20040212Landolt Direct.pdf

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
In the Matter of the Application of
ACIFICORP for Exempt Wholesale
Generator Determinations Relating to the
Skookumchuck Hydroelectric Plant.
Case No.f';IC".~fJ l(-tJl
PACIFICORP
DIRECT TESTIMONY OF RANDYA. LANDOLT
Please state your name, business address and present position with
PacifiCorp.
My name is Randy A. Landolt and my business address is Suite 1500, Lloyd
Center Tower, 825 NE Multnomah Street, Portland, Oregon. My present position
at PacifiCorp is Managing Director, Hydro Resources.
Qualifications
Briefly describe your educational and professional background.
I graduated in 1973 from Oregon State University with a Bachelor of Science
Degree in Civil Engineering. Following graduation, I briefly performed land
development work before joining PacifiCorp as an Assistant Design Engineer of
generation, transmission and distribution infrastructure. Most of my career has
been associated with the engineering and Federal Energy Regulatory Commission
FERC") regulation of hydroelectric facilities.
What are your responsibilities as Managing Director, Hydro Facilities?
I am currently responsible for the operations and maintenance, engineering,
construction, and regulatory/environmental compliance for PacifiCorp s portfolio
of 51 hydroelectric projects.
Purpose of Testimony
What is the purpose of your testimony?
I describe the contemplated sale of the Skookumchuck Dam and related assets
(the "Skookumchuck Project" or "Project") and the reasons for the proposed sale.
The testimony supports PacifiCorp s request that the Commission find that
allowing the Project to become an "eligible facility" under section 32 of the
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Public Utility Holding Company Act of 1935 ("PUHCA") will benefit consumers
is in the public interest and does not violate State law. These findings are
necessary for FERC to authorize the purchaser to operate the Project as an exempt
wholesale generator.
Description of the Transaction
Please describe the assets proposed for sale.
The primary asset is the Skookumchuck Dam which is an earthfill structure
190 feet high and 1340 feet in length. Other assets included in the sale are
653 acres of land beneath and adjacent to the four-mile long reservoir created by
the dam, the powerhouse at the base of the dam housing a 1 MW hydroelectric
generating unit, and miscellaneous small buildings and operations and
maintenance equipment. All assets included in the sale are specifically identified
in the Skookumchuck Facilities Purchase and Sale Agreement dated
November 25, 2003 (the "Sale Agreement"). The Sale Agreement is identified as
PacifiCorp Exhibit No.1. See Sale Agreement, Schedules 2.1(a) through 2.1(e).
All of the facilities included in the Sale Agreement are located in Thurston
County, Washington, twelve miles northeast of Centralia, Washington.
Who currently owns the sale assets?
The Skookumchuck Project is owned as tenants in common by PacifiCorp and six
other public and private owners: Puget Sound Energy, Inc. ("Puget"); Public
Utility District No.1 of Snohomish County, Washington; City of Tacoma
Washington; Avista Corporation; City of Seattle, Washington; and Public Utility
District No.1 of Grays Harbor County, Washington (collectively, the "Owners
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These same entities owned the 1 340 MW coal-fired Centralia Steam Plant until
that plant was sold in May 2000. PacifiCorp has a 47.5 percent ownership share
in the Skookumchuck Project, the same ownership share the Company had in the
Centralia Steam Plant.
Please describe the purchaser.
The purchaser is 2677588 Washington LLC ("Washington LLC" or the "Buyer
a limited liability company formed under Washington law by TransAlta USA Inc.
TransAlta ). TransAlta is a Delaware corporation with headquarters in
Centralia, Washington. TransAlta is the indirect owner of both the Centralia
Steam Plant and the Centralia Coal Mine.
When and why was the Skookumchuck Dam constructed?
The construction of the dam was completed in 1973. The sole purpose of the dam
was to store portions of the natural flow of the Skookumchuck River for release in
a controlled manner to meet the cooling water requirements of the Centralia
Steam Plant. Water from the reservoir is released into the natural channel of the
river and then diverted at the Centralia Steam Plant Pumping Station located
approximately 2 miles downstream of the dam.
Please explain the development of hydropower generation at the
Skookumchuck Dam.
