28461.doc

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF APPLICATION OF AVISTA CORPORATION FOR AUTHORITY TO SELL ITS INTEREST IN THE COAL-FIRED CENTRALIA POWER PLANT. )
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) CASE NO. AVU-E-99-6

ORDER NO.  28461

On March 7, 2000, the Idaho Public Utilities Commission (Commission) issued final Order No. 28297 approving the sale by Avista Corporation dba Avista Utilities—Washington Water Power Division (Avista; Company) of its 15% ownership interest in the 1340 MW coal-fired Centralia Power Plant. In this Order the Commission found the depreciation reserve methodology to be a reasonable method for distribution of gain associated with the sale. The customer portion of the regulatory gain for Idaho, pending final sale and adjustment, was calculated to be $6,811,625. Under the accounting approved by the Commission, tariffed rates for Idaho electric tariff customers of Avista are to be reduced by a uniform 1.318% for eight years or until amortization is completed.
Pursuant to the Commission’s Order, the Potlatch’s Lewiston facility, a special contract customer of Avista, was denied any share of the sale gain. The Commission in its Order stated:
The Potlatch-Lewiston facility is a special contract customer and its rates are determined within the four corners of its service contract. We find that the Company in this case presents a persuasive argument for denying Potlatch any share of the customer portion of the Centralia gain.

On March 28, 2000, Potlatch Corporation, a party to the underlying case, filed a timely Petition for Reconsideration of that portion of Order No. 28297 “denying Potlatch any share of the customer portion of the Centralia gain.” Reference Idaho Code § 61-626. Potlatch contends that the Commission’s Order is “contrary to the evidence, unreasonable, discriminatory and unlawful.”
Potlatch contends that “regardless of the form of the contract, all contract rates, including the Potlatch rates at issue in this case, have been required to cover the cost of service and be ‘just, reasonable, and non-discriminatory’ vis-à-vis other ratepayers.” Avista and the Commission, Potlatch contends, are arguably estopped to take a position to the contrary. Potlatch contends that it has both a legal and equitable right to participate in the gains from the Centralia sale by virtue of the fact that it contributed to the plant’s depreciation reserve both as a special contract customer and for the period prior to 1991 when Potlatch contends that its rates were subject to rate adjustments in the same manner as tariff rates. Nothing in the agreement, Potlatch argues, can be construed as a waiver of Potlatch’s legal rights in this regard. To exclude Potlatch from the gain of the Centralia sale, Potlatch contends, unjustly enriches other Idaho ratepayers at Potlatch’s expense.
The Commission after reviewing and considering the Petition of Potlatch, the transcript record and its Order No. 28297 found it reasonable to provide Potlatch with additional opportunity to present its claim of entitlement to a share of the customer portion of the Centralia gain. Reference Order No. 28355. In its Order granting reconsideration, the Commission notes that
The entitlement of Potlatch may be a mixed question of law and fact. We note that the parties to the Potlatch “Electric Service and Purchase Agreement” are both parties to this case. Avista contends that Potlatch should not share in the Centralia gain—Potlatch contends that it should. Arguably, the contract should define rights and obligations. If the matter cannot be resolved outside the contract or if the intent of the parties is not readily apparent or obvious from the contract language, the appropriate forum for resolving the dispute may be the courts and not the Commission. The Commission reminds the parties of its limited jurisdiction regarding contract interpretation. Reference Idaho Code § 61-501; Afton Energy Inc. v. Idaho Power Company, 111 Idaho 925, 729 P.2d 400 (1986); and Lemhi Telco v. Mountain States Tel & Tel, 98 Idaho 692, 571 P.2d 753 (1977).

Public hearing on Potlatch’s Petition for Reconsideration was held on June 21, 2000. The following parties appeared by and through their respective counsel:
Avista Corporation Gary A. Dahlke, Esq.
Potlatch Corporation Conley Ward, Esq.
Commission Staff Scott Woodbury, Esq.

