluation of Centralia to 10
5 years, it may be appropriate to put a greater emphasis on
6 the first 10 years when some of the unknowns are more
7 predictable.
8 Q Would you please summarize your testimony?
9 A Yes. Mr. Lobb recommends that the gain of
10 the sale be shared with ratepayers to sufficiently
11 demonstrate that customers will not be
12
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16
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18
19
20
21
22
23
24
25
61
Johnson, Reb 3a
Avista
1 harmed by the transaction. I believe that recommendation
2 makes an implicit assumption that there is more downside
3 risk to the sale of the plant than there is potential for
4 even greater benefit than the company has included in its
5 analysis. I don't believe that is necessarily the case,
6 but is more a result of the common assumption that energy
7 prices might increase at a faster rate than inflation.
8 The opposite has occurred over the past 15 years. There
9 are uncertainties regarding both the projected plant
10 costs and the cost of alternatives and the benefits of
11 selling the plant could turn out to be even greater than
12 anticipated.
13 Customers will not be harmed in the
14 near-term from a sale of the plant. We know that in the
15 next few years the cost of the Centralia plant is going
16 to go up related to compliance with air quality
17 requirements. We also believe that replacement power
18 options will be less than projected plant costs over the
19 next 10 years. Beyond 10 years there is a lot of
20 uncertainty and it may be appropriate to put a greater
21 emphasis on the first 10 years when some of the unknowns
22 are more predictable. It is not necessary that the gain
23 on the sale be shared with ratepayers to sufficiently
24 demonstrate that customers will not be harmed by the
25 transaction.
62
Johnson, Reb 4
Avista
1 Q Does that conclude your rebuttal testimony?
2 A Yes.
3
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63
Johnson, Reb 4a
Avista
1 (The following proceedings were had in
2 open hearing.)
3 COMMISSIONER SMITH: Mr. Ward, do you have
4 questions for Mr. Johnson?
5 MR. WARD: I do not. Thank you.
6 COMMISSIONER SMITH: Mr. Woodbury.
7 MR. WOODBURY: Thank you, Madam Chair.
8
9 CROSS-EXAMINATION
10
11 BY MR. WOODBURY:
12 Q Mr. Johnson, you're a part of the Company's
13 resource optimization department?
14 A That's correct.
15 Q And you evaluate long-term electricity
16 supply, wholesale opportunities as part of your duties?
17 A That's part of it, right.
18 Q And as part of your duties, you're also
19 responsible for making projections?
20 A I'm one of the people who makes price
21 projections in the Company.
22 Q And did you -- were you the one that put
23 together the projected costs of continued operation of
24 Centralia?
25 A Yes, I was.
64
CSB REPORTING JOHNSON (X)
Wilder, Idaho 83676 Avista
1 Q And you indicated a $26.45 per
2 megawatt-hour total cost estimate for year 2000. Do you
3 know, you made this a few months ago, do you know what
4 the present cost of operation is of Centralia? Is it
5 higher or lower than your estimate?
6 A I would assume it's around that, even
7 though we don't do an estimate on a monthly basis of the
8 cost.
9 Q Would you agree that after the sale Avista
10 will no longer be, if the sale is approved, be privy to
11 information regarding Centralia operating costs?
12 A I believe that would be correct.
13 Q You also discuss replacement power options
14 in your testimony, but you state that essentially no
15 replacement power options have been finalized; is that
16 correct?
17 A We have made a replacement purchase, a
18 short-term replacement purchase.
19 Q Then so on page 3, line 6, where you say no
20 replacement power options have been finalized, then
21 that's not correct at this point?
22 A At the time this was prepared that was
23 correct, but since then we have made an arrangement.
24 Q Okay, what type of an arrangement have you
25 made?
65
CSB REPORTING JOHNSON (X)
Wilder, Idaho 83676 Avista
1 A Well, I need to ask Mr. Dahlke because we
2 have some confidentiality around that arrangement.
3 MR. WOODBURY: Okay.
4 COMMISSIONER SMITH: Do you want to be at
5 ease for a moment or how do you want to do this? I know,
6 let's take a five-minute break. We'll be at recess for
7 about five minutes.
8 (Recess.)
9 COMMISSIONER SMITH: All right, we'll go
10 back on the record. I believe Mr. Woodbury was asking
11 questions.
12 Q BY MR. WOODBURY: Mr. Johnson, it's my
13 understanding from your prior testimony that the Company
14 has entered into a contract for replacement power.
15 A That's correct.
16 Q And it's also my understanding that the
17 terms of that contract, including pricing and length, are
18 confidential.
19 A That's true.
20 Q And should the Commission or other party
21 desire to view that, I don't believe there's a
22 proprietary confidentiality agreement in this case, but
23 one could be executed and the Company would provide that?
24 A That's my understanding.
25 Q And your familiarity with the terms of the
66
CSB REPORTING JOHNSON (X)
Wilder, Idaho 83676 Avista
1 agreement, would your testimony be changed in any way?
2 A No, it would not.
3 Q Okay. Looking to your rebuttal testimony,
4 you take issue with Mr. Lobb's, Staff's, statement that
5 the economic benefit analysis of the Company is
6 unreliable, and yet you go on to state that he correctly
7 points out that changes in the critical assumptions
8 change the results of the analysis and that you would
9 agree that long-term projections are highly uncertain
10 with respect to energy and fuel prices and that the
11 economic benefits of selling the plant could be either
12 better or worse than estimated; is that right?
13 A That's his statement, yes.
14 Q Can you push the microphone up? If the
15 estimated benefits can be better or worse than projected,
16 doesn't that say something about the reliability of the
17 analysis?
18 A I believe there is uncertainty in the
19 analysis. There's uncertainty of what the plant will
20 cost in the future, there's uncertainty of what
21 replacement power purchases will be, but I think there's
22 a symmetry to the uncertainty on both sides.
23 Q To the extent that the benefits could be
24 either better or worse, isn't it just as reasonable to
25 project a $7.7 million loss over 20 years?
67
CSB REPORTING JOHNSON (X)
Wilder, Idaho 83676 Avista
1 A My base case analysis is there will be a
2 gain, but it's certainly possible there could be a
3 $7.7 million loss.
4 COMMISSIONER KJELLANDER: Mr. Johnson, I'm
5 sorry to interrupt, could you please move closer to your
6 microphone? Thank you.
7 Q BY MR. WOODBURY: You state with some
8 certainty that Centralia plant costs will increase in the
9 next few years. Are you referring there to the cost of
10 scrubbers and emission control equipment?
11 A Primarily the addition of the scrubbers,
12 generation rewinds, some other large capital expenditures
13 that need to be made at the plant, plus escalation in
14 fuel costs and O&M.
15 Q Any offsetting decrease in costs that
16 you're aware of that are on the horizon?
17 A Not that I'm aware of.
18 Q I did have a question that I asked Mr. Ely
19 regarding the coal, but I was told that Mr. McKenzie
20 would be the better person to ask regarding that.
21 A I guess it would be what the question is
22 about the coal. If it's about the coal supply issues, I
23 might know more about it than Mr. McKenzie.
24 Q I think it was regarding the pricing of the
25 coal inventory.
68
CSB REPORTING JOHNSON (X)
Wilder, Idaho 83676 Avista
1 A I'm not aware of the accounting procedures
2 to price the coal inventory.
3 Q All right. At page 3 of your rebuttal
4 testimony, you state that the -- you're speaking of the
5 Company's 1997 integrated resource plan and the
6 Commission authorizing a change from 20 years to 10 years
7 as far as the forecast period.
8 A That's correct.
9 Q And you state that the Company proposed a
10 change because of uncertainty beyond 10 years and then
11 you identified some areas of that uncertainty, one being
12 structure of the industry. Can you indicate with some
13 certainty what changes will occur in the industry in the
14 next three years or ten years?
15 A I don't know any specific examples of what
16 might occur, but --
17 Q Do you know what Avista's load obligations
18 will be three years from now?
19 A I don't know for certain, but I suspect
20 they would be similar to what they are now.
21 Q You suspect what?
22 A They'd be similar to what they are now with
23 some slight growth.
24 Q Do you know what new technologies we'll see
25 in the next ten years?
69
CSB REPORTING JOHNSON (X)
Wilder, Idaho 83676 Avista
1 A I don't know which ones will be
2 commercially available and applicable, no.
3 Q And do you know what changes in
4 environmental regulation you would probably see in the
5 next ten years?
6 A I know what some of the possibilities are,
7 but I don't know what will be applied, necessarily.
8 MR. WOODBURY: Thank you, Mr. Johnson.
9 Madam Chair, Staff has no further questions
10 of Mr. Johnson.
11 COMMISSIONER SMITH: Do the Commissioners
12 have questions of Mr. Johnson?
13 Redirect, Mr. Dahlke?
14 MR. DAHLKE: No, thank you.
15 COMMISSIONER SMITH: Thank you for your
16 help, Mr. Johnson.
17 (The witness left the stand.)
18 MR. DAHLKE: Our next witness is Mr. Thomas
19 Dukich.
20
21
22
23
24
25
70
CSB REPORTING JOHNSON (X)
Wilder, Idaho 83676 Avista
1 THOMAS D. DUKICH,
2 produced as a witness at the instance of Avista
3 Corporation, having been first duly sworn, was examined
4 and testified as follows:
5
6 DIRECT EXAMINATION
7
8 BY MR. DAHLKE:
9 Q Mr. Dukich, you might try to lean forward
10 to the mike. With the blower, it was a little hard to
11 hear Mr. Johnson, but it's much more comfortable with the
12 blower.
13 A How is that?
14 Q Better, magic. Would you please state your
15 name and position?
16 A My name is Tom Dukich. I'm the rates
17 director at Avista.
18 Q And, Mr. Dukich, have you prepared and
19 filed prefiled direct testimony in this matter and
20 prefiled rebuttal testimony?
21 A I have.
22 Q And do you have any corrections or changes
23 to either your prefiled direct testimony or your prefiled
24 rebuttal testimony?
25 A I do not.
71
CSB REPORTING DUKICH (Di)
Wilder, Idaho 83676 Avista
1 Q If I were to ask you the questions
2 contained in your prefiled direct testimony and your
3 prefiled rebuttal testimony, would your answers be the
4 same as contained therein?
5 A They would.
6 Q And are you also sponsoring some exhibits
7 for us today?
8 A Yes.
9 Q Can you tell us what exhibits those are?
10 A The exhibits, I believe, are all in the
11 direct testimony.
12 Q Exhibits 3, 4, 5 and 6?
13 A Yes.
14 MR. DAHLKE: I'd request that Mr. Dukich's
15 testimony be spread on the record and that the exhibits
16 that he's sponsoring, Exhibits 3, 4, 5 and 6, be admitted
17 into evidence.
18 COMMISSIONER SMITH: If there is no
19 objection, we will spread the prefiled testimony of
20 Mr. Dukich upon the record as if read and admit
21 Exhibits 3 through 6.
22 (Avista Corporation Exhibit Nos. 3 - 6
23 were admitted into evidence.)
24 (The following prefiled direct and
25 rebuttal testimony of Mr. Thomas Dukich is spread upon
the record.)
72
CSB REPORTING DUKICH (Di)
Wilder, Idaho 83676 Avista
1 I. INTRODUCTION
2 Q. Please state your name, business address
3 and present position with the Company?
4 A. My name is Thomas D. Dukich. My business
5 address is East 1411 Mission Avenue, Spokane, Washington.
6 I am the Manager of Rates and Tariff Administration. I
7 joined the Company in 1978 after having been previously
8 employed as an Associate Professor at Gonzaga University.
9 Q. Would you briefly describe your duties?
10 A. My responsibilities as Rates Manager
11 include the formulation and management of the Company's
12 plans and activities related to the regulation of gas and
13 electric services in the states of Washington, Idaho,
14 Oregon, and California.
15 Q. Would you describe your educational
16 background?
17 A. I graduated from the University of
18 Minnesota in 1967 with a B.A. in Psychology and Business,
19 and from the University of Montana in 1972 with M.A. and
20 Ph.D. degrees in Experimental Psychology, Statistics and
21 Research Design. During my 20 years of employment at
22 Avista I have completed courses and seminars on strategic
23 planning, forecasting, finance, accounting, rate design
24 and pricing.
25 Q. What is the scope of your testimony?
73
Dukich, Di 1
Avista
1 A. I discuss the basis for Avista's proposal
2 relating to the disposition of the book gain resulting
3 from the sale of Centralia ("the sale"). In my testimony
4 I attempt to provide a general framework of issues for
5 the Commission to consider rather than focusing on a
6 specific methodology regarding the disposition of the
7 gain. I also briefly discuss the Company's position
8 regarding the depreciation-based proposal put forth by
9 PacifiCorp.
10
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12
13 /
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16
17
18
19
20
21
22
23
24
25
74
Dukich, Di 1a
Avista
1 Q. Are you sponsoring any exhibits in this
2 proceeding?
3 A. Yes, I am sponsoring Exhibit Nos. 3, 4, 5
4 and 6, as marked for identification. I will introduce
5 and describe these exhibits, as appropriate, later in my
6 testimony.
7 II. GAIN ON THE SALE
8 Q. Has the Company concluded that it is in the
9 public interest to sell Avista's share of Centralia?
10 A. Yes, for the various reasons summarized in
11 Mr. Ely's testimony.
12 Q. Is there a gain on the sale of the
13 Company's share of Centralia?
14 A. Yes. The after-tax gain related to the
15 sale of the Company's 15% ownership share is
16 approximately $29.6 million. Mr. McKenzie testifies to
17 the calculation of this book gain.
18 Q. Is it necessary to include the book gain in
19 the economic analysis in order to satisfy a "no-harm" to
20 customers standard as a result of the sale?
21 A. No. Mr. Johnson's analysis shows a present
22 value of cost savings to customers of $7.7 million over
23 the 20-year study period. His analysis excludes the book
24 gain on the sale. Therefore, the book gain represents
25 additional value over and above the no-harm to customers
75
Dukich, Di 2
Avista
1 standard.
2 Q. What should the Commission take into
3 consideration in its decision related to the disposition
4 of the gain?
5 A. The Commission should consider various
6 alternatives and, most importantly, should consider the
7 soundness of the rationale underlying these alternatives.