The Owners considered construction of a hydroelectric facility during the late
1980s. The Skookumchuck Dam had the potential to develop upwards of 10 MW
of hydroelectric capacity if the management of the stored water in the
Skookumchuck Reservoir were oriented toward power production. However, the
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needs of the Centralia Steam Plant have had priority over maximum hydroelectric
development at the dam. The Owners therefore chose to develop a smaller
hydroelectric project. The hydroelectric facilities were constructed in 1991 and
were sized at 1 MW in order not to conflict with the water cooling needs of the
Centralia Steam Plant.
What arrangements are in place for disposition of the energy produced by
the hydroelectric facility?
The Project output is and always has been sold to Puget, which owns and operates
the adjacent electrical transmission and distribution system. The wholesale
purchase agreement with Puget expired several years ago and sales since then
have been made without a contract. Decisions regarding future Project sales will
be made by Washington LLc.
Please describe governmental regulation of the Project.
The addition of the hydroelectric facilities to the Project required the Owners to
file an Application for Exemption from licensing with the FERC. An exemption
from licensing was available under 16 U.c. ~2705(d) because the Project was
under 5 MW in capacity. The Skookumchuck Project is exempt from routine
annual inspections by the FERC, but is under the FERC's jurisdiction relative to
dam safety issues.
What are the basic terms of the sale to Washington LLC?
The base sale price is $7 570 373.16, which was calculated by multiplying
PacifiCorp s net book value for the Project as of September 30, 2003 by 2.105.
The multiplier grosses up PacifiCorp s net book value to incorporate the other
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Owners' 52.5 percent interest in the Project. The base sale price will be adjusted
for changes in net book value from September 30, 2003 to the Closing Date of the
transaction.
The Owners are selling to Washington LLC all of their interests in the
Skookumchuck Dam, 1 653 acres of real property underlying and adjacent to the
reservoir, all relevant easements, rights of way, licenses, franchises, and water
rights appurtenant to the real property or associated with operation of the
hydroelectric facility. Washington LLC will also acquire the powerhouse
structure, equipment utilized to operate the Skookumchuck Dam and
hydroelectric generating facilities, outbuildings, and specifically identified
vehicles. See Sale Agreement, Schedules 1.1(a), (b), and (c).
Washington LLC will continue operating under current fish and wildlife
agreements and licenses. Assigned contracts and licenses are listed in the Sale
Agreement, Schedules 2.1(d) and (e), respectively.
Washington LLC will assume all liabilities associated with the Skookumchuck
Project including the obligation to maintain the flow regimes below the Project
and provide the required services associated with the Centralia Steam Electric
Generating Project Fish and Wildlife Agreement dated May 29, 1998. See Sale
Agreement, Section 2.
Washington LLC will also assume the Owners' rights and obligations under the
Project Safety Program. The Safety Program, described in detail in Exhibit A of
the Sale Agreement, is a dam safety/stability program addressing the
identification of the appropriate Maximum Credible Earthquake (MCE) to be used
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for stability analysis, the liquefaction potential of foundation materials beneath
the downstream shell of the dam and an examination of the current Probable
Maximum Flood (PMF) inflow curve calculations with regard to the most recent
storm of record that occurred in February 1996.
Puget will retain its 12 kV electric distribution line that crosses the real property
that is subject to the sale. See Sale Agreement, Schedule 2.2(b).
Additional details of the transaction are specifically described in the Sale
Agreement, Exhibit No.
Please identify the costs associated with operating the Skookumchuck
Project.
The average annual operating cost from 2000 through 2003 has been
approximately $320 000. These costs include labor costs for the single part-time
Project operator, security and periodic maintenance support and approximately
$134 000 associated with the adjacent Washington State Department of Fisheries
steelhead rearing facility that is physically and contractually associated with the
Skookumchuck Project. The balance of the expenses are for engineering and
regulatory activity support.
Costs have risen in recent years due to increased Safety Program expenses and the
need for increased security in compliance with the Project's "Levell Security
Risk" classification, as established by the FERc. Project costs are more
specifically addressed in the testimony of PacifiCorp witness Craig Johnson.