By this Order the Commission affirms its prior finding in Order No. 28297 that Potlatch is not entitled to any share of the gain from the sale of Centralia.
DISCUSSION AND FINDINGS OF FACT
As established in the underlying case, the Centralia Power Plant has been in service since 1971. Tr. p. 340. From 1971 to 1991, Potlatch was a tariff customer of Avista (previously Washington Water Power). In 1991, Potlatch entered into a ten year contract with Avista. Exhibit 204. Because Potlatch generates much of the power it needs by using fuel such as wood waste, the contract includes rates for both the purchase and sale of power. If Potlatch is found to be entitled to a share of the customer portion of the gain from the sale of Centralia, Avista calculates and Potlatch concurs that the share would be approximately $332,195. Tr. pp. 367, 424; Exh 9.
Potlatch contends that during the entire duration of its contract it has paid rates in excess of its cost of service and has thus paid rates that have included its fair share of Centralia depreciation. Tr. pp. 337, 338, 367, 369. Potlatch is therefore, it argues, an “equitable owner” of the Centralia Power Plant; it has purchased an interest in the plant, it states,—Avista merely holds the title. As an equitable owner Potlatch contends that it is entitled to a pro rata share of the capital gain in the same manner as all other owners. Tr. pp. 334, 371, 405, 466, 467. Citing Boise Water Corporation v. Idaho Public Utilities Commission, 99 Idaho 158, 578 P.2d 1089 (1978).
Potlatch also contends that the Commission was wrong in focusing on Potlatch’s service contract with Avista in denying Potlatch a share of the Centralia gain. This is not a contract matter, Potlatch contends. Reference Exhibit 204; Tr. p. 371. Nor, it contends, is this a rate matter. Tr. pp. 354, 371, 405. It is instead a matter of market value exceeding book value. Tr. p. 405. The issue, it states, is about ownership and property rights. Tr. pp. 356, 369, 371, 466.
Potlatch claims entitlement to a benefit apart from and outside its contract. Tr. p. 453. In denying Potlatch a share of the Centralia gain, Potlatch contends that basic standards of justice and equity are at issue. Tr. p. 356. The Commission, it states, is basically confiscating without compensation property that Potlatch “bought” and distributing it to parties who have no legitimate claim to the resulting windfall. Such an outcome, it concludes, is irrational, inequitable, manifestly unjust, and adverse to the public interest. Tr. pp. 357, 358, 374, 375, 466. Potlatch is the only customer, it notes, who is being denied the right to participate in the Centralia gain; the discrimination issue, it states, does not go away. Tr. p. 365.
Avista, the other contract party to Potlatch’s service agreement, contends that Potlatch should not receive any part of the customer share of the Centralia gain. Tr. p. 412. Avista argues that the contract controls. The Potlatch special contract, Avista states, provides for no adjustments to revenues or rates outside the contract, either increases or decreases. Tr. pp. 412, 413, 418. Between the contract parties, Avista contends there was a clear bargain for agreed to fixed prices. Tr. p. 470.
The negotiated contract includes both purchase and sales rates and Potlatch, the Company states, was concerned with the net of the two. Tr. pp. 426, 429, 430. Avista contends that the rates in the Potlatch service agreement were negotiated and were not based on Centralia fixed costs or Centralia generation or Centralia depreciation. Tr. pp. 416, 424, 430. Indeed, as in the earlier proceeding in this case, Avista argues that Potlatch rates have not supported the costs of the Centralia resource, and that Potlatch under its service agreement has been paying market-based rates. Tr. pp. 191, 192, 416. Had Potlatch continued to be a tariffed customer instead of becoming a special contract customer in 1991, the Company would agree that it would be entitled to a share of the gain. Tr. p. 417.
Avista further disputes Potlatch’s contention that Potlatch has a specific ownership interest in Centralia. The Boise Water case cited by Potlatch, it states, cannot be read in such a manner. What bears emphasis in that case, Avista contends, is that it’s the public in general, the customers in general who are treated for ratemaking purposes “as if” they were equitable owners. Boise Water does not, it argues, stand for the proposition that you take the next step and treat individual customers as though they were actual equitable owners whose interests cannot be “confiscated,” as Potlatch has characterized it, in a regulatory proceeding. Tr. pp. 470, 471.