8 In addition, the Commission may want to consider how
9 these alternatives relate to the unique
10
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12
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16
17
18
19
20
21
22
23
24
25
76
Dukich, Di 2a
Avista
1 circumstances of each of the companies involved in the
2 sale, i.e., the disposition of the gain for Avista may
3 appropriately be different than that for PacifiCorp.
4 III. PROPOSAL
5 Q. Turning now to the Company's proposal for
6 the disposition of the gain on the sale of Centralia,
7 what are you recommending?
8 A. I am asking the Commission to consider
9 allowing Avista to retain all of the book gain relating
10 to the sale. Admittedly, this may be viewed by some as
11 an "aggressive" position for the Company to take. But I
12 believe there are circumstances that warrant giving this
13 proposal serious consideration. Should the Commission
14 decide that 100% is not appropriate, the Company believes
15 there is still a rational and reasonable basis that would
16 support a shareholder retention level above the
17 depreciation based approach proposed by PacifiCorp. I
18 also recommend that the Commission consider the gain in
19 its historical context. I believe that a discussion that
20 puts the gain in an historical context unique to Avista
21 will provide useful information for the Commission to
22 consider, regardless of the methodology the Commission
23 ultimately adopts.
24 Q. What principle do you believe the
25 Commission should consider in determining how to treat
77
Dukich, Di 3
Avista
1 the gain on the sale of the Centralia Power Plant?
2 A. I believe the Commission should consider
3 whether the transaction strikes a balance between the
4 interests of ratepayers and shareholders that is fair,
5 and that preserves affordable service. So, the first
6 element I suggest the Commission consider is the
7 historical balance that has evolved over the years
8 between Avista customers and
9
10 /
11
12 /
13
14 /
15
16
17
18
19
20
21
22
23
24
25
78
Dukich, Di 3a
Avista
1 Avista shareholders, and take this balance into account
2 in its determination of a fair and equitable disposition
3 of the gain.
4 Q. What is the other element?
5 A. The second element is related to fairness.
6 It is the notion that the benefit of a gain should follow
7 the risk of possible loss. It would seem to be equitable
8 that if shareholders take risk, that risk should result
9 in occasional gains, not just exclusively losses. Stated
10 another way, a policy that awards all or most of the
11 gains to customers, and occasional losses to shareholders
12 would seem to be inequitable.
13 Q. Please explain further the first element
14 related to the balance that has evolved over the years
15 between Avista customers and Avista shareholders.
16 A. Exhibit No. 3 shows Avista's overall
17 electric rate of return since 1973, the first full year
18 Centralia was placed in utility service. It is clear
19 from Exhibit No. 3 that, more often than not, Avista's
20 rate of return has been below that considered fair and
21 reasonable and authorized by the Commission. Certainly,
22 it is clear that Avista's rate of return has not been
23 guaranteed during these years. And, I think it is fair
24 to say, Avista shareholders have not been unduly enriched
25 during this time.
79
Dukich, Di 4
Avista
1 Exhibit No. 4 shows how Avista's Residential rates
2 have compared with over 200 other investor owned
3 utilities for the last 20 years (1978 to 1999). Rates
4 for residential customers have consistently been among
5 the very lowest in the United States, most often ranking
6 third lowest or better. A typical bill for an Avista
7 electric customer has averaged about one-half the U.S.
8 average.
9 Q. What do you conclude from these two
10 exhibits?
11
12 /
13
14 /
15
16 /
17
18
19
20
21
22
23
24
25
80
Dukich, Di 4a
Avista
1 A. Customers seem to have been exceptionally
2 well served over the past 20 years in terms of rate
3 levels, and it appears that shareholders have not been
4 unduly enriched during this time.
5 Furthermore, the Company has consistently received
6 high marks for its customer service. For example,
7 Theodore Barry & Associates, in an independent survey of
8 electric utilities in 1998, ranked the Company number one
9 in overall customer service performance. The Company
10 surpassed 33 other energy providers for the lowest annual
11 customer service expense, while receiving one of the
12 highest customer satisfaction ratings in the survey
13 group. In 1999, Avista's customer service call center
14 was selected as the Best Call Center of the Year by Call
15 Center Magazine.
16 Q. Did shareholders suffer any losses during
17 the time periods covered by Exhibit Nos. 307 and 308?
18 A. Yes, and this leads to the notion that the
19 benefit of a gain should follow the risk of possible
20 loss.
21 Exhibit No. 5 shows the major write-offs booked by
22 Avista since 1985. The after-tax total for the electric
23 utility system is $58.7 million; pre-tax write-offs were
24 in excess of $96 million. These include write-offs
25 associated with Skagit, WNP-3, Kettle Falls, Creston and
81
Dukich, Di 5
Avista
1 the sale of Meyers Falls.
2 Exhibit No. 6 helps put these write-offs in the
3 context of the Company's net utility plant investment
4 since 1985. Between 1985 and 1998, electric net utility
5 plant has increased by $52.2 million. Gross plant
6 investment has increased by $601.6 million. A comparison
7 of Exhibit Nos. 5 and 6 shows that after tax write-offs
8 have exceeded the change in net plant investment since
9 1985. In terms of incremental gross plant investment
10
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13 /
14
15 /
16
17
18
19
20
21
22
23
24
25
82
Dukich, Di 5a
Avista
1 since 1985, approximately 10% has been written off, after
2 tax. On a before tax basis, 16% of incremental gross
3 plant investment has been written off.
4 Q. Are you claiming that the Company was
5 treated unfairly by having to incur such significant
6 write-offs?
7 A. Fairness in past Commission decisions is
8 not really the issue here. This is not a matter of
9 second guessing the Commission with regard to prudence
10 and I am not contending that the Commission should ignore
11 the "used and useful" standard or any other rule or law.
12 What is relevant is that the shareholders took risk in
13 making these investments in order to discharge the
14 utility's public service obligations. The net result is
15 that shareholders did not realize a return on their
16 investment, or did not recover all of their investment,
17 or both. In other words, they took a risk and lost.
18 In the specific case of Kettle Falls and WNP-3,
19 shareholders took a risk in building a resource and in
20 subsequent regulatory proceedings were not allowed to
21 recover all of the costs. Again, the exact reason for
22 taking the write-offs is not the most important point.
23 The important point is that significant after tax
24 write-offs have occurred approximately 10% of gross plant
25 investment since 1985. Shareholders are exposed to
83
Dukich, Di 6
Avista
1 unexpected losses. There is no guaranteed return on the
2 investments, or guaranteed return of the investments.
3 Unexpected shareholder losses are not recovered.
4 The question then becomes: If there is an
5 unexpected gain, who should get it, shareholders or
6 customers?
7 Q. Are you familiar with any situation where
8 shareholders took a risk and won? For example, are you
9 familiar with any situation where shareholders took a
10 risk in
11
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Dukich, Di 6a
Avista
1 building a resource, or making a purchase, and in a
2 subsequent regulatory proceeding were allowed by this
3 Commission to retain all or even a part of the "gain" or
4 savings?
5 A. No. I can't recall a single instance.
6 Usually the opposite is true. For example, the Company
7 purchases over 100 average megawatts of power under
8 long-term contracts from the Mid-Columbia public utility
9 districts at an average cost below a penny per kWh. The
10 prices for these contracts are well below market and have
11 been for many years, which has provided the Company's
12 retail customers with significant benefits. But because
13 there is no rate base treatment or other provision for
14 shareholders to benefit from these very favorable
15 contracts, 100% of the benefits are being flowed through
16 to customers.
17 Q. What do you conclude from this discussion?
18 A. Customers have enjoyed rates among the very
19 lowest in the United States and high levels of customer
20 service. Shareholders, on the other hand, have
21 frequently achieved returns below those authorized by the
22 Commission and have incurred substantial write-offs.
23 Shareholders have not shared in efficiency gains achieved
24 by Avista management nor have they shared in savings
25 achieved by the purchase or construction of below market
85
Dukich, Di 7
Avista
1 resources.1 As stated earlier, its seems inequitable for
2 shareholders to receive none of the benefits from "good
3 decisions," or opportunity sales that do no harm to the
4 customer, and yet absorb losses associated with
5 investments that were deemed to be above-market or
6 imprudent.
7 Q. How does this relate to your recommendation
8 on the gain associated with
9
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15
16
17
18
19
20
21
22
23 1. However, for natural gas service, the Commission has
recently allowed Company shareholders the opportunity to
24 retain certain purchase and gas management efficiencies
through the Gas Benchmark Mechanism.
25
86
Dukich, Di 7a
Avista
1 the sale of Centralia?
2 A. The Company requests that the Commission
3 carefully consider the balance of equities between
4 shareholders and customers in deciding on the disposition
5 of the gain from the sale of Centralia. Given the
6 write-offs Avista has taken, and given the historically
7 low rates and high quality service enjoyed by customers,
8 it would be reasonable and equitable in this particular
9 instance to allow the Company to retain 100% of the gain
10 associated with the sale.
11 IV. PACIFICORP PROPOSAL
12 Q. Does the Company have a view with regard to
13 PacifiCorp's proposal, should the Commission not find the
14 above arguments persuasive?
15 A. Yes. At a minimum, Avista shareholders
16 should be no worse off than under the depreciation-based
17 proposal put forth by PacifiCorp. As the Company
18 understands this proposal, shareholders are allowed to
19 retain a portion of the gain that is proportional to the
20 un-depreciated amount of the Centralia investment. The
21 remaining portion of the gain would go to ratepayers in
22 the form of an offset that will provide a direct benefit
23 to customers. Mr. McKenzie discusses how the
24 depreciation-based methodology would apply to Avista. He
25 also discusses the Company's proposal for the disposition
87
Dukich, Di 8
Avista
1 of the customers share of the gain under such an
2 approach. Although this approach is considerably less
3 desirable to the Company, the disposition of the gain
4 discussed by Mr. McKenzie does address, albeit to a
5 lesser degree, the equity issues previously addressed in
6 my testimony.
7 Q. Does this conclude your direct testimony?
8 A. Yes.
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1 Q. Please state your name, business address
2 and present position with the Company?
3 A. My name is Thomas D. Dukich. My business
4 address is East 1411 Mission Avenue, Spokane, Washington.
5 I am the Director of Rates and Tariff Administration.
6 Q. Have you previously filed testimony in this
7 proceeding?
8 A. Yes.
9 Q. What is the scope of your rebuttal
10 testimony?
11 A. In my rebuttal testimony I respond to the
12 testimony of staff and intervenor witnesses related to
13 the disposition of the gain on the sale of Centralia.
14 Q. Are you sponsoring any exhibits with your
15 rebuttal testimony?
16 A. No.
17 Q. Do you have any opening comments before
18 turning to the specific issues raised by other witnesses
19 in the case?
20 A. Yes. First of all I would like to clarify
21 and summarize my testimony since there may be some
22 confusion regarding the rationale for Avista's proposal
23 regarding the disposition of the gain on the sale of
24 Centralia. Our proposal is premised upon balancing the
25 interests of customers and shareholders. In my direct
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Dukich, Reb 1
Avista
1 testimony I outlined what I believe to be the current
2 status of this balance as the Commission faces the
3 decision regarding the gain on the sale:
4 Previous Investment Write-offs by Avista - The
Company's shareholders have not been shielded from
5 significant write-offs: since 1985 before tax
write-offs have totaled over $96 million. The
6 purpose of presenting this historical fact in this
portion of my testimony was not to complain,
7 contest, revisit, or call into question the
fairness of the prior decisions of the Commission.
8 The purpose was to simply show that past
Commission decisions and Company actions have
9 resulted in significant write-offs (losses) to
shareholders, and that a balance of interests for
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Dukich, Reb 1a
Avista
1 customers and shareholders would seem to
necessitate occasional gains going to shareholders
2 along with the losses.
3 Customer Service and Retail Rates - Several
independent studies have rated Avista's customer
4 service and business operations as outstanding.
In addition, retail rates for the Company's
5 customers have varied between the lowest and the
fifth lowest in the United States over the last 20
6 years. The purpose of this testimony was to
simply show that customers have been well served
7 by Avista, and that the Company's customer service
and retail rates should not be factors that would
8 preclude the Commission in any way from assigning
the gain to shareholders.
9
Historical Rates of Return - In Exhibit No. 3 of
10 my direct testimony I provided a comparison of
Avista's actual and "Commission Basis" rates of
11 return to those authorized by the Commission for
the period 1973 to 1998. The purpose of this
12 testimony was not to claim an entitlement to the
gain from Centralia simply and only because the
13 Company's earned rate of return was sometimes
below the authorized return. The purpose was to
14 point out that the regulated rates of return since
1973 have not unduly enriched shareholders, as I
15 concluded on Page 5 of my direct testimony.
16 Both my direct testimony and rebuttal testimony
17 speak to the balance of interests between customers and
18 shareholders, and request that the Commission consider
19 this balance in its decision. The Company's book value
20 has been significantly decreased in the past for the
21 investments that were disallowed for recovery by the
22 Commission related to WNP-3, Skagit, and Kettle Falls
23 (Exhibit No. 5). If there is to be symmetry (fairness),
24 it is also necessary for there to be an increase in book
25 value from time to time. Therefore, we believe it would
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Dukich, Reb 2
Avista
1 be reasonable and appropriate for all, or a major
2 portion, of the gain on Centralia to be assigned to
3 shareholders. It is our position that this would balance
4 the interests involved without diminishing future
5 customer service or increasing customers' rates.
6 Q. Turning now to rebuttal of specific issues,
7 on Page 10 of his testimony Dr. Peseau discusses a
8 "capitalist economic system" that "governs every publicly
9 traded corporation, including Avista and other members of
10 the utility industry." Do you have any comments on this
11 testimony?
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Dukich, Reb 2a
Avista
1 A. Yes. One theory of regulation is that the
2 Commission serves as a substitute or surrogate for
3 competition in our "capitalist economic system" to ensure
4 that pricing to customers is fair, just and reasonable,
5 and that service is safe and reliable.1 Commission
6 regulation is primarily economic in the sense that prices
7 are regulated through an analysis of various costs,
8 including capital return.
9 It is the Company's decision, in the first
10 instance, to determine whether to acquire or dispose of
11 assets. These decisions, however, are subject to the
12 specific approval of the Commission, including the
13 financial impact on customers from those decisions.
14 In the competitive world, both the gains and
15 losses from investment decisions accrue to the business
16 owners. Monopoly status, in and of itself, does not
17 preclude the assignment of both gains and losses to
18 shareholders. As the surrogate for competition, it is
19 the Commission's decision as to how gains and losses are
20 shared between customers and shareholders.