Please identify Exhibit No.2, the Skookumchuck Dam Management
Agreement.
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The Skookumchuck Dam Management Agreement is an agreement entered into
between the Owners and TransAlta Centralia Generation LLC governing how the
Skookumchuck Dam will be managed and how the parties will bear the costs of
management. Under this Agreement, TransAlta (through its indirect wholly-
owned subsidiary, TransAlta Centralia Generation LLC) agreed to pay up to
$300 000 of the annual Project costs for the first two years after acquiring the
Centralia Steam Plant. Since May 2002, there has been no cap on Project costs
and TransAlta has deposited payments into an escrow account for the eventual
offset of Project costs. These Project costs will be paid to the Owners in addition
to the sale price.
What has been the generation output experience from the Project?
Over the last eight years, PacifiCorp s share of the Project output has averaged
013 MWh/year. The last four years' experience has been particularly low
averaging approximately 1 000 MWh per year. This change in generation level is
due primarily to changes to the operating schedule for the unit. The
Skookumchuck Project experienced the failure of a circuit board in the control
and communications module about the same time as the Centralia Steam Plant
was sold to TransAlta. The failure of this component resulted in the shutdown of
the generating unit, and resolution of the problem was delayed due to limited staff
availability. The ability to operate the generating unit with this component out of
service was subsequently confirmed by PacifiCorp engineering staff. The
Skookumchuck plant operator is currently operating the generating unit in a
manual mode during the hours he is present on site each day.
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What are the key incentives for the Owners to sell the Skookumchuck
Project at this time?
The key factors are as follows:
The facilities represented "core business" assets to each of the Owners
only as long as they had an ownership interest in the Centralia Steam
Plant.
The energy generated by the hydroelectric facilities has negligible value
compared to the $7.57 million net book value.
It is likely that FERC will mandate dam modifications to meet stability
criteria. The cost of these modifications is estimated to be $5 million to
$7 million.
Unless TransAlta is willing to continue its commitment to shoulder Project
expenses under the current Skookumchuck Dam Management Agreement
there is no ongoing assurance that TransAlta will compensate the Owners
for ongoing operation and maintenance costs or for other operational
liabilities.
TransAlta is currently motivated to own the Skookumchuck Project and
control stream flows to meet Centralia Steam Plant cooling water
requirements.
Does the proposed sale benefit PacifiCorp s customers?
Yes, positive benefits for customers will be realized if the sale takes place.
Absent the ownership of the Centralia Steam Plant, the continued ownership of
the Skookumchuck Project does not provide positive benefits to the Company
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customers or shareholders. In addition, the following facts support selling the
Project:
The Project is clearly uneconomic as a stand-alone hydroelectric facility
and the energy output is insignificant in the Company s generation
portfolio.
The Project is not a source of power for PacifiCorp customers as the
Project output is sold to Puget.
The facilities are over one hour travel time from PacifiCorp s nearest
operation center at the Lewis River, 10 miles east of Woodland
Washington, making it difficult to effectively manage the Project.
The Project diverts critical operating and capital funds and management
attention away from the core generating assets of the Company.
But for the sale, PacifiCorp would retain economic responsibility for its
share of routine expense, capital costs and any capital modifications to the
dam that may be required to meet federal seismic criteria for stability.
A Flood Control Committee formed by Lewis and Grays Harbor Counties
Washington and the cities of Centralia, Chehalis and Aberdeen
Washington (the "Committee ) to develop a flood control plan has
indicated that if they decide to pursue acquiring the Project for flood
control purposes, they will not be in a position to offer net book value.
Given the positive aspects of selling the Skookumchuck Project and the net book
value price, the proposed sale would be beneficial to both PacifiCorp s customers
and its shareholders.
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When the Centralia Steam Plant was sold in 2000, why was the
Skookumchuck Project retained by the Owners?
In July 1998, the Centralia Steam Plant Owners received an inquiry from the
Committee expressing an interest in acquiring the Skookumchuck Dam and
reservoir. The Committee had been working with the U.S. Army Corps of
Engineers to develop a comprehensive flood control plan for the basin. In June
1999, a Memorandum of Understanding ("MOD") between the Owners and the
Committee was signed reflecting the Committee s intent to purchase the facilities.
