990824_sw.doc

DECISION MEMORANDUM

TO: COMMISSIONER HANSEN
COMMISSIONER SMITH
COMMISSIONER KJELLANDER
MYRNA WALTERS
RON LAW
BILL EASTLAKE
TONYA CLARK
STEPHANIE MILLER
BEV BARKER
TERRI CARLOCK
RANDY LOBB
KATHY STOCKTON
WORKING FILE

FROM: SCOTT WOODBURY

DATE: AUGUST 24, 1999

RE: CASE NO. AVU-E-99-6 (AVISTA)
CENTRALIA PLANT PURCHASE AND SALE AGREEMENT
PURCHASER: TECWA POWER, INC. (EWG)

On August 10, 1999, Avista Corporation dba Avista Utilities — Washington Water Power Division (Avista) filed an Application with the Idaho Public Utilities Commission regarding the proposed sale by the Company of its 15% ownership interest in the coal-fired Centralia Power Plant.
In Order No. 28097, Case No. WWP-E-98-11, the Commission made the following findings regarding Centralia:
It is the Commission’s understanding that there have as yet been no regulatory filings regarding the proposed sale. Although raised at hearing, the Commission reserves judgment as to the applicability of Idaho Code § 61-328 — Electric Utilities — Sale of Property to be Approved by Commission. We note that the Company’s ownership interest in Centralia is part of its rate base in Idaho on which it receives a return on investment. We therefore put Avista on notice that prior to any transfer of its ownership interest in Centralia we expect a filing by Avista with this Commission addressing the proposed sale, its ramifications, rate consequences and the Company’s proposed treatment of same.