21 Q. Beginning on Page 13, Line 2 of his
22 testimony, Dr. Peseau states that the Skagit, Creston and
23 Meyers Falls write-offs "cannot be attributed to
24 regulatory actions?" Is this testimony correct?
25 A. No. In Order No. 19411 in Case No.
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Dukich, Reb 3
Avista
1 U-1008-219, dated January 30, 1985, the Commission
2 disallowed recovery of 50% of the Company's investment in
3 the Skagit Project. The Commission allowed a 15-year
4 amortization of the remaining 50%, without a
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18 1The Company is also subject to other sources of
competition in the form of alternate fuel sources,
19 neighboring public utilities and Bonneville Power
Administration (BPA). BPA serves as wholesale provider
20 of preference power to public agencies within a
statutorily defined region in the Northwest that includes
21 all of Avista's service territories. While Avista's
service territory in Idaho does have the protection of
22 the Idaho Antipiracy Statute, some competition can occur
on the fringes. In addition, certain customers, such as
23 federal agencies, have direct rights to purchase from
BPA. In 1990 Avista lost the housing load of Fairchild
24 Air Force Base to BPA. All of this competition
places pressure on Avista to keep its rates low to meet
25 competition.
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Dukich, Reb 3a
Avista
1 return on the unamortized balance. The rate making
2 treatment approved by the Commission required the Company
3 to write off approximately 75% of its investment in the
4 Project (the absence of a return on the remaining balance
5 resulted in an additional write-off above the initial
6 50%).
7 The Company wrote off its $11.2 million investment
8 in the Creston Project without receiving or requesting a
9 change in retail rates, as well as the $200,000
10 associated with Meyers Falls.
11 Q. Beginning at Page 13, Line 20 of his
12 testimony, Dr. Peseau addresses the Company's testimony
13 regarding gains associated with building or purchasing
14 resources. Do you have any comments on this testimony?
15 A. Yes. The Company's testimony that
16 Dr. Peseau refers to includes the following question
17 beginning on Page 6, Line 22 of my direct testimony:
18 "For example, are you familiar with any situation
where shareholders took a risk in building a
19 resource, or making a purchase, and in a
subsequent regulatory proceeding were allowed by
20 this Commission to retain all or even a part of
the "gain" or savings?"
21
22 In my response to this question I stated, "I can't
23 recall a single instance."
24 In his testimony addressing this question and
25 answer, Dr. Peseau points to the Company's recent rate
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Dukich, Reb 4
Avista
1 case (Case No. WWP-E-98-11) where the Commission assigned
2 all gains and losses from commercial trading activity to
3 shareholders as an instance where gains are assigned to
4 shareholders, contrary to my assertion.
5 What Dr. Peseau fails to recognize, however, is
6 that these speculative commercial trading transactions
7 are unrelated to the resources that are built or
8 purchased to serve
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Dukich, Reb 4a
Avista
1 customers' loads. The Company clearly explained this
2 fact in its testimony in the case, and the Commission
3 recognized it on Page 16 of its Order No. 28097:
4 "Recognizing that the Resource Optimization
department of the Company does engage in some
5 level of speculative transactions not otherwise
associated with the operation of Company resources
6 or serving retail load,..." (underscore added)
7 Furthermore, on Page 16, Line 5 of Dr. Peseau's
8 testimony, with regard to the Company's subsidiary
9 operations, he states, "Avista's shareholders have
10 therefore borne the entire risk and are entitled to all
11 the profits from the gain." Similarly, with commercial
12 trading activities, the Company places its own capital at
13 risk, bears the entire risk, and receives all gains and
14 losses. Thus, Dr. Peseau's testimony actually supports
15 the Company's position.
16 Q. At Page 4, Line 1 of his testimony,
17 Dr. Peseau states that, "In this sense, Avista customers
18 have been co-investing in Centralia," and later
19 references an "equitable ownership interest" in Centralia
20 by customers. Do you have any comments on this
21 testimony?
22 A. Yes. The legal and operational ownership
23 of utility assets resides with, and is the responsibility
24 of, the utility. The presumed monopoly status of the
25 utility and the corresponding regulation by the
97
Dukich, Reb 5
Avista
1 Commission does not result in customers owning the
2 utility's assets. Simple use of a product, even if the
3 price is regulated and based on cost, does not result in
4 ownership of the means of producing that product.
5 Customers no more
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Dukich, Reb 5a
Avista
1 own the generating assets than I own some of McDonalds
2 because I have purchased their Big Macs2.
3 As the surrogate for competition, it is the
4 Commission's decision as to how gains and losses are
5 shared between customers and shareholders.
6 Q. On Page 11, Line 24 of Ms. Stockton's
7 testimony, regarding the disposition of the gain, she
8 states that, "The depreciation approach is the proper
9 approach according to the Supreme Court of Idaho."
10 Ms. Stockton also states that, "The Supreme Court of
11 Idaho, in Boise Water Corporation v. Idaho Public
12 Utilities Commission, 99 Idaho 158, 578 P.2d 1089 (1978),
13 found that the ratepayers' payment of depreciation
14 expense (on property other than real property)
15 establishes a right to the gain on the sale of an asset."
16 Do you have any comments on this portion of
17 Ms. Stockton's testimony?
18 A. Yes. For a number of reasons, we believe
19 that this ruling does not bind the Commission to a
20 similar decision in this case. First, the Idaho Supreme
21 Court ruling in Boise Water Corporation v. Idaho Public
22 Utilities Commission, 99 Idaho 158, 578 P.2d 1089 (1978)
23 (Boise Water case), is a decision made for a company in
24 different utility business with a different regulatory
25 history.
99
Dukich, Reb 6
Avista
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7
8
9
10 2One approach to allocating gain on the sale of an asset
was outlined in Democratic Central Committee v.
11 Washington Metro. Area Transit Comm. 485 F.2d 786
(D.C. Cir. 1973). On pages 805-806 the court framed the
12 task as follows:
"Investors, we have concluded, are not automatically
13 entitled to gains in value of operating utility
properties simply as an incident of the ownership
14 conferred by their investments. And it goes without
saying that consumers do not succeed to such gains simply
15 because they are users of the service furnished by the
utility. Neither capital investment nor service
16 consumption contributes in any special way to
value-growth in utility assets. Rather, the values with
17 which we are concerned have grown simply because of a
rising market.
18 Investors and consumers thus start off on an equal
footing, and the disposition of the growth must depend on
19 other factors. We thus reach the dual critical inquiry;
identification of the principles which must guide the
20 allocation, as between investors and consumer groups, of
appreciation in value of utility assets while in
21 operating status; and application of those principles to
transit's situation."
22 Over 25 years have passed since this decision. There
have been significant changes in the electric utility
23 industry during this time and this case may not be
entirely on point. Nevertheless, it can provide a useful
24 framework for debate and discussion and I have used it
for this purpose.
25
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Dukich, Reb 6a
Avista
1 Second, the sale of Centralia involves the sale of
2 depreciable property. The Boise Water case involved a
3 transfer of real property to an affiliate, and thus the
4 sale of depreciable property was not even at issue in the
5 Boise Water case, nor did the case involve an outright
6 sale of property.
7 Third, in addressing gains to ratepayers related
8 to sales of property on Page 1092, on two different
9 occasions the ruling includes statements with
10 introductory qualifiers. One sentence begins with, "One
11 way of looking at", and another begins with, "In one
12 sense." Thus, we believe the ruling does not dictate a
13 "one size fits all" method for viewing or handling all
14 gains from the sale of property.
15 Fourth, the Boise Water case involves property
16 with a book value of $12,295.000. In Avista's current
17 filing, the gain is related to the sale of a major
18 base-load generating resource. The Company's investments
19 in generating resources have been subjected to rigorous
20 reviews that have resulted in substantial write-offs for
21 the Company. A decision related to the disposition of
22 the gain on the sale of Centralia is clearly in a
23 different category than that of the relatively minor real
24 property transaction.
25 Fifth, although the ruling on Page 1089 includes a
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Dukich, Reb 7
Avista
1 reference to both "rewards" and "losses," there is no
2 meaningful discussion of balancing gains and losses for
3 customers and shareholders in the case.
4 Lastly, I can not find in the court's ruling an
5 exact reference to Ms. Stockston's statement that, "The
6 Supreme Court of Idaho. . .found that the ratepayers'
7 payment of depreciation expense (on property other than
8 real property) establishes a right to the gain on the
9 sale of an asset." Our reading of the Court's ruling is
10 that customers have an equitable interest and can not, by
11 law, be excluded from the potential of receiving a
12 portion of the
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Dukich, Reb 7a
Avista
1 gain. However, the exact method or the exact amount of
2 the sharing must be justified by the facts of the case in
3 question. Customers have the right to have place at the
4 table, as do shareholders, but neither has a legal right,
5 a priori, to any specific portion of the gain.
6 With regard to the disposition of the gain on
7 Centralia, symmetry and fairness for the Company's
8 customers and shareholders should be based on the unique
9 circumstances for Avista. I have outlined Avista's
10 unique circumstances in my direct testimony.
11 Historically, Avista's customers have not paid all of the
12 investment costs associated with generating projects, as
13 evidenced by the write-offs experienced by the Company,
14 e.g., WNP-3 and Kettle Falls. Consequently, for this and
15 the other reasons outlined, we believe that it would be
16 reasonable and appropriate for all, or a major portion,
17 of the Centralia gain be assigned to Avista's
18 shareholders.
19 The gain on the sale of Centralia represents
20 economic value over and above the book value of the asset
21 and the amount rate based. Customers have not been
22 charged a return on this economic value (the gain), nor
23 have they paid depreciation based on this economic value.
24 The assignment of all or a major portion of the gain to
25 shareholders, therefore, would not take away from
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Dukich, Reb 8
Avista
1 customers any value that they have or are currently
2 receiving.
3 Q. On Page 3, Line 17 of his testimony
4 Dr. Peseau states that, "Once an asset is placed in rate
5 base, regulation in Idaho provides for both the return on
6 (rate of return) and return of (depreciation) shareholder
7 investment in a plant such as Centralia." Do you have
8 any comments on this testimony?
9 A. Yes. It is very important to note that in
10 this testimony Dr. Peseau has repeatedly used the
11 qualifier: "Once an asset is placed in rate base,..."
12 (underscores added).
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Dukich, Reb 8a
Avista
1 In his discussion on Page 11 regarding compensation to
2 the Company for its investment risk, he again uses the
3 qualifier: "As soon as a utility asset is placed in rate
4 base." And once more on Page 12, Line 9, "Once the plant
5 is in rate base,..."
6 "Rate base" includes the value of any investments
7 for which the Commission has granted recovery through
8 retail rates. In general, an investment which has been
9 disallowed for rate making purposes must be written off
10 by the Company, which results in a reduction to both rate
11 base and the Company's book value. The Company receives
12 neither a return on, nor a return of this investment.
13 Therefore, the allowed rate of return to compensate the
14 Company for its investment risk is earned only on the
15 investment that the Commission has approved for recovery
16 in rates.
17 The rate of return established by the Commission
18 for the Company does not in any way preclude a decision
19 by the Commission to assign all, or a major portion, of
20 the gain on Centralia to shareholders. The Company's
21 investments in generating resources have been subjected
22 to rigorous reviews that have resulted in substantial
23 write-offs for the Company. Sales of assets such as
24 Centralia are also subject to a specific decision of the
25 Commission granting approval of the sale, and the
105
Dukich, Reb 9
Avista
1 disposition of any related gains and losses. In both
2 instances, either a disallowance of investment recovery
3 or an assignment of a gain to shareholders, the decision
4 of the Commission has a direct financial impact on
5 financial statements and shareholders, irrespective of
6 the rate of return authorized by the Commission for the
7 Company.
8 Q. Beginning on Page 24, Line 15 Dr. Peseau
9 discusses potential future policy decisions by the
10 Commission related to utility mergers and acquisitions,
11 and electric restructuring, and recommends that the
12 Commission "set a policy in this proceeding"
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Dukich, Reb 9a
Avista
1 regarding the future sharing of gains and losses. Do you
2 agree with Dr. Peseau's recommendation?
3 A. No. Electric industry restructuring on a
4 broad scale has not yet occurred in the State of Idaho,
5 nor does it seem imminent. It would be premature to make
6 decisions, or adopt policies, related to electric
7 restructuring now, before all the factors that would need
8 to be taken into consideration are known, including any
9 possible legislation. It is also not necessary or
10 prudent to make specific stranded cost or benefit
11 decisions now, in dealing with the proposed sale of
12 Centralia. Furthermore, any decisions related to utility
13 mergers and acquisitions should be based on the specific
14 circumstances of the transaction, and the information
15 available at the time.
16 Q. Do you have any further comments related to
17 the testimony of staff and intervenor witnesses in the
18 proceeding?
19 A. Yes. The Company has not responded to each
20 and every statement of each witness or to certain
21 off-handed remarks of Dr. Peseau. To the extent that a
22 witness has made a statement not rebutted by the Company,
23 our silence does not indicate agreement.
24 The Company's position regarding the sale of
25 Centralia and the disposition of the gain on the sale
107
Dukich, Reb 10
Avista
1 stands as filed by the Company in its direct and rebuttal
2 testimony in this case.
3 Q. Does this conclude your rebuttal testimony?
4 A. Yes.
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Dukich, Reb 10a
Avista
1 (The following proceedings were had in
2 open hearing.)
3 MR. DAHLKE: And Mr. Dukich is available
4 for cross-examination.
5 COMMISSIONER SMITH: Mr. Ward, do you have
6 questions for Mr. Dukich?
7 MR. WARD: No questions.
8 COMMISSIONER SMITH: Mr. Woodbury.
9 MR. WOODBURY: Thank you, Madam Chair.
10
11 CROSS-EXAMINATION
12
13 BY MR. WOODBURY:
14 Q Good morning, Mr. Dukich.
15 A Good morning.
16 Q Referring first to your direct testimony on
17 page 2, you speak of a no-harm-to-customers standard. Is
18 that, to your knowledge, a statutory standard or is it a
19 standard that was developed by this Commission in its
20 orders?
21 A You know, I can't recall, Mr. Woodbury.
22 I'll try not to guess.
23 Q When you use the term "no-harm-to-customers
24 standard," are you speaking of immediate harm or future
25 harm?