Staff also argues that Potlatch should not be allowed to receive any of the Centralia gain. Staff contends that Potlatch’s entire relationship, rights and obligations, with Avista is defined in the contract. Any equitable claim Potlatch may have had to a share of the gain was contracted away in 1991. Tr. pp. 438-9.
The Commission finds Potlatch’s arguments on reconsideration to be unpersuasive. We find that Potlatch’s rights and entitlements are governed by its service contract with Avista. It was clearly the intention of the parties as reflected in the underlying contract that the contract rates and revenues be fixed. Potlatch’s reliance on the Boise Water case is misplaced. While in certain circumstances, such as the sale of Centralia, customers as a whole should be and are treated as if they were equitable owners for purposes of assigning the gain on disposition, individual customers do not take title, either actual or equitable, in a utility’s assets by virtue of the fact that the rate making process includes depreciation expense in calculation of the revenue requirement.
Potlatch also argues that even if the contract is mistakenly deemed relevant, the Commission was wrong in applying the contract standard to its agreement with Avista. Tr. p. 350. It is not nearly so black and white, Potlatch contends; it is not, it states, a “contract standard” agreement. Tr. pp. 371, 388. Rather, the contract specifies neither a contract nor tariff standard for changing rates. Tr. p. 351. Paragraph 21 of the agreement, it states, establishes a subtle but crucial departure from the contract standard. Tr. p. 351. Rather than precluding Commission adjustment of contract rates, Potlatch states that the agreement instead simply provides the contract parties with rights of termination should the Commission intervene. Tr. p. 371.
Staff argues that Potlatch negotiated and signed a “contract standard” agreement in 1991 that specified the terms and conditions under which Potlatch takes service from the Company. Tr. p. 437. A “contract standard” agreement establishes rates that do not change with non-contractual changes. Potlatch, Staff contends, contracted for certainty in its rates, excluding itself from the vagaries in future forecasting and non-contractual changes in cost of service. Tr. p. 439. As result of the contract, Potlatch, Staff states, is neither entitled to savings that result from reductions in cost of service nor subject to higher costs resulting from increases in cost of service during the term of its contract. Tr. p. 437. Staff contends that Potlatch has no entitlement to a benefit apart from and outside its contract. Tr. p. 438. Staff argues that the commission should not intervene in private company/customer contracts absent a showing that the public interest is adversely affected (eg. where the rate is so low that it might impair the financial ability of the public utility to continue its service, cast an excessive burden on other customers, or is unduly discriminatory). Tr. pp. 438, 439, 442, 447; Citing Agricultural Products Corporation v. Utah Power & Light Company, 98 Idaho 23 at 29, 557 P.2d 617 (1976).
Staff cites Potlatch testimony in the underlying contract case (WWP-E-91-5) as evidence of Potlatch, Commission and utility expectations that there be no adjustment in rates for the term of the contract. Tr. pp. 443, 445. The contract specifies both the price that Potlatch will pay for electrical service and the price that Potlatch will receive for its generation. Exh. 204. The contract, therefore, specifies the annual cost and the annual revenue that will result. Staff contends that a return of any portion of sale gain to Potlatch constitutes a change in net annual costs and revenues for both parties. Tr. pp. 446, 447. The method adopted by the Commission for sharing Centralia gain, Staff states, is really just a rate adjustment and a cost adjustment; it is essentially a modification of depreciation expense through amortization. Tr. pp. 449, 450.
The Commission, Staff notes, in its subsequent consideration of an Idaho Power/FMC contract acknowledged in footnote, its prior approval of “contract standard” rates for Potlatch. Reference Order No. 27463, p. 4, fn. 3, Case No. IPC-E-97-13. Staff also notes that the Commission has excluded Potlatch from all non-contractual changes in Avista’s cost of service over the term of the contract. Tr. p. 444.