Avista contends that Idaho Code § 61-328 requires Commission approval only for the sale of property located in the state of Idaho. The Centralia Plant is located in the state of Washington. Avista does not believe that approval of the sale of non-sited property is required under Idaho Code § 61-328. Should the Commission, however, decide to exercise authority over the proposed sale, Avista request Commission approval of the transaction.
Avista proposes to sell its 15% interest in the Centralia Power Plant to TECWA Power, Inc. (TECWA), a Washington corporation and a subsidiary of TransAlta Corporation, headquartered in Calgary, Alberta, Canada. TECWA has agreed to buy the 1340 megawatt coal-fired Centralia Power Plant for $452,598,000 and the adjacent Centralia Mine for $101,400,000. The other seven co-owners of the power plant and their ownership shares are: PacifiCorp 47.5%, City of Seattle 8.0%, City of Tacoma 8.0%, Snohomish PUD 8.0%, Puget Sound Energy 7.0%, Grays Harbor County PUD 4.0%, and Portland General Electric (PGE) 2.5%. PacifiCorp is the sole owner of the Centralia Mine.
As reflected in the Application and by way of background regarding the sale, the Company relates that the Centralia owner’s agreement allows any co-owner of the power plant to veto proposed capital expenditures. Continued operation of the Centralia Power Plant requires the installation of sulfur dioxide scrubbers and low nitrogen burners to meet emission standards. PGE, as well as some other co-owners, vetoed the proposed expenditures. Closure of the plant, the Company contends, would result in mine closure costs, reclamation costs and plant dismantling costs. In October 1998, the co-owners put the Centralia Plant and Mine up for auction. Trans Alta/TECWA was selected as the purchaser of the Centralia Plant and Mine. The terms of the Centralia Plant Purchase and Sale Agreement require the plant owners to contract by the end of May 1999 for the installation of required emission control equipment and to continue the installation of such equipment until the sale closes. To facilitate the sale to TECWA and to begin the process of unifying ownership of the plant so as to more effectively deal with continued operation of the plant, Avista on May 5, 1999, agreed to purchase PGE’s 2.5% interest in Centralia. The purchase of PGE’s share is anticipated to close on or before November 30, 1999. On May 6, 1999, the co-owners of Centralia entered into the agreement with TECWA to sell the plant. A separate agreement was entered into on May 6 between PacifiCorp and TECWA Fuel to sell the mine. In addition, Avista notes that it entered into an agreement with Snohomish PUD to purchase their 8% share of Centralia in the event the sale to TECWA does not close. Should the sale to TECWA not close Avista will own a 25.5% (15% original, plus 2.5% PGE, plus 8% Snohomish PUD) interest in the power plant.
Avista represents that the sale to TECWA and the continued operation of the Centralia Power Plant and the Centralia Mine is in the public interest. The majority of the 675 employees at the plant and mine, it contends, would continue to be employed. The installation of emission controlled equipment, the Company states, will place the power plant among the cleanest coal-fired plants in the United States. Continued operation will also continue to provide the region with a valuable 1340 megawatt resource, enough power for a city the size of Seattle.
Avista contends also that the sale of Centralia will directly benefit its customers. The sale will eliminate the need to engage in sometimes contentious and costly disputes among the owners. The sale will free the utility to conduct independent resource optimization decisions. The sale will eliminate uncertainties regarding mine reclamation costs.
The Company’s after-tax gain resulting from the sale is expected to amount to approximately $30 million. The gross purchase price is subject to certain adjustments. The actual dollar value of the net gain on the sale will not be finalized until the close of the transaction. The net depreciated book value of the plant, the Company contends, is approximately $17 million. As reflected in the Application, Avista intends to defer the gain and will propose an allocation of the gain between shareholders and customers and will propose a ratemaking treatment of the customer share of the gain in a future proceeding. Avista has not yet obtained replacement power and is continuing to evaluate replacement power options and costs.
Avista acknowledges the jurisdiction of the Commission with regard to its rates, charges, services and practices. The Company requests authorization to defer the gain associated with the sale to a future rate proceeding. Avista also requests a determination from the Commission (reference 15 U.S.C. § 79z–5a(c)) that allowing the facility to be eligible for purposes of becoming an exempt wholesale generator (EWG) (1) will benefit consumers, (2) is in the public interest, and (3) does not violate state law. Avista asks that the requested determination be made prior to and contingent upon the required approvals of the sale.
The Company asks that the requested approvals, to the extent required, be made on an expedited basis. The termination date for the agreement with TECWA is May 5, 2000. The contract permits termination if regulatory approvals are not received within 180 days of filing. The Company requests that its Application be processed pursuant to Modified Procedure, i.e., by written submission rather than by hearing. Reference Commission Rules of Procedure, IDAPA 31.01.01.201-204.
The Company’s Application includes a copy of the Centralia Power Plant Purchase and Sale Agreement. The Company’s December 31, 1998 Annual Report--Form 10-K Securities and Exchange Commission filing, and the related prefiled testimonies of Gary Ely its Executive Vice President; George Perks, Superintendent of Thermal Operations; William Johnson, Power Contract Analyst; and Ronald McKenzie, Senior Rate Accountant.

Staff Analysis
The Company has requested that its underlying Application for approval of sale and regulatory be processed under Modified Procedure. Staff does not yet have enough information to determine whether it can support the Company’s filing, the Company’s proposal to defer decision regarding allocation of gain and rate treatment, or proposed procedure. Staff recommends that the Commission issue a Notice of Application, establish a 21-day Intervention Deadline, provide Notice of Opportunity for Discovery by Parties, and establish a future date (i.e., September 30, 1999) when parties can perhaps provide more meaningful comment on the Company’s proposed procedure. Alternatively, Staff recommends that the underlying matter be set for hearing.
The Company also requests a more expedited treatment of its request for Commission findings regarding EWG eligibility. It is Staff’s understanding that the findings can be interlocutory and made contingent upon a favorable final Commission Order in the case and the co-owners ability to receive other required regulatory approvals.

Commission Decision
The Company has proposed Modified Procedure in this case, Staff proposes a more measured approach. What is the Commission’s preference? How does the Commission wish to handle the requested findings regarding EWG eligibility?

Scott D. Woodbury
Deputy Attorney General
bls/M:avue996_sw
DECISION MEMORANDUM 2