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Wilder, Idaho 83676 Avista
1 A I think that would include all for the
2 foreseeable.
3 Q Short term and long term?
4 A Right. Probably more long term. I mean,
5 there could be some small perturbations but long term.
6 Q The Company's primary proposal in this case
7 is to retain all of the book gain related to the sale and
8 you state that that may be viewed by some as an
9 aggressive position.
10 A Correct.
11 Q Is it viewed by the Company as an
12 aggressive position?
13 A No, I think my testimony outlines why we
14 took that position in terms of balancing equities over
15 time and taking a look at the fact that it's not very
16 often that there are gains compared to the number of
17 times that there are unexpected losses and to balance
18 that out, it might be reasonable to take a look at
19 allowing 100 percent of the gain given the history of
20 what's happened.
21 Q Would you agree that it could reasonably be
22 viewed by some of your customers as an aggressive
23 position?
24 A I'm not sure how to answer that. I don't
25 know. I probably --
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Wilder, Idaho 83676 Avista
1 Q Then I wonder if you feel that nobody
2 really would view it as an aggressive position why you
3 would put that in your testimony.
4 A Oh, because I believe that if you look at
5 maybe some of the positions that the parties have taken
6 in this proceeding across the states and contrast it to
7 PacifiCorp's depreciation approach or maybe the Staff's
8 review of what's happened in the state before, it may be
9 more aggressive than what you would normally see a
10 company propose, but I think the intent was to engage a
11 debate or, I mean, at least an examination of the reasons
12 or the basis for prior decisions, and our impression was
13 that sometimes not necessarily -- well, if you look at
14 all the jurisdictions together, there hasn't been a real
15 thorough discussion, it doesn't seem, of the reasons why
16 the depreciation methodology is, I guess you might say,
17 convenient or provides a nice quantitative tool, but
18 there isn't a lot of discussion, extensive discussion,
19 about the reasons behind it or the philosophy that has
20 gone to how the gains are distributed.
21 Q Okay, your direct testimony was filed
22 before other party positions were developed, wasn't it?
23 A Yes.
24 Q You also state that the Commission should
25 consider the Company's proposal in an historical
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Wilder, Idaho 83676 Avista
1 context.
2 A Right.
3 Q And can you define what you mean by
4 "historical context"? Are you talking about your
5 representations as far as whether or not the Company
6 achieved what you perceived to be a reasonable return in
7 the last 13, 20 years, is that what you're speaking of?
8 A I think when we put this together, there
9 was no firm definition of historical, but one definition
10 was from the time that Centralia went into rate base,
11 which I think is 1972, so basically, the plant has been
12 in, I think, for about 28 years. I think earlier we
13 talked in the hearing about 22, but it's been about 28,
14 so that was one benchmark.
15 I think the other benchmark was probably
16 the benchmark of the heavy construction era in the '70s
17 and '80s when the -- basically what happened in the
18 utility industry kind of changed, I think. Interest
19 rates were high, there was the nuclear power issue, I
20 guess, and what had happened all around the United
21 States. There was a lot more write-offs. I think prior
22 to that the utility industry was a lot more, you might
23 say, sedate or certain, but from the '70s on, I think
24 there's a lot more uncertainty, a lot more write-offs.
25 If you throw in deregulation on top of that, you've got,
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Wilder, Idaho 83676 Avista
1 I guess, in the modern history from 1970 on, it's kind of
2 a different era, so that was the time frame where I was
3 talking about, not going back to 1920 or something, but
4 more from 1970.
5 Q Should we consider Avista's proposal to
6 retain all the gain in the context of your most recent
7 general rate case where the Company requested a 25 basis
8 point adder and equity return for good management?
9 A I think that was part of the balancing and
10 I think I used -- in my rebuttal testimony, I have a
11 footnote for the Democratic Central Committee decision
12 and how that basically frames many of the issues and
13 basically, that decision talked about are there ways
14 that, say, the Company should not get the gain and one of
15 the ways might be to say if the Company had earned
16 excessively, then they shouldn't get the gain the
17 equities would say. If the Company had exceptionally
18 poor customer service, they shouldn't get the gain, or
19 the Company had really high rates, they shouldn't get the
20 gain, so the way I outlined my testimony was to say that
21 none of those appear to be true of Avista, maybe the
22 opposite is true; the rates have been low, our customer
23 service has been very good and there hasn't been
24 excessive earnings from our point of view, so it was more
25 of, I guess you might say, from an exclusionary point of
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1 view because that's the tactic that some of the courts
2 seem to have taken. The equities didn't indicate that
3 there was anything negative against the Company.
4 Q Would you agree with Dr. Peseau's testimony
5 that in the 13 years between '86 and '99 when the Company
6 did not have a general rate case that the Company took
7 that opportunity to refinance its debt at a lower
8 interest rate, thereby decreasing its cost of capital and
9 initiated programs that resulted in operational savings?
10 A Correct. Well, the operational savings, as
11 a matter of fact, costs increased, but they were offset
12 by, partially offset by, things that were done on
13 refinancing debt, so I wouldn't agree with that statement
14 broadly that all costs decreased. As a matter of fact,
15 they didn't. I think the ability, part of the ability,
16 to stay out was due to refinancing and lower interest
17 rates compared to what they were set in 1986.
18 Q Would you agree with Dr. Peseau's
19 observation that one of the primary reasons your rates
20 along with Idaho Power's are among the lowest in the
21 country is because you're hydro-based utilities?
22 A Certainly, that's partially true, but there
23 are other hydro-based utilities or utilities that had a
24 chance to be hydro-based, whether that be Portland
25 General or Puget, as evidenced by the fact that they
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Wilder, Idaho 83676 Avista
1 probably have had upwards of 4-$500 million worth of
2 residential exchange benefits that Avista never did get,
3 so their costs were actually higher than Bonneville's,
4 the way the exchange was calculated, ours were lower, so
5 if you compare us to the primary hydro utility in the
6 region, which is Bonneville, our costs were actually
7 lower and evidenced by the fact that we didn't qualify
8 for the exchange, and if you look at non-hydro costs, the
9 national studies show that our other costs are also among
10 the lowest in the U.S., as well as our customer service,
11 so I don't think that that is the only reason.
12 Certainly, the foresight that we had to
13 build those plants, which, by the way, are not in the
14 middle of our service territory, they're in Montana, and
15 up until recently our two major facilities were on the
16 very edge of our service territory, Cabinet and Noxon are
17 outside, a river does not run through our service
18 territory in that sense, we went outside of our territory
19 to build those projects.
20 Q Okay.
21 A I might add, also, that about -- I think
22 the Company's owned hydro, if I'm not mistaken, is
23 approximately about 40 percent of our resources. If you
24 include purchased, I think it's maybe around 60, so we
25 have a substantial portion of thermal as well as hydro.
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Wilder, Idaho 83676 Avista
1 Q On page 6 of your direct testimony, you
2 frame a question to yourself and then you avoid the
3 answer.
4 A I do? What page?
5 Q Page 6. Your question was, "Are you
6 claiming that the Company was treated unfairly by having
7 to incur such significant write-offs?"
8 And your answer was, "Fairness in past
9 Commission decisions is not really the issue here."
10 You framed the question and avoided the
11 answer. Do you want to answer it directly, the question,
12 yes or no?
13 COMMISSIONER SMITH: He asked if you wanted
14 to.
15 THE WITNESS: No, I don't want to. I think
16 the issue here is for the sake of discussion is that our
17 intent was not to revisit past decisions and whether we
18 considered them fair or not. We may have considered them
19 unfair in some sense, but what's done is done. I guess
20 maybe that would be a better answer and my point wasn't
21 that we were treated unfairly. My point was that the end
22 result was we had some write-offs, a lot of write-offs,
23 $96 million pre-tax and no gains basically, so it's been
24 during that time a no gains game with the symmetry being
25 all write-offs and not many gains and in that sense, the
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CSB REPORTING DUKICH (X)
Wilder, Idaho 83676 Avista
1 balance of equities is not -- it's not that balanced if
2 you want to take that approach.
3 Q BY MR. WOODBURY: You would agree that the
4 standards that the Commission applied in those cases with
5 respect to prudence and used and useful the Commission
6 was fair in doing so?
7 A Yes, I think that they could do that and
8 that was certainly within their -- that's the point of my
9 testimony. This is not a matter of law in that sense.
10 It's a matter of Commission discretion and I think I talk
11 about the Commission being a surrogate for competition
12 and so to that extent, maybe these are extraordinary
13 losses, whether you call -- prudency basically is a
14 surrogate for price, I think, by and large and that maybe
15 the price came in too high so the plants were not allowed
16 and if the price comes in too low or there's an
17 extraordinarily good decision made, even if that's for
18 whatever the reason, like maybe the gain on Centralia,
19 maybe the Company ought to get to retain that.
20 Q At page 6 of your testimony you ask
21 yourself, "Are you familiar with any situation where
22 shareholders took a risk and won?" And the answer is
23 "No." Was that your answer alone or did that represent
24 the institutional memory of the Company?
25 A I thought it represented both and I do mean
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CSB REPORTING DUKICH (X)
Wilder, Idaho 83676 Avista
1 to clarify that from the basis of a regulated -- from the
2 regulated business, on the regulated side. There may be
3 some smaller gains in the 50-100,000 range, but nothing
4 major that I'm aware of on the regulated side of the
5 business. If you have another example, I'd be interested
6 to hear that if I was wrong. If you look through our
7 10-K's --
8 Q I don't have another thing that I would
9 like to bring up about that.
10 A Okay.
11 Q In your rebuttal testimony, you address
12 Staff raised a Boise Water case, a Supreme Court case,
13 Idaho Supreme Court, in its testimony and you state on
14 page 6 that the court found that the ratepayers' payment
15 of depreciation expense on property other than real
16 property establishes a right to the gain on the sale of
17 an asset. You wouldn't -- you agree that that's what the
18 court found in that case?
19 A Could you refer me to the line again,
20 Mr. Woodbury? I'm sorry.
21 Q It's probably between line 5 and line 12 on
22 page 6.
23 A This is what Ms. Stockton said.
24 Q Okay. Well, do you disagree that that's
25 what the court found?
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CSB REPORTING DUKICH (X)
Wilder, Idaho 83676 Avista
1 A I can't find that exact statement in the
2 court case, no.
3 Q Then on page 7, you say your reading of the
4 court's ruling is that customers have an equitable
5 interest and cannot, by law, be excluded from the
6 potential of receiving a portion of the gain and that
7 customers have the right to have a place at the table, as
8 do shareholders, but neither have a legal right, a
9 priori, to any specific portion of the gain.
10 A Right.
11 Q And that's the Company's reading of that
12 case?
13 A Yes.
14 Q You tried to distinguish that case in
15 saying that that decision was made for a company in a
16 different utility business with a different regulatory
17 history.
18 A Correct. I think we distinguish about five
19 or six different -- not only --
20 Q Are you saying that the court's decision in
21 Boise Water establishes no precedent for cases involving
22 electric utilities?
23 A I'm saying that that's one of the things
24 you'd want to look at. If you look at equities, you'd
25 look at the history, the embedded history, of what's
119
CSB REPORTING DUKICH (X)
Wilder, Idaho 83676 Avista
1 happening and it wasn't my impression that the Boise
2 Water case established some firm precedent, no.
3 Q You cite the --
4 A In fact, I think if you read the last
5 paragraph in that case, it says that there needs to be a
6 basis in fact for how the gain is distributed and the
7 facts of the case have to support the decision the
8 Commission makes.
9 Q You then go on to cite the Democratic
10 Central Committee case involving Washington Metro Area
11 Transit and is it your understanding that the -- that
12 that's a transit company?
13 A Yes.
14 Q That's a different utility business?
15 A It is a different utility business, yes. I
16 might add, though, that I didn't cite that in terms of
17 any precedent.
18 Q The court cited it in its opinion, too,
19 didn't it?
20 A Pardon?
21 Q The court cited that case in its opinion?
22 A Yes, and the footnote in that basically
23 says that the preamble in that case, the discussion in
24 that case, I think, frames the issue very well and I
25 didn't cite the outcome of the case as being precedent
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CSB REPORTING DUKICH (X)
Wilder, Idaho 83676 Avista
1 for anything, but I think the discussion talking about
2 gains following risks and benefits following burdens,
3 that frames the issue very well that we're facing today.
4 Q Page 10 of your rebuttal testimony you
5 state, "To the extent that a witness has made a statement
6 not rebutted by the Company, our silence does not
7 indicate agreement."
8 A Correct.
9 Q Does your silence indicate disagreement?
10 A No.
11 Q You understand the purpose of rebuttal
12 testimony?
13 A Yes.
14 Q And was the Company not provided with
15 adequate time to prepare rebuttal in this case?
16 A Well, the Company chose for the sake of
17 expedience and brevity and focusing on the major issue
18 not to address each and every issue, particularly in
19 Dr. Peseau's testimony regarding what we consider
20 offhanded remarks, that it wasn't worth going through and
21 rebutting that item by item. We chose to ignore that
22 rather than rebut it, but it didn't mean we agreed with
23 it.
24 Q You understand that the Commission can only
25 consider the record in this case?
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CSB REPORTING DUKICH (X)
Wilder, Idaho 83676 Avista
1 A Yes.
2 Q So if you've foregone some argument, then
3 essentially that's waived?
4 A I would defer to Mr. Dahlke and let him
5 make a legal judgment on that.
6 MR. WOODBURY: Fine. Madam Chair, Staff
7 has no further questions of Mr. Dukich.
8 COMMISSIONER SMITH: Thank you,
9 Mr. Woodbury.
10 Do we have questions from the
11 Commissioners? Commissioner Hansen.
12
13 EXAMINATION
14
15 BY COMMISSIONER HANSEN:
16 Q I just would kind of like to clarify, on
17 your direct testimony on page 5, lines 1 through 3, you
18 talk about, you say, "Customers seem to have been
19 exceptionally well served over the past 20 years...," and
20 from your previous discussions in this matter, is that
21 based on the service quality they've received as well as
22 the low rates that they've been assessed mainly due to
23 hydropower, is that where you get that they were
24 exceptionally served?
25 A Yes, I think if you look at -- I think my
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CSB REPORTING DUKICH (Com)
Wilder, Idaho 83676 Avista
1 exhibit shows that the customers have been either the
2 lowest -- among the four lowest in the United States over
3 the last 20 years, as well as the studies that have been
4 done, like Call Center of the Year, customer service.
