991008_sw.doc

DECISION MEMORANDUM

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

FROM:

DATE: October 8, 1999

RE: CASE NO. AVU-E-99-6 (Avista)
CENTRALIA SALE

On August 10, 1999, Avista Corporation dba Avista Utilities — Washington Water Power Division (Avista; Company) 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 the Company’s recently completed general rate case, 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.

Order No. 28097, Case No. WWP-E-98-11
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 requests 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. 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%.
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 up for auction. Trans Alta/TECWA was selected as the purchaser. 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. In addition, Avista notes that it has 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 is in the public interest. The majority of the employees at the plant, it contends, would continue to be employed. The installation of emission control 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 the Company’s customers; will eliminate the need to engage in sometimes contentious and costly disputes; will free the utility to conduct independent resource optimization decision; and will eliminate uncertainties regarding mine reclamation costs.
The Company’s after-tax gain resulting from the sale is expected to be 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 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, Executive Vice President; George Perks, Superintendent of Thermal Operations; William Johnson, Power Contract Analyst; and Ronald McKenzie, Senior Rate Accountant.
On September 7, 1999, the Commission in Case No. AVU-E-99-6 issued a Notice of Application and a Deadline for Intervention. The Commission also solicited comment on the Company’s proposal to process its Application pursuant to Modified Procedure. The deadline for filing written comments regarding the Company’s proposed use of Modified Procedure was September 30, 1999. Written comments were filed by Potlatch Corporation (granted intervention by Order No. 28164) and Commission Staff. (Comments attached).
Based on its preliminary review, Staff supports the Company’s request to process its Application pursuant to Modified Procedure. Staff identifies the following issues that it intends to address: (a) prudence of sale—reclamation risk, multiple owner risk, economics (cost of replacement power, etc.); (b) gain-dollar calculation and regulatory treatment. Staff believes that the issues in the respective cases of Avista and PacifiCorp dealing with the justification for the sale and distribution of the gain resulting from the sale are similar and can be addressed under Modified Procedure. Although Staff’s investigations are still underway, it is Staff’s belief that factual differences can be adequately addressed in written comments. Staff indicates that it stands ready, however, to proceed to hearing in one or both of the cases should the Commission, the Company, or other parties believe that a hearing is necessary to more fully evaluate the issues. Staff proposes the following Modified Procedure scheduling:
Staff/Intervenor comment deadline
Utility reply December 3, 1999
December 30, 1999
It is Potlatch’s contention that Modified Procedure is not appropriate. By way of reasoning Potlatch states the following:
The extent to which ratepayers are entitled to participate in the gain on the sale of depreciable utility property is a recurring and often contentious issue before this Commission. A full analysis of the relevant case law on the subject is beyond the scope of these Comments, but it is important to note that the Commission in recent years has uniformly adhered to the view that:

The customers are entitled to share in any gain attributable to the sale of depreciable property. The customers have paid rates based on a revenue requirement that included the assets to be transferred and therefore have an equitable interest.

IPUC Order No. 25753, Case Nos. PPL-E-94-1 & WWP-E-94-1 at p. 6 (October 5, 1994).

In its Application and the accompanying prefiled testimony, Avista proposes to defer the question of ratepayer participation in the gain from the Centralia sale to some unspecified “future proceeding.” Application at p. 5. This proposal is unreasonable on its face. Allowing Avista to retain the ratepayers’ share of the sale proceeds would effectively convert its customers into involuntary lenders, at zero percent interest for an undefined period of time. An even more glaring defect in the proposal is that neither Avista’s customers nor the Commission can adequately evaluate the public interest aspects of the sale until its economic ramifications are identified. This, in turn, requires resolution of a number of issues such as the proper method of calculating the gain, the portion attributable to the ratepayers, and the rate making treatment of replacement power costs.

The Commission must also consider the ramifications of the Centralia sale in the light of potential restructuring of the electric utility industry. Utilities should not be allowed to profit from from the piecemeal sale of selected generating assets at prices above book value, and then subsequently insist after restructuring that ratepayers are responsible for the stranded cost of less valuable assets. The Commission can preclude such an inequitable result only by attaching appropriate conditions to any order approving the Centralia sale.

These issues cannot be adequately considered without evidentiary hearings.…

Commission Decision
The Commission has solicited comment on the appropriateness of Modified Procedure in Case No. AVU-E-99-6. Does the Commission find that Modified Procedure is appropriate? If so, does the Commission find Staff’s proposed schedule to be reasonable? If the Commission finds Modified Procedure to be inappropriate, what is the Commission’s preference?

vld/M:AVU-E-99-6_sw2

DECISION MEMORANDUM 3