This MOD expired in December 1999, but the Owners understood that the
Committee s intent to acquire the facilities had not changed. This desire by the
Committee to purchase the facilities and the Committee s stated intent to operate
the facilities in a manner that would not be in conflict with the continued
operation of the Centralia Steam Plant caused the Owners to withhold the
Skookumchuck Project from the sale of the Centralia Steam Plant.
How did the new owners of the Centralia Steam Plant address operation of
the Skookumchuck Project?
The Centralia Steam Plant sale was completed on May 4, 2000 and the parties
then entered into the Skookumchuck Dam Management Agreement. As I
explained above, under this Agreement, TransAlta (through its indirect wholly-
owned subsidiary, TransAlta Centralia Generation LLC) agreed to reimburse the
Skookumchuck Project Owners for all expenses related to the Project up to a cap
of $300 000 per calendar year for a period of two years. The Owners and
TransAlta Centralia Generation LLC also executed a Water Flow Agreement
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reflecting the need to coordinate the operation of the Project with the cooling
water requirements of TransAlta s Centralia Steam Plant. See Sale Agreement
Section 2.7. The Skookumchuck Dam Management Agreement also provided
TransAlta with an option to purchase the Skookumchuck Project at PacifiCorp' s
net book value multiplied by 2.105 between May 5, 2002 and May 5, 2003 if a
sale to the local governmental consortium had not taken place. The 2.105
multiplier was explained on page 4 of my testimony.
Why was the sale to the Committee not completed?
There were several reasons. Following the expiration of the Committee-Owners
MOU, the consortium continued to work with the Corps of Engineers to conduct
stability/safety drilling tests and studies on the dam and to evaluate the ability to
modify the dam, which would be a requirement of the flood control project.
Concurrently, the Skookumchuck Dam was also due for stability/safety studies
required by the FERC, and the FERC agreed to use the Corps' field results instead
of requiring the Owners to conduct duplicate drilling tests and studies. Once the
Corps' studies were complete , it was unclear whether the structure met safety and
stability criteria. The FERC commissioned an independent consultant to analyze
the drilling test data and studies.
In March 2003, PacifiCorp received notification from FERC to conduct additional
seismic drilling, at an estimated cost of $130,000, to determine the liquefaction
potential of the dam under critical seismic load conditions. This additional field
work was completed in January 2004 and the ensuing analysis is scheduled to be
submitted to the FERC by March 31 2004.
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In addition, the Committee has been unable to secure governmental
appropriations for the flood control project. Even if such a funding source
materialized, the Committee has indicated that it would not pay for any
remediation costs to bring the Project up to current seismic standards, and would
only be willing to pay approximately 1/3 of the net book value of the Project, an
offer that the Owners are not willing to accept.
Why was TransAlta the only purchaser considered?
The dam was originally constructed to provide an assured water cooling source
for the Centralia Steam Plant. This original purpose still has value to TransAlta
the owner and operator of the Centralia Steam Plant, but does not afford the same
value to anyone else. For this reason, TransAlta included in the Skookumchuck
Dam Management Agreement a right of first refusal for the purchase of the
facilities at a price of net book value. In addition, TransAlta has expressed a
willingness to meet the stability/safety requirements that may be imposed on the
Skookumchuck Dam. See Sale Agreement, Sections 1.1(0),6 and 5.3(a)(iv).
Does TransAlta intend to operate the Project as an exempt wholesale
generator ("EWG") under PUHCA?
Yes, that is the stated intention of TransAlta. In order to secure EWG status, we
must ask the Commission to find that allowing the Project to be an "eligible
facility" under PUHCA: (a) will benefit customers, (b) is in the public interest
and (c) does not violate Idaho law. Section ill ofPacifiCorp s Application
describes the specific approvals requested of the Commission. We ask the
Commission to consider the EWG issues on an expedited basis. The Owners and
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TransAlta could move up the Closing Date if EWG findings are secured early
from each state in which the Project was included in rate base, thus allowing
TransAlta to accelerate its EWG filing with FERc.
Does this conclude your direct testimony?
Yes.
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