5 Also, I think in the testimony, I think Ms. Maxwell's
6 testimony in the rate case, our just concluded rate case,
7 showed that Avista had the lowest complaint rate of any
8 of the Idaho utilities, electric utilities, so I think
9 it's both rates and customer service.
10 Q Okay, going on, then you talk or you have
11 reference to the shareholder and you say, "...it appears
12 that shareholders have not been unduly enriched." What
13 do you mean by "unduly"?
14 A Well, to be honest with you, that statement
15 was in there as -- I cited the Democratic Central as what
16 I consider a framework for the debate, kind of, and in
17 the Democratic Central decision, they talk about the
18 Metro Authority one year earned real high rates of return
19 and that was part of the balancing of equities to say
20 that the customers have earned -- I mean the company
21 earned very high rates of return. I didn't find anything
22 comparable to that in our history.
23 Our rates of return have been around the
24 allowed, up or down, and you can argue about whether they
25 were exact or whatever, but there were no windfall
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CSB REPORTING DUKICH (Com)
Wilder, Idaho 83676 Avista
1 returns of the 20 to 30 percent range or anything even
2 close to that. They were all around the allowed, within
3 a couple of percent, and that really was the intent of
4 the statement. You couldn't look back and say, well, you
5 didn't get any gains, but one year you earned 28
6 percent. There's nothing in the recent history that
7 shows that.
8 Q So really, then, you kind of based that on
9 rate of return?
10 A Yes, even though that's not really an
11 adequate measure, because the rate of return
12 automatically factors out any write-offs, so even absent
13 write-offs and you know what I mean, then the rate of
14 return looks forward and when the rate base is
15 calculated, rate of return is excluded, so I did base it
16 on a rate of return, yeah.
17 Q By doing so, I guess the question I've got
18 in my mind is, is it really, I guess I'd ask, is it the
19 ratepayers' fault that the stockholders have not received
20 the rate of return that you think is just and fair to
21 them?
22 A No. In fact, I think that goes to maybe
23 the question Mr. Woodbury asked me about avoiding my own
24 question. The intent wasn't to say it was anybody's
25 fault or anyone was to blame or anyone was treated
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CSB REPORTING DUKICH (Com)
Wilder, Idaho 83676 Avista
1 unfairly, including the customers, and if that came
2 across in my testimony, I'm sorry about that. I really
3 didn't mean to talk about who's at fault in that sense.
4 What I meant to say is that whatever the reason, here's
5 how it came out and if you look historically at the
6 balance of the equities or fairness that there are more
7 things on the negative side than the positive side.
8 There are a lot of losses dollar-wise but
9 no gains, no material gains. No matter who's to credit
10 or to blame, that's just the way it's turned out and that
11 maybe is one thing the Commission may want to look at in
12 terms of looking at a balancing over the years, so again,
13 I don't want to phrase it in terms of anyone's fault or
14 blame.
15 Q I guess just one last question.
16 A Sure.
17 Q I guess I'm just kind of surprised, under
18 this kind of condition, why did the Company wait 13 years
19 to come in for a rate case? I mean, didn't you feel the
20 pressure then or in the past that you should be coming
21 forth and trying to better the rate of return for your
22 stockholders?
23 A I think Mr. Redmond made a commitment at
24 one time actually in this Hearing Room or the one before
25 it was remodeled that we would try to have a rate freeze
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CSB REPORTING DUKICH (Com)
Wilder, Idaho 83676 Avista
1 for 10 years and I think that was part of what we looked
2 at. The way the events unfolded in terms of the interest
3 rates decreasing, what the Company did to keep out of a
4 rate case, I think all that did factor into not coming
5 in, but this case in particular, the gain on the
6 Centralia case, is in a way independent of an increase
7 for -- a request for a rate case and, again, the reason
8 to cite the rate of return was only to show that there
9 hadn't been any undue enrichment in the past. It wasn't
10 cited to show that we were unfairly treated. It was to
11 show that there wasn't any windfall profits in there that
12 would have offset the $96 million worth of write-offs
13 that we had, so I don't consider this in the same, I
14 guess, framework as a general rate case filing.
15 COMMISSIONER HANSEN: That's all I have.
16 COMMISSIONER SMITH: Do we have redirect,
17 Mr. Dahlke?
18 MR. DAHLKE: No redirect.
19 COMMISSIONER SMITH: Thank you,
20 Mr. Dukich.
21 (The witness left the stand.)
22 MR. DAHLKE: The next witness is Mr. Ronald
23 McKenzie.
24
25
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CSB REPORTING DUKICH (Com)
Wilder, Idaho 83676 Avista
1 RONALD L. McKENZIE,
2 produced as a witness at the instance of Avista
3 Corporation, having been first duly sworn, was examined
4 and testified as follows:
5
6 DIRECT EXAMINATION
7
8 BY MR. DAHLKE:
9 Q Mr. McKenzie, would you please state your
10 full name and position?
11 A My name is Ronald L. McKenzie. I'm a
12 senior rate accountant with Avista Corporation.
13 Q And, Mr. McKenzie, have you prepared
14 prefiled direct testimony and prefiled rebuttal testimony
15 for this proceeding?
16 A Yes, I have.
17 Q Do you have that testimony with you?
18 A Yes.
19 Q Do you have any corrections or changes to
20 your prefiled testimony?
21 A No, I do not.
22 Q If I were to ask you the questions
23 contained in that testimony, would your answers be the
24 same?
25 A Yes.
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CSB REPORTING McKENZIE (Di)
Wilder, Idaho 83676 Avista
1 Q And are you also sponsoring Exhibits 7 and
2 8 with your direct testimony?
3 A Yes, I am.
4 Q Do you have any additional comments that
5 you need to make with regard to the changes in the
6 prefiled testimony of Kathleen Stockton that is referred
7 to in your rebuttal testimony but was delivered to you
8 subsequent to the filing of your rebuttal testimony?
9 A I've made no changes to my rebuttal
10 testimony based on the changes of Ms. Stockton. My
11 rebuttal testimony is based on her original testimony
12 before the revisions and some of the revisions that she
13 made were a result of reviewing my rebuttal testimony.
14 MR. DAHLKE: With that, I'd move that
15 Mr. McKenzie's direct testimony and rebuttal testimony be
16 spread on the record and that Exhibits 7 and 8 be
17 admitted into evidence.
18 COMMISSIONER SMITH: If there's no
19 objection, it is so ordered.
20 (Avista Corporation Exhibit Nos. 7 & 8
21 were admitted into evidence.)
22 (The following prefiled direct and
23 rebuttal testimony of Mr. Ronald McKenzie is spread upon
24 the record.)
25
128
CSB REPORTING McKENZIE (Di)
Wilder, Idaho 83676 Avista
1 Q Please state your name, business address
2 and present position with Avista Corporation ("Avista").
3 A My name is Ronald L. McKenzie and my
4 business address is East 1411 Mission Avenue, Spokane,
5 Washington. I am employed by Avista as a Senior Rate
6 Accountant.
7 Q Would you briefly describe your educational
8 background?
9 A I was graduated from Eastern Washington
10 University in 1973 with a Bachelor of Arts degree in
11 Business Administration majoring in accounting. I
12 obtained a Master of Business Administration Degree from
13 Eastern Washington University in 1989. I have attended
14 several utility accounting and ratemaking courses and
15 workshops.
16 Q How long have you been employed by Avista
17 and what are your present duties?
18 A I was first employed by Avista in September
19 1974. My present duties include preparing data related
20 to regulatory matters and presenting testimony before
21 regulatory commissions.
22 Q Have you previously testified before this
23 Commission?
24 A Yes. I have testified before this
25 Commission in several prior proceedings.
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McKenzie, Di 1
Avista
1 Q What is the scope of your testimony in this
2 proceeding?
3 A My testimony in this proceeding addresses
4 the calculation of the gain associated with the sale of
5 Avista's 15% share of the Centralia Power Plant to TECWA
6 Power, Inc. ("TECWA"). I also set forth proposed
7 accounting entries to record the sales transaction. I
8 discuss the Company's proposed ratemaking treatment in
9 the event that the Commission allocates a
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McKenzie, Di 1a
Avista
1 portion of the gain to customers.
2 Q How did Avista originally plan to treat the
3 gain resulting from the sale?
4 A In its application Avista originally
5 proposed to defer the gain on the sale and to decide the
6 issue of allocation of the gain between shareholders and
7 customers in a future proceeding.
8 Q Are you sponsoring any exhibits?
9 A Yes. I am sponsoring Exhibit No. 7 which
10 consists of three pages and Exhibit No. 8 which consists
11 of two pages.
12 Q Will you please explain page 1 of Exhibit
13 No. 7?
14 A Yes. Page 1 shows the estimated cash
15 proceeds from the plant sale, the estimated income tax
16 calculation and the estimated after tax gain. The plant
17 sale price that Avista expects to receive is 15% of
18 $454,698,000, or $68,204,700. Avista's share is subject
19 to an adjustment which will be determined based on what
20 PacifiCorp's actual breakeven price of the mine turns out
21 to be in comparison to the sales price of the mine.
22 Avista's share of the sale of the 230KV transmission
23 system amounts to $18,000. The purchase price is reduced
24 by $2,100,000 for employee benefit obligations with
25 Avista's 15% share amounting to $315,000. The purchase
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McKenzie, Di 2
Avista
1 price is further reduced by the amount of expected
2 reclamation accruals with Avista's share amounting to
3 $8,610,000. Projected closing costs amount to $625,000.
4 TECWA is reimbursing plant additions and RACT (Reasonably
5 Available Control Technology) compliance expenditures.
6 Coal inventory is being purchased at a price determined
7 by the cost of the last 100,000 tons of coal delivered by
8 rail adjusted by the heating value of the coal in
9 inventory delivered from the
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McKenzie, Di 2a
Avista
1 mine. TECWA is purchasing supplies at original cost.
2 The total projected cash proceeds amounts to
3 approximately $67,800,000. The estimated income tax
4 expense amounts to approximately $19,100,000 and the
5 after tax gain is projected to be approximately
6 $29,600,000.
7 Q Would you please explain pages 2 and 3 of
8 Exhibit No. 7?
9 A Yes. Page 2 of Exhibit No. 7 shows the
10 projected accounting entries for Avista. Page 3 consists
11 of notes that relate to the proposed accounting entries
12 on page 2.
13 Q Is the gain subject to change as well as
14 the accounting entries?
15 A Yes. There are a number of factors that
16 will affect the amount of the gain as well as the
17 accounting entries. Such factors include the closing
18 date of the sale, the difference between PacifiCorp's
19 actual breakeven price of the mine and the sales price of
20 the mine, the valuation of coal inventory, and the true
21 up of estimates to actuals once actual information is
22 available.
23 Q Will Avista provide the Commission with
24 final accounting entries?
25 A Yes. Avista will provide the Commission
133
McKenzie, Di 3
Avista
1 with final accounting entries that will include a final
2 calculation of the gain.
3 Q Turning now to the gain on the sale of
4 Centralia, what is the Company's position on the
5 disposition of the gain?
6 A As indicated in Mr. Dukich's testimony, the
7 Company is proposing that all the gain should be assigned
8 to shareholders.
9 Q In the event the Commission allocates a
10 portion of the gain to customers, such as the
11 depreciation method proposed by PacifiCorp, does the
12 Company have a specific proposal on the ratemaking
13 treatment for the
14
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17 /
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19 /
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21
22
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24
25
134
McKenzie, Di 3a
Avista
1 customers' share of the gain?
2 A Yes. If the Commission were to allocate a
3 portion of the gain to customers based on the
4 depreciation method proposed by PacifiCorp, it would
5 result in a sharing of the gain between customers and
6 shareholders as shown on page 1 of Exhibit No. 8. Line 4
7 shows the customer percentage of the gain being 69.70%
8 based on the ratio of accumulated depreciation to gross
9 plant. Line 8 shows the dollar amount of the customer
10 portion of the estimated gain amounting to approximately
11 $20,635,000. Line 10 shows the allocation of the
12 customer portion of the gain to jurisdictions based on
13 the production/transmission allocation formula with the
14 Idaho portion of the customer share of the gain amounting
15 to approximately $6,800,000.
16 Q Is the method of allocating the gain
17 between shareholders and customers in Exhibit No. 8 the
18 same method being proposed by PacifiCorp?
19 A Yes. This method allocates the gain
20 between shareholders and customers on the ratio of
21 undepreciated plant (gross plant less accumulated
22 depreciation) to gross plant for the shareholder share of
23 the gain, and on the ratio of depreciated plant to gross
24 plant for the customer share of the gain. This is the
25 same methodology being proposed by PacifiCorp for
135
McKenzie, Di 4
Avista
1 allocating their gain on sale of the Centralia Power
2 Plant.
3 Q How does the Company propose to handle the
4 customer portion of the gain for ratemaking purposes, if
5 a portion of the gain is allocated to customers?
6 A Page 2 of Exhibit No. 8 shows that the
7 Company proposes to use the customer portion of the gain
8 to: 1) offset costs related to storm damage repair costs
9 in Idaho resulting from Ice Storm 1996, 2) offset the
10
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15 /
16
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18
19
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21
22
23
24
25
136
McKenzie, Di 4a
Avista
1 Idaho electric portion of the remaining transition
2 obligation for postretirement health care and life
3 insurance benefits, 3) offset the costs associated by the
4 buy-out of a PURPA contract, and 4) offset a portion of
5 the cost of the initial payment to settle the Nez Perce
6 lawsuit.
7 Q How does the Company propose that the
8 customer portion of the gain be treated for ratemaking
9 purposes in the event that the Commission allocates a
10 smaller percentage of the gain to customers than that
11 allocated under the depreciation method?
12 A In that event, the Company proposes that
13 the customers' share of the gain be used in the order
14 listed on page 2 of Exhibit No. 8. The gain should first
15 be used to offset all or a portion of the costs related
16 to storm damages in Idaho resulting from Ice Storm 1996.
17 Then, if any customer gain remains, the remaining gain be
18 used to offset all or a portion of the transition
19 obligation for postretirement health care and life
20 insurance benefits. Any remaining customer gain would
21 then be used to offset all or a portion of PURPA contract
22 buy-out. And finally, any remaining customer gain would
23 be used to offset a portion of the initial payment to
24 settle the Nez Perce lawsuit.