Staff further notes that the Potlatch in the underlying contract proceeding characterized its contract as a “wager” from the Commission’s point of view. Contract case Tr. p. 152; Tr. pp. 445, 446. Indeed, Potlatch stated in that case “there is no way the Commission can be absolutely 100% sure that a circumstance would occur that if you approve this arrangement you might seven or eight years later say golly, we never thought of it,” citing for example “if for some reason their thermal generating facilities were destroyed.” Contract case Tr. pp. 149, 152, Nicholson; Tr. pp. 390, 445.
Avista disputes Potlatch’s contention that giving Potlatch a share of the Centralia gain is not a change in contract rates. Such an argument, it states, is just semantics – the end result is revenues being less than they are specified to be in the contract. It does not matter, it states, whether or not the gain is given through a reduction in rates or a lump sum refund. Tr. pp. 414, 415. As reflected in the underlying contract proceeding, the purchase and sale components of the contract are inextricably tied—the end result of a ten-year history of attempted negotiations. Tr. p. 382. Should the Commission choose to reduce the revenue from the Potlatch contract by granting Potlatch a share of the Centralia gain, Avista contends that the Commission should also reduce the amount paid to Potlatch for power purchases by a similar amount. Tr. p. 420.
The Commission finds that approval of the contract has provided Potlatch with the rate certainty and protection from governmental interference it contracted for. By way of clarification, it is not because Potlatch is a special contract customer that it is denied a share of the gain. It is because the contract that it negotiated and presented to the Commission for approval did not reserve or establish such a right.
Potlatch contends that this case is not about the contract, nor about rates, but is about property rights. We disagree. The fact is that this case is about rates and revenue and the Potlatch contract. A return of any portion of Centralia sale gain to Potlatch would constitute a change in net annual costs and revenues as defined in its contract.
The Commission finds that Potlatch is not being unduly discriminated against in this case. Reference Idaho Code § 61-315. Nor are equity or fairness being compromised. The mere fact of different treatment does not necessarily violate the equal protection clauses of either the fifth or fourteenth amendments to the United States Constitution or Article 1, Section 2 of the Idaho Constitution. Potlatch is being treated differently because its relationship with Avista is unique; it is the Company’s only special contract customer; it is the Company’s only non-tariff rate customer. Its sale and purchase rates are inextricably tied. We are simply giving Potlatch the benefit of its negotiated private contract.
Potlatch in this case continues in its attempt to establish a middle ground somewhere between a “tariff standard” and a “contract standard.” Clearly Potlatch’s rates are not tariff rates. The size of Potlatch’s load requirement (greater than 25 MW) required a special contract. We find that the public interest as defined in Agricultural Products is not adversely affected by our decision in this case.
CONCLUSIONS OF LAW
The Idaho Public Utilities Commission has jurisdiction over this matter and Avista Corporation dba Avista Utilities – Washington Water Power Division, an electric utility, pursuant to the authority and power granted under Title 61 of the Idaho Code and the Commission’s Rules of Procedure, IDAPA 31.01.01.000 et seq.
O R D E R
In consideration of the foregoing and as more particularly described above, IT IS HEREBY ORDERED and the Commission does hereby affirm its prior Order No. 28297 issued in Case No. AVU-E-99-6 and deny Potlatch the relief requested in its Petition for Reconsideration.
THIS IS A FINAL ORDER ON RECONSIDERATION. Any party aggrieved by this Order or other final or interlocutory Orders previously issued in this Case No. AVU-E-99-6 may appeal to the Supreme Court of Idaho pursuant to the Public Utilities Law and the Idaho Appellate Rules. See Idaho Code § 61-627.
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this
day of August 2000.

DENNIS S. HANSEN, PRESIDENT

MARSHA H. SMITH, COMMISSIONER

PAUL KJELLANDER, COMMISSIONER

ATTEST:

Barbara Barrows
Assistant Commission Secretary

vld/O:AVU-E-99-6_sw3

ORDER NO. 28461 1

Office of the Secretary
Service Date
August 8, 2000