25 Q Will the Company's revenue requirement in
137
McKenzie, Di 5
Avista
1 its next general electric rate case be impacted by the
2 Company's proposal on how to handle the customer portion
3 of the gain?
4 A Yes. All of the items identified above
5 with the exception of Ice Storm will have the effect of
6 reducing the revenue requirement in the Company's next
7 general electric rate case.
8 Q Is there a rationale for using the four
9 items identified above to
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17
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25
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McKenzie, Di 5a
Avista
1 offset any customer portion of the gain?
2 A Yes. The gain on the sale of the Centralia
3 Power Plant is the type of event that does not occur on a
4 regular basis. Likewise, the storm damage costs from Ice
5 Storm 1996 relate to an unusual event. The
6 postretirement benefit transition costs resulted from a
7 one-time, accounting change. The PURPA contract buy-out
8 and the Nez Perce lawsuit payment are also one-time
9 events. The combined amount of the four offset items
10 equal the customer portion of the gain under the
11 depreciation method of allocating the gain, and three of
12 the four offset items will benefit customers by reducing
13 revenue requirements in future electric general rate
14 cases.
15 Q Did the Commission disallow recovery of Ice
16 Storm in Avista's last electric rate case?
17 A Yes. The Commission in its Order No. 28097
18 in Case No. WWP-E-98-11 at page 11 did disallow recovery
19 of Ice Storm costs.
20 Q Considering the prior disallowance, why do
21 you believe that a portion of the any customer share of
22 the Centralia gain be first used to offset Ice Storm
23 costs?
24 A The Commission's Order dealt with not
25 allowing recovery of Ice Storm costs through rates. The
139
McKenzie, Di 6
Avista
1 Commission used the rationale that Ice Storm was an
2 extraordinary, non-recurring expense. Certainly, the
3 sale of the Centralia Power Plant falls into the same
4 category as Ice Storm of being an extraordinary and
5 non-recurring type of event. The Company's proposal does
6 not violate Order 28097 as no recovery of Ice Storm is
7 being sought through rates. Rather, a portion of the
8 extraordinary, non-recurring gain from the sale of
9 Centralia is being proposed to offset the extraordinary,
10 non-
11
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140
McKenzie, Di 6a
Avista
1 recurring cost of Ice Storm.
2 Q Does that conclude your direct testimony in
3 this proceeding?
4 A Yes, it does.
5
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141
McKenzie, Di 7
Avista
1 Q Please state your name, business address
2 and present position with Avista Corporation ("Avista").
3 A My name is Ronald L. McKenzie and my
4 business address is East 1411 Mission Avenue, Spokane,
5 Washington. I am employed by Avista as a Senior Rate
6 Accountant.
7 Q Have you previously submitted direct
8 testimony in this proceeding?
9 A Yes.
10 Q What is the scope of your rebuttal
11 testimony in this proceeding?
12 A My rebuttal testimony responds to the
13 direct testimony of Commission Staff witness, Kathleen L.
14 Stockton, and Potlatch Corporation witness, Dennis E.
15 Peseau. I explain why Avista's proposal on how to
16 utilize the customer share of the gain for ratemaking
17 purposes is appropriate and will not result in a double
18 recovery of costs. I explain several corrections to
19 Ms. Stockton's revenue requirement calculation and
20 explain why her proposal is not appropriate. My rebuttal
21 testimony explains why Dr. Peseau's calculation of the
22 customer share of the gain is incorrect. I also explain
23 why the Potlatch contract should receive absolutely no
24 share of any customer portion of the gain and that any
25 revenue adjustments should be spread on a uniform
142
McKenzie, Reb 1
Avista
1 percentage basis.
2 Q Would you please restate Avista's position
3 on the disposition of the gain on the sale of the
4 Centralia Power Plant?
5 A Yes. As indicated in Mr. Dukich's
6 testimony, Avista is proposing that all the gain should
7 be assigned to shareholders. In the event
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143
McKenzie, Reb 1a
Avista
1 the Commission allocates a portion of the gain to
2 customers, such as the depreciation method proposed by
3 PacifiCorp, Avista is proposing that any customer portion
4 of the gain by used to offset the specific items
5 identified in my direct testimony. The first offset item
6 that I identify is Ice Storm 1996.
7 Q Would you please respond to Ms. Stockton's
8 position that it is not appropriate to use the gain on
9 the sale of Centralia to offset the unrecovered costs of
10 the Ice Storm 1996?
11 A Yes. Beginning at page 13, line 19,
12 Ms. Stockton argues that since the Commission did not
13 allow recovery of Ice Storm costs through present rates
14 in Avista's recently concluded general rate case, it is
15 not appropriate to request recovery of those costs now.
16 Avista is not requesting recovery of Ice Storm costs
17 through rates. Avista is requesting that a portion of
18 any customer portion of the gain be first used to offset
19 Ice Storm costs.
20 At page 13, beginning at line 6, of her testimony
21 Ms. Stockton argues that, "It is clear that the
22 Commission did not allow recovery of the Ice Storm costs
23 through present rates, and did not intend for the Company
24 to request relief at an even later time." It is clear is
25 that the Commission did not allow recovery of Ice Storm
144
McKenzie, Reb 2
Avista
1 costs through present rates. It is certainly not clear
2 that the Commission precluded offsetting a portion of any
3 customer share of the Centralia gain against Ice Storm
4 costs.
5 Q Would you please respond to Ms. Stockton's
6 testimony that the sale of the Centralia Plant is a
7 "usual" event and is therefore not in the same "unusual"
8 event category as an ice storm?
9 A Yes. In its over 110-year history, this is
10 the first major generating resource ever sold by the
11 Company. The sale of the Centralia
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145
McKenzie, Reb 2a
Avista
1 Power Plant is an unusual event. At page 14, beginning
2 at line 23, of her testimony Ms. Stockton attempts to put
3 the sale of Centralia into the "normal course of
4 business" category. This is simply not the case. It is
5 not Avista's normal course of business to sell its
6 generating assets. Avista's normal course of its
7 electric utility business is to generate, transmit and
8 distribute power to its customers. The sale of Centralia
9 is an extraordinary, non-recurring type of event.
10 Q Would you please respond to Ms. Stockton's
11 testimony pertaining to the other three offset items
12 Avista is proposing?
13 A Yes. At page 15, beginning at line 8, of
14 her testimony Ms. Stockton disagrees with using any
15 customer portion of the gain to offset postretirement
16 benefit transition costs, a PURPA contract buyout, and a
17 portion of the Nez Perce initial lawsuit settlement
18 payment. She argues that since customers are currently
19 paying the yearly amortization of these costs through
20 rates, that approving an offset for these costs would
21 allow over-recovery.
22 Avista is proposing to offset any customer portion
23 of the gain by first offsetting the costs associated with
24 Ice Storm and then by writing off all or a portion of the
25 unamortized balances related to the three items listed
146
McKenzie, Reb 3
Avista
1 above. It was not Avista's intent to over-recover costs
2 associated with the proposed write-off items. Avista
3 originally proposed to wait until its next general rate
4 case to adjust the revenue requirement to recognize the
5 elimination or reduction in the amortization expenses
6 related to these items. Between rate cases Avista may
7 experience reductions in some costs, but the majority of
8 its costs increase. Hence, Avista did not believe that
9 there would
10
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19
20
21
22
23
24
25
147
McKenzie, Reb 3a
Avista
1 be an over-recovery of costs associated with the proposed
2 write-off amounts between rate cases.
3 If the Commission were to allocate a portion of
4 the gain to customers using the depreciation method and
5 determine that a rate adjustment is appropriate for the
6 offsets shown on page 2 of Exhibit No. 8, the reduction
7 in the Idaho electric annual revenue requirement would be
8 $816,000. Worksheets showing the calculation of this
9 amount have been provided to the Staff.
10 Q Is there an inconsistency in Staff's
11 testimony regarding the adjustment of revenues for
12 changes occurring since the recently approved rate case?
13 A Yes. While Ms. Stockton claims that unless
14 rates are adjusted, there will be an over-recovery of
15 costs; another Staff witness, Mr. Lobb, at page 13,
16 beginning at line 1, recognizes that replacement power
17 costs are expected to increase the revenue requirement
18 above the level associated with Centralia in the recent
19 general rate case, but argues that the revenue
20 requirement not be changed until a future rate case.
21 Q Does Ms. Stockton's testimony contain
22 inconsistencies regarding the treatment of gains and
23 losses?
24 A Yes. At page 9 of her testimony, beginning
25 at line 6, she cites Case No. IPC-E-93-20, an Idaho Power
148
McKenzie, Reb 4
Avista
1 Company case dealing with a loss on the sale of
2 distribution facilities. In that case Idaho Power
3 Company requested that the loss be absorbed in the
4 accumulated reserve for depreciation account. Under that
5 proposed treatment the reserve balance would be depleted
6 which would cause an increase in Idaho Power
7
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13
14
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16
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19
20
21
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149
McKenzie, Reb 4a
Avista
1 Company's rate base. In the future, depreciation rates
2 would also increase due to the loss. The Commission
3 Staff recommended that the loss from the sale be placed
4 into a regulatory asset account to be amortized over a
5 period of ten years. The unamortized balance of the loss
6 would be excluded from rate base and the annual
7 amortization expense would be included in the revenue
8 requirement. The Commission rejected Idaho Power
9 Company's proposal and accepted the Staff's proposal of
10 an amortization with no return on the unamortized
11 balance.
12 In the current case, Ms. Stockton is recommending
13 a treatment of the gain on the sale of Centralia that the
14 Staff opposed and the Commission rejected in the Idaho
15 Power Company case. Ms. Stockton proposes, beginning on
16 page 16 at line 10 of her direct testimony, that the gain
17 be credited to accumulated depreciation, that rate base
18 be lowered and that depreciation expense be reduced. In
19 the Idaho Power Company case Staff proposed an
20 amortization with no return on the unamortized balance
21 and in this case Staff is proposing an amortization with
22 a return on the unamortized balance.
23 Q Do you have any problem with Ms. Stockton's
24 calculation of her proposed reduction in revenue
25 requirement shown on Exhitbit No. 104?
150
McKenzie, Reb 5
Avista
1 A Yes. The Staff proposed reduction in rate
2 base should be an average that takes into account the
3 first year of amortization of the gain. In addition,
4 preferred trust securities have tax deductible interest.
5 Hence, the weighted cost of preferred trust securities
6 should be excluded from the preferred equity return and
7 included with the debt return. A corrected calculation
8 has been provided in the workpapers submitted to the
9 Staff. It
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151
McKenzie, Reb 5a
Avista
1 should be noted that based on an amortization rate of
2 3.38%, the effective amortization period used by
3 Ms. Stockton is 29.6 years.
4 Q Turning now to Potlatch's testimony, does
5 Dr. Peseau modify Avista's calculation of the customers'
6 share of the gain under the depreciation method?
7 A Yes. Avista's calculation of the
8 customers' share of the gain under the depreciation
9 method is shown on my Exhibit No. 8, page 1 of 2. The
10 69.70% customer share is calculated by dividing
11 accumulated depreciation by gross plant. Dr. Peseau
12 changes the calculation on his Exhibit No. 203 by adding
13 $4,000,000 of deferred income taxes to accumulated
14 depreciation and then divides that sum by gross plant to
15 produce a customer share of 76.63%.
16 Q Is Dr. Peseau's adjustment appropriate?
17 A Absolutely not. The Commission should
18 reject Dr. Peseau's adjustment of directly assigning
19 deferred income taxes to the customer share. The
20 depreciation method of allocating the gain is an approach
21 that, if adopted, should not include components other
22 than gross plant and accumulated depreciation. Specific
23 components such as income taxes should not be singled out
24 for assignment to either customers or shareholders.
25 While Avista is not proposing to directly assign
152
McKenzie, Reb 6
Avista
1 components of the net of tax gain, one such direct
2 assignment that would drastically reduce the benefit to
3 customers is a direct assignment of federal income tax
4 associated with the sale. Federal income tax associated
5 with the sale will be computed on the difference between
6 the sales price and the net depreciated tax basis of the
7 plant. Hence, a portion of the taxable gain relates to
8 the cumulative
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153
McKenzie, Reb 6a
Avista
1 amount of depreciation taken for tax purposes. It is
2 estimated that accumulated tax depreciation at December
3 31, 1999 will be $44,767,210 and the associated federal
4 income tax on that portion of the gain will be
5 $15,668,523 ($44,767,210 x 35%). Since tax benefits
6 relating to approximately $42,029,393 or 93.88% of the
7 total amount of tax depreciation of $44,767,210 will
8 cumulatively have been passed on to customers at December
9 31, 1999, 93.88% of the $15,668,523 tax on the gain or
10 $14,709,609 could be directly assigned to customers with
11 $958,914 being assigned to shareholders.
12 While Dr. Peseau's inappropriate adjustment would
13 result in an increase in the customer portion of the gain
14 of $2,051,661 ($22,686,697-$20,635,036), he fails to
15 recognize other adjustments that would reduce the
16 customer portion of the gain. Rather than $10,920,960
17 (69.70% x $15,668,523) of federal income tax associated
18 with tax depreciation being allocated to customers under
19 the depreciation method, $14,709,609 could be directly
20 assigned to customers. Such a direct assignment would
21 reduce the amount of gain to customers by $3,788,649
22 ($14, 709,609-$10,920,960).
23 Q In addition to Dr. Peseau's method being
24 theoretically flawed, does Dr. Peseau use an incorrect
25 amount of deferred federal income taxes under his
154
McKenzie, Reb 7
Avista
1 approach?
2 A Yes. Dr. Peseau argues that deferred taxes
3 related to tax benefits associated with tax depreciation
4 in excess of book depreciation that have not been flowed
5 through to customers should be added to accumulated
6 depreciation. He uses a $4,000,000 amount. The correct
7 amount would be $993,236 from Exhibit No. 7, page 2 of 3,
8 entry number 7. The $4,000,000 of deferred federal
9 income taxes incorrectly used by Dr. Peseau relates to
10 FAS-
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17
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155
McKenzie, Reb 7a
Avista
1 109. Among other timing differences, FAS-109 deferred
2 tax liabilities reflect tax benefits associated with tax
3 depreciation in excess of book depreciation that have
4 previously been flowed through to customers.
5 Q Would you please summarize your objections
6 to Dr. Peseau's proposed modification to the calculation
7 of the customer share of the gain under the depreciation
8 approach?
9 A Yes. The depreciation approach to
10 allocating the gain to customers is determined by
11 dividing accumulated depreciation by gross plant.
12 Modifying the calculation to include deferred income
13 taxes as Dr. Peseau proposes is not appropriate.
14 Dr. Peseau uses an incorrect amount in his calculation.
15 If the depreciation approach were to be modified to
16 include deferred income taxes, a direct assignment of
17 federal income tax associated with the sale would
18 drastically reduce the benefit to customers.
19 Q Would you please comment on Dr. Peseau's
20 proposal on how to distribute the customer share of the
21 gain to retail customers?
22 A Yes. At page 24, beginning at line 1, of
23 Dr. Peseau's testimony he claims that the customer share
24 of the gain should be allocated to retail customers based
25 on annual energy consumption. He further states that
156
McKenzie, Reb 8
Avista
1 large industrial customers and contract customers should
2 receive a single billing credit or a check with other
3 customers receiving a credit over the course of a year.
4 The Commission should not adopt Dr. Peseau's
5 proposal. Any rate reduction should be spread to
6 customer classes, excluding the Potlatch special
7 contract, on a uniform percentage basis as proposed by
8 Mr. Lobb at page 12 of his direct testimony, beginning at
9 line 16. The Potlatch special contract is
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157
McKenzie, Reb 8a
Avista
1 not subject to price adjustments, either increases or
2 decreases. The Potlatch special contract has been
3 exempted from Power Cost Adjustment (PCA) rebates and
4 surcharges, from the Demand Side Management (DSM) tariff
5 rider and from the recent general rate increase effective
6 August 1, 1999. The Potlatch special contract should get
7 no share of any price reduction associated with gain on
8 sale of the Centralia Power Plant. A uniform percentage
9 basis of spreading a rate reduction is more appropriate
10 than a uniform cents-per-kilowatt-hour basis since a
11 uniform percentage basis more closely resembles the
12 spread of general rate changes in the past and since PCA
13 rebates and surcharges as well as the DSM tariff rider
14 are spread to rate schedules on a uniform percentage
15 basis.
16 Q Does that conclude your rebuttal testimony
17 in this proceeding?
18 A Yes, it does.
19
20
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22
23
24
25
158
McKenzie, Reb 9
Avista
1 (The following proceedings were had in
2 open hearing.)
3 MR. DAHLKE: Mr. McKenzie is available for
4 cross-examination.
5 COMMISSIONER SMITH: Mr. Ward, do you have
6 questions for Mr. McKenzie?
7 MR. WARD: I do.
8
9 CROSS-EXAMINATION
10
11 BY MR. WARD:
12 Q Mr. McKenzie, my questions will fall into
13 two broad categories. The first ones have to do not with
14 the question of how to allocate the gain on the sale but
15 with the manner of accounting for the disposition of
16 Centralia itself, so I just want you to know that's where
17 I'm directed in case I'm unclear.
18 With regard to Centralia and the sale and
19 the accounting for it, as I understand it, the Company's
20 position is, first of all, Mr. Johnson conducted an
21 analysis that finds at least under one scenario that the
22 present value of the sale versus continued operations
23 produce roughly a $7.7 million 20-year net present value
24 benefit associated with the sale; correct?
25 A I'd state it a little bit differently.
159
CSB REPORTING McKENZIE (X)
Wilder, Idaho 83676 Avista
1 Mr. Johnson's analysis looks at the continued operation
2 of the mine versus replacement power options and that
3 comparison results in his present value benefit to
4 customers.
5 Q Fine, I'll accept that, and would it be
6 fair for me to assume that insofar as the actual
7 accounting on the Company's books as opposed from
8 regulatory accounting, the accounting on the Company's
9 books for the sale will in fact remove the Centralia
10 asset and accumulated depreciation from the Company's
11 books?
12 A Yes.
13 Q But on the regulatory side, it seems to me,
14 and certainly if you disagree with my paraphrase, feel
15 free to do so, it seems to me that -- well, first of all,
16 on the regulatory side, the Company has not proposed, has
17 it, to delete Centralia from rate base and adjust rates
18 accordingly?
19 A Not in this proceeding, no, but that would
20 be a result in a future proceeding, a future general rate
21 case.
22 Q If in fact -- you were a witness in the
23 prior rate case, were you not?
24 A No, I was not.
25 Q Were you in attendance?
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CSB REPORTING McKENZIE (X)
Wilder, Idaho 83676 Avista
1 A Yes.
2 Q And would it be fair to say that in
3 response to a motion and argument by Potlatch that
4 regarding the then pending Centralia sale that the
5 Company took the position that that sale was not a known
6 and measurable and reliable adjustment to rates at that
7 point?
8 A I would agree with that characterization,
9 yes.
10 Q And the Commission accepted that argument,
11 did it not?
12 A Yes.
13 Q Had the Commission not accepted that
14 argument and determined that the sale was a known and
15 measurable adjustment, would not the appropriate
16 accounting treatment, regulatory accounting treatment,
17 been the same as the book treatment; that is, the removal
18 of a plant from rate base, both with respect to the asset
19 value and the accumulated depreciation?
20 A That would be one of the adjustments, but
21 you'd also have to factor in replacement power.
22 Q And if you know, I recognize this isn't
23 your field, doesn't the power cost adjustment provision
24 for Avista capture power purchases and changes in power
25 supply costs?
161
CSB REPORTING McKENZIE (X)
Wilder, Idaho 83676 Avista
1 A The power cost adjustment only captures
2 changes in power supply costs due to changes in
3 streamflow conditions, actual conditions compared to the
4 average that's built into its rates.
5 Q The costs, however, are themselves, the
6 base costs are themselves, calculated not only using
7 streamflows but other fuel sources, are they not?
8 A Not other fuel sources. The costs of
9 short-term purchases and sales are determined to evaluate
10 the difference in power costs due to the change in
11 streamflows, but these questions are more properly
12 addressed to Mr. Johnson.
13 Q Okay. Let me leave that, then, and go back
14 to my basic question. Why didn't the Company in this
15 case account for the sale of Centralia in the same manner
16 that it would if we were looking at an ordinary rate
17 proceeding; that is, the removal of the plant from rate
18 base and associated adjustments?
19 A First off, the sale has not occurred yet,
20 so there's uncertainty at this point in time of making
21 that adjustment. The other point is, and Mr. Johnson
22 would be the witness that would respond to this question,
23 what the replacement power cost is in comparison to the
24 cost of Centralia power.
25 Q Well, I don't want to cross you on
162
CSB REPORTING McKENZIE (X)
Wilder, Idaho 83676 Avista
1 Mr. Johnson's testimony, but you are aware, are you not,
2 that he postulates a most likely scenario of decreased
3 costs?
4 A Over his time horizon. I'm not sure
5 exactly in the short term, one- to three-year period,
6 what the comparison is, but over the long term, he's
7 demonstrating a benefit to customers.
8 Q Do you happen to have Mr. Johnson's
9 testimony and exhibits with you?
10 A Yes, I do.
11 Q If you'd turn to page 2 of Exhibit No. 1,
12 do you have that?
13 A Yes.
14 Q Those -- let's look at the, since we're in
15 this year now, the three postulated scenarios for
16 replacement power costs and do you see those three
17 numbers there beginning with 25.21?
18 A Yes.
19 Q If you go back a page to the 2000
20 calculation of Centralia costs, scan over to the far
21 right-hand side and you'll see that cost listed as $26.45
22 per megawatt-hour, do you see that?
23 A Yes.
24 Q Doesn't that suggest to you that even in
25 the short term Mr. Johnson projects that there will be
163
CSB REPORTING McKENZIE (X)
Wilder, Idaho 83676 Avista
1 immediate savings from the substitution of purchased
2 power for the Centralia plant?
3 A Comparing those two numbers, that is the
4 result, but I'm not sure that that is what actually is
5 occurring or has occurred. Mr. Johnson talked about a
6 replacement purchase that's already been made, the terms
7 of which are confidential, and you should address
8 questions regarding Mr. Johnson's exhibits and cost to
9 Mr. Johnson.
10 Q All right, but given the way that the
11 Company has treated this application, if there are cost
12 savings, those will not result in any rate reductions,
13 will they?
14 A Well, the Company is proposing some offsets
15 that would result in future rate reductions under its
16 proposal.
17 Q But only after a rate hearing sometime in
18 the future, if ever?
19 A No. My testimony leaves the option up to
20 the Commission. They could adjust rates after they
21 approve the sale currently and I identify an amount of
22 that adjustment in my rebuttal testimony.
23 Q Let's leave the subject and go now to the
24 treatment of the gain. Starting with your direct
25 testimony, if you'd turn to that, now, beginning on about
164
CSB REPORTING McKENZIE (X)
Wilder, Idaho 83676 Avista
1 page 4 of your testimony, you discuss the use of any
2 customer portion of the gain to reduce certain items on
3 the books, that are currently on the books, you obviously
4 recall that testimony?
5 A Yes.
6 Q I'm going to leave aside the ice storm
7 which I think is pretty well covered and let's focus on
8 the other three items, if you would, and you list those
9 at the bottom of page 4 and page 5. Now, would you agree
10 with me that the existing rates of the Company have a
11 component designed to recover the amortization of those
12 three costs?
13 A Yes, they do.
14 Q And going back to the rate case, if this
15 proceeding had occurred as part of the rate case and the
16 Commission were to accept your proposal, that is, the
17 assignment or the use of some of the proceeds to write
18 down these accounts, that would have decreased rates,
19 would it not?
20 A It would have made the revenue requirement
21 smaller, yes.
22 Q Okay. Now, in this case if the Commission
23 accepts your proposal as is, will rates decrease?
24 A Again, as I previously stated, my rebuttal
25 testimony identifies a rate decrease associated with
165
CSB REPORTING McKENZIE (X)
Wilder, Idaho 83676 Avista
1 these three offset items and leaves the option up to the
2 Commission of whether or not rates should be adjusted.
3 We bring up the fact that the majority of our costs
4 increase over time and we don't feel that we would be
5 over-collecting on these offset items, but, again, the
6 Commission has the option of changing the Company's
7 rates.
8 Q Okay.
9 A The amount is identified on page 4 of my
10 rebuttal testimony, line 7, $816,000.
11 Q Well, I wanted to come back to that in a
12 bit, but are you then withdrawing your original proposal
13 that's contained in your direct testimony?
14 A No.
15 Q All right, let me ask you one further
16 question about the original proposal. I don't know what
17 the life, the amortization life, of those accounts were,
18 but let's assume it was three years. Do you have that
19 hypothesis in front of you?
20 A I have the hypothesis, but the amortization
21 periods were much longer than that. In the case of the
22 Nez Perce settlement, it was 45 years.
23 Q If in fact -- well, maybe there's an easier
24 way to ask it. If the Company were not to come in for
25 another general rate case for another 13 years, can you
166
CSB REPORTING McKENZIE (X)
Wilder, Idaho 83676 Avista
1 accept that happy hypothesis?
2 A Okay.
3 Q Isn't it true that to the extent the
4 Company recovers some or all of these items up front
5 without a rate adjustment that at any time that the
6 combination of the amortization process and the
7 contribution from the gain zeros out the account
8 thereafter the Company will overrecover in rates?
9 A I don't agree with that statement. You
10 have to look at the Company's overall costs to determine
11 whether its earnings have been excessive or not and over
12 time costs generally tend to increase, so there are
13 offsets to any reductions that might occur in specific
14 cost items.
15 Q That's fair enough. Would my hypothesis be
16 true if you assume all other things are equal?
17 A If all of the other Company's costs
18 remained the same, yes, your hypothesis would be true.
19 Q Okay. Turning to the rebuttal testimony,
20 if you would, we have on pages -- beginning at the bottom
21 of page 6 and through page 7, there's a discussion that
22 took me a very long time to wade through and understand,
23 but I think I have it now, so let me see if that's in
24 fact the case. Here you are responding to Dr. Peseau's
25 proposal regarding deferred taxes and one of your
167
CSB REPORTING McKENZIE (X)
Wilder, Idaho 83676 Avista
1 observations is that a certain portion of the gain,
2 $40 million plus, comes from the reduction of asset value
3 because of depreciation. That's your first hypothesis;
4 correct?
5 A Yes.
6 Q And then you say because the customers
7 furnished those funds to reduce the asset value, we could
8 attribute the income tax consequences to the customers;
9 isn't that the next step in the syllogism?
10 A No. The point I'm making is because of
11 flow-through treatment of tax benefits for plant
12 additions made prior to 1981, customers have received
13 reductions in rates for the flow-through of those tax
14 benefits amounting to about 93.9 percent of the total tax
15 depreciation, so they've received a benefit, so you could
16 directly assign the tax on that piece of the gain to the
17 customers because they've previously received the
18 benefit.
19 Q Are you saying they received a benefit
20 because the Company was able to take a deduction for
21 depreciation?
22 A Yes. They received the amount of reduction
23 in tax expense from the tax depreciation that was taken
24 and that was a benefit to customers.
25 Q Isn't it the normal assumption that the
168
CSB REPORTING McKENZIE (X)
Wilder, Idaho 83676 Avista
1 owner of the Company receives the benefit of depreciation
2 in that sense; in other words, his return is his cash
3 flow minus depreciation and, of course, other non-cash
4 items?
5 A Well, revenues reflected the pass-through
6 of the benefits, so there was no net income effect to the
7 Company.
8 Q Let me try one more time, Mr. McKenzie. If
9 I'm the customer and you're the owner of Avista and you
10 have a $10.00 revenue requirement, part of that revenue
11 requirement -- and let's say that part of that revenue
12 requirement consists of $1.00 for depreciation. Okay, in
13 my rates, I give you $3.00 or whatever, including the
14 $1.00 for depreciation and that's what happens in
15 ratemaking, isn't it?
16 A In that simple example, yes, but there's
17 also tax depreciation than may be different than book
18 depreciation and that's exactly what happened here. Tax
19 depreciation exceeded book depreciation and the tax
20 effect of that was flowed through, the benefit was flowed
21 through, to customers and resulted in revenues being
22 lower than what they would have been if the tax deduction
23 was based on book depreciation.
24 Q I understand that, Mr. McKenzie, but I'm
25 trying to divorce the idea right at the moment of tax
169
CSB REPORTING McKENZIE (X)
Wilder, Idaho 83676 Avista
1 timing differences from the first -- from the larger
2 portion of your testimony in which you suggest that the
3 ratepayers would become responsible for 93.88 percent of
4 the tax on the gain because they paid depreciation.
5 That's a separate allegation, okay?
6 Let me try to cut to the chase and get at
7 it another way. How could the ratepayers become
8 responsible for the tax on a gain that in effect -- when
9 in effect they don't receive all the gain?
10 A I think what I'm trying to explain in my
11 testimony is that if you want to make direct assignments,
12 like Dr. Peseau is suggesting making a tweak to the
13 accumulated depreciation method, that if you decide to
14 make that tweak, which is incorrect because he uses an
15 incorrect number, then you need to also look at other
16 things that could be directly assigned that would
17 influence the allocation of the gain and the tax on the
18 tax depreciation recapture could be almost entirely
19 directly assigned to customers because they've received
20 those tax benefits over time.
21 Q Well, I can't speak for the other
22 customers, Mr. McKenzie, but I can speak for Potlatch,
23 we'd cheerfully pay it if we get the full recapture of
24 the depreciation amount.
25 Let me approach the witness, if I may.
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CSB REPORTING McKENZIE (X)
Wilder, Idaho 83676 Avista
1 (Mr. Ward distributing documents.)
2 MR. WARD: This won't need to be marked.
3 These are already exhibits in the proceeding. Now,
4 Madam Chair, I've passed out two separate pages. The
5 first, as you can see, is a copy of Mr. McKenzie's
6 rebuttal, page 7, and the second is Exhibit No. 7, page 2
7 of 3.
8 Q BY MR. WARD: I did give you both pages,
9 didn't I, Mr. McKenzie?
10 A You didn't give me anything, but I do have
11 it.
12 Q You're the one I wanted to have access to
13 it at the same time. I apologize.
14 (Mr. Ward approached the witness.)
15 Q BY MR. WARD: Now, then, nobody would
16 characterize me as an accounting expert, Mr. McKenzie, so
17 correct my terms if I wander off of the straight and
18 narrow, but I'd like to ask you some general questions
19 first and then we'll get to these two pages. In general,
20 over many years there have been a variety of differences
21 in booking of taxes for regulatory books on the one hand
22 and tax books on the other; is not that true?
23 A I'm not sure I entirely agree with that.
24 Q Well, let's take deferred taxes. Way back
25 in -- I can almost remember to my youth in this business
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CSB REPORTING McKENZIE (X)
Wilder, Idaho 83676 Avista
1 the treatment of deferred taxes was originally left to
2 state commissions. They could flow through tax timing
3 differences or they could normalize. Do you recall that
4 long ago?
5 A I recall long ago that the flow-through
6 method was adopted for Avista for ratemaking purposes,
7 yes.
8 Q And in fact, some jurisdictions, and I'd
9 suggest to you this is one, you can verify that some
10 other time, alternated between normalization and
11 flow-through; that is, they went from normalization to
12 flow-through and then later on back to normalization
13 again. Now, in the latter instance, the conversion back
14 to normalization was mandated by federal law, was it not?
15 A In 1981, yes, the Tax Reduction Act
16 mandated deferred accounting for federal income taxes for
17 property additions beginning in 1981 and beyond. The
18 plant that existed prior to 1981 was under the old
19 flow-through method and continued to be under the
20 flow-through method even after 1981.
21 Q Okay; so with respect to -- well, let's
22 focus now for the moment on any normalized differences.
23 If you have deferred taxes because of normalization --
24 and that happens, does it not?
25 A Yes.
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CSB REPORTING McKENZIE (X)
Wilder, Idaho 83676 Avista
1 Q -- isn't it a fact that what happens in the
2 regulatory process is the customers, ratepayers, pay the
3 Company for a calculated tax liability that in fact is
4 more, typically, than the Company's actual taxes?
5 A Yes.
6 Q And those differences are booked as
7 deferred taxes?
8 A Correct.
9 Q Now, and isn't it true that in general,
10 those deferrals are due to different service lives and
11 depreciation lives between regulatory books and tax
12 books?
13 A Yes. Normally, tax lives are shorter than
14 book lives and also the tax rules allow for accelerated
15 depreciation methods where the book method is a straight
16 line method, normally.
17 Q Now, and isn't it also true that assuming
18 the Company keeps an asset over the entire period of its
19 life, in theory, at least, the customers who have prepaid
20 somewhat more than the actual income taxes due on
21 revenues generated by a particular asset will in the end
22 recover after some cross-over point those excess payments
23 as the -- well, let me just ask it like that. At some
24 cross-over point they start to recover back, do they not?
25 A Yes. The revenue requirement is based on
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CSB REPORTING McKENZIE (X)
Wilder, Idaho 83676 Avista
1 the straight line book calculation and deferred taxes are
2 just the balancing to account for the difference between
3 the tax and the book depreciation, but deferred taxes
4 will equal zero at some point in time.
5 Q Okay. Now, after taking issue with
6 Dr. Peseau's theory, you take issue with the number that
7 he calculates for deferred tax of $4 million; correct?
8 A Correct.
9 Q Now, we may have inadvertently contributed
10 to some confusion here by citing a round figure of
11 $4 million that should have said, probably, roughly
12 $4 million, but if you would look at -- I don't see lines
13 on Exhibit 7. Do you see the -- oh, number 2, plant in
14 service, below that do you see the second number 2,
15 accumulated depreciation?
16 A Yes.
17 Q And that figure is 40,196,000 and change;
18 correct?
19 A Correct.
20 Q Now, I want you to look over to page 7 of
21 your testimony and on line 5 -- do you see that?
22 A Yes.
23 Q -- you have the total amount of tax
24 depreciation of $44,767,210, do you see that?
25 A Yes.
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CSB REPORTING McKENZIE (X)
Wilder, Idaho 83676 Avista
1 Q Isn't that difference roughly $4 million?
2 A Yes, it is, but like I state in my
3 testimony, my rebuttal testimony, the flow-through method
4 of accounting flowed those tax benefits through to
5 customers and you're comparing a tax depreciation number
6 that includes both normalization and flow-through with
7 the majority being flow-through.
8 Q And you say that some portion of -- and now
9 we have to look to your Exhibit No. 7 again, down at the
10 bottom, just before the first line across the exhibit,
11 there's a $4 million figure?
12 A Under note 8?
13 Q Yes, thank you.
14 A Yes.
15 Q And your testimony says some portion of
16 that is due to -- is flowed-through items?
17 A Correct.
18 Q But wouldn't the correct calculation of the
19 total deferred tax difference be note 7, 993,236, plus
20 note 8, 4 million less whatever flowed-through items are
21 in the account and not otherwise accounted on the
22 Company's books?
23 A Well, if you did that calculation, you'd
24 add 4 million to the 993,236 and then subtract 4 million
25 because that basically represents tax amounts that were
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CSB REPORTING McKENZIE (X)
Wilder, Idaho 83676 Avista
1 flowed through to customers. Note 7 there represents
2 what you previously asked me about, under normalization,
3 what are the deferred taxes and that's the 993,236. The
4 reason for the 4 million under FAS-109 is basically the
5 fact that there were flow-through tax benefits that have
6 already been given to customers.
7 Q Let me suggest this: Mr. McKenzie, since
8 we have different estimates of what the deferred tax
9 balance is, isn't that something that could be relatively
10 easily audited and accounted for when the books are
11 closed?
12 A Yes, and it could be audited and accounted
13 for now. Basically, my exhibit shows deferred taxes at
14 the end of 1999 under note 7 and then note 8 is the
15 FAS-109 deferred tax amounts. These amounts will change
16 a little bit as we proceed past the end of 1999 into 2000
17 until the sale closes and in that sense, they could be
18 audited, but they could be audited now as well.
19 Q But are you contending that all the items
20 in FAS-109 are flow-through items?
21 A No, I'm not.
22 MR. WARD: Okay, I'll leave it at that. I
23 have one final matter. Again, if I may approach the
24 witness.
25 COMMISSIONER SMITH: Yes, you may.
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CSB REPORTING McKENZIE (X)
Wilder, Idaho 83676 Avista
1 MR. WARD: And, Madam Chair, this might be
2 easiest if we take a five-minute break because I'm going
3 to walk him through this exhibit to save a little time.
4 COMMISSIONER SMITH: All right, we'll take
5 a five-minute break.
6 (Recess.)
7 COMMISSIONER SMITH: All right, it looks
8 like everybody is ready. We'll go back on the record.
9 Q BY MR. WARD: Now, if you would turn to
10 your rebuttal testimony, bottom of page 8 --
11 COMMISSIONER SMITH: Mr. Ward, is your mike
12 on?
13 MR. WARD: I'm sorry.
14 Q BY MR. WARD: Referring to your rebuttal
15 testimony at the bottom of page 8 and the top of page 9,
16 beginning with the last partial sentence there, you're
17 explaining why you do not agree that the Potlatch
18 contract should participate in any portion of the gain,
19 of the customers' share of the gain, from the sale of
20 Centralia; correct?
21 A Correct.
22 Q And you say at the bottom of page 8, the
23 last partial sentence, "The Potlatch special contract is
24 not subject to price adjustments, either increases or
25 decreases." Do you see that testimony?
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CSB REPORTING McKENZIE (X)
Wilder, Idaho 83676 Avista
1 A Yes.
2 Q Now, first of all, let me ask you, is it
3 fair to assume that when the Company and Potlatch entered
4 into their contract that the rate was established at a
5 point in which the parties agreed, among other things, to
6 cover not only depreciation on the Company's assets but a
7 return on those assets; isn't that fair to assume?
8 A I don't know that to be the case. I wasn't
9 party to the negotiations or any of the studies that went
10 into the negotiations. I would be of the opinion that to
11 the extent that variable costs are covered and fixed
12 costs are partially recovered that would otherwise be
13 spread to other customers that there would be a benefit
14 to the Company having the Potlatch contract and that was
15 probably the basis for the negotiations.
16 Q Well, let me ask it another way. Attached
17 to the contract, let me represent to you that attached to
18 the contract, is the application the two parties filed
19 with the Commission and among other things in that
20 application, they contended that the contract was just
21 and reasonable. Generally speaking, just and reasonable
22 rates provide for a return on and a return of capital to
23 the Company, do they not?
24 A In a normal ratemaking context I would
25 agree with that, but this was a special contract where
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CSB REPORTING McKENZIE (X)
Wilder, Idaho 83676 Avista
1 the determined rates I don't believe were entirely set
2 based on cost of service ratemaking principles.
3 Q I understand that caveat, but let me try
4 one more time. Would the Company knowingly have entered
5 into a contract with Potlatch that didn't cover their
6 depreciation and some return on their assets? Do you
7 think that likely?
8 A It's possible. As I stated, as long as
9 there was some fixed cost recovery that without Potlatch
10 as a customer would be spread to other customers, there
11 would be a benefit of having the Potlatch contract.
12 Q Would the Commission normally approve an
13 agreement that provided nothing more than an incremental
14 benefit from a system customer?
15 A I believe it would and I think that's what
16 happens like in the case of bypass customers. If you
17 allow a lower rate and you can demonstrate some fixed
18 cost recovery, that's better keeping that customer than
19 losing the customer and having your other customers pick
20 up costs that would have been otherwise allocated to the
21 bypass customer.
22 Q Well, in 1992, or for that matter now, does
23 Potlatch have the ability to bypass Avista?
24 A Well, now it's under special contract, but
25 at the end of that contract, yes, it could go to the open
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CSB REPORTING McKENZIE (X)
Wilder, Idaho 83676 Avista
1 market and purchase power.
2 Q Is that your understanding of the current
3 law?
4 A Yes.
5 Q Okay. Let me refer you to the -- turning
6 back to -- I'd like you to turn to Exhibit B which is
7 marked with a second post-it that we put on your
8 document. Now, with regard to your testimony that the
9 Potlatch special contract is not subject to price
10 adjustments, either increases or decreases, isn't it true
11 that this exhibit, at least for the floor rate and the
12 ceiling rate, provides for what I'll characterize as
13 relatively steady escalation in both?
14 A I haven't calculated the escalation rates.
15 It appears they escalate at a pretty much steady rate,
16 but there are years when the rate doesn't go up, but my
17 testimony wasn't addressing price adjustments that are
18 identified in the contract. My testimony was addressing
19 price adjustments outside the contract, like a general
20 rate increase or a power cost adjustment or a demand side
21 energy tariff rider.
22 Q Well, let's go to rate adjustments outside
23 the ratemaking process. If you'd turn to the first
24 sticky I put on your document, under paragraph X is a
25 definition of system avoided energy rate. Do you see
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CSB REPORTING McKENZIE (X)
Wilder, Idaho 83676 Avista
1 that?
2 A Yes.
3 Q And that definition ties the system avoided
4 energy rate to the incremental cost, determined hourly,
5 in cents per kilowatt-hour, for the last resource
6 operated or obtained by WWP, now Avista; correct?
7 A Correct.
8 Q Now, during the break you had an
9 opportunity to look over the rest of the document and
10 without going into detail or asking everybody to read an
11 incredibly complicated sequence, that system avoided
12 energy rate has many, I'll call them, caveats,
13 limitations, modifications in the rest of the
14 definitions, but basically, isn't it true that that
15 definition drives Potlatch's rates?
16 A I think I'd generally agree with that. I
17 think, also, I might add that it's kind of a
18 market-driven rate.
19 Q It can be if the incremental cost is the
20 market price of energy; correct?
21 A Right.
22 Q Now, would you also agree with me, and I
23 know this is not your area of expertise, power supply,
24 but isn't it true that just intuitively we can see that
25 any time you change the resource stack there is likely to
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CSB REPORTING McKENZIE (X)
Wilder, Idaho 83676 Avista
1 be impacts on the incremental cost?
2 A There could be, yes.
3 Q And if that's true, there would be impacts
4 on the system avoided energy rate and ultimately on
5 Potlatch's rates?
6 A There could be, yes.
7 MR. WARD: That's all I have. Thank you.
8 COMMISSIONER SMITH: Okay, thank you,
9 Mr. Ward.
10 Mr. Woodbury, I assume you have cross.
11 MR. WOODBURY: Yes.
12 COMMISSIONER SMITH: Well, why don't we
13 take our lunch break now and come back at 1:15.
14 (Noon recess.)
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CSB REPORTING McKENZIE (X)
Wilder, Idaho 83676 Avista