20040402Final Order No 29453.pdf

Office of the Secretary
Service Date
April 2, 2004
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
ACIFICORP FOR EXEMPT WHOLESALE
GENERATOR DETERMINATIONS RELATING)
TO THE SKOOKUMCHUCK HYDRO- ELECTRIC PLANT.
CASE NO. PAC-O4-
ORDER NO. 29453
On February 12, 2004, PacifiCorp (Company) filed an Application with the Idaho
Public Utilities Commission (Commission) regarding the proposed sale by PacifiCorp of its
ownership interest in the Skookumchuck Hydroelectric Plant, a I-megawatt (MW) generation
facility located in the state of Washington. The facility is co-owned by PacifiCorp, Avista
Corporation, Public Utility District No.1 of Snohomish County, Puget Sound Energy, Inc., City
of Tacoma, City of Seattle and Public Utility District No.1 of Grace Harbor County (collectively
the "Owners
PacifiCorp has entered into a Purchase and Sale Agreement to sell the Skookumchuck
Hydroelectric Plant to 2677588 Washington LLC, a Limited Liability Company formed by
TransAlta USA, Inc. (TransAlta). The Skookumchuck Project is a small, 1 MW hydroelectric
facility located in the vicinity of Centralia, Washington on property adjacent to the Centralia
Power Plant, a large coal-fired generating facility. Washington LLC intends to operate the
Skookumchuck Project as an exempt wholesale generator (EWG) within the meaning of Section
32 of the Public Utility Holding Company Act of 1935 (PUHCA).
PacifiCorp seeks a Commission Order making certain public interest findings
required in order for this Skookumchuck Project to qualify as an exempt facility and for
Washington LLC to qualify as an EWG under Section 32 ofPUHCA.
Washington LLC is a Washington Limited Liability Company and a direct wholly-
owned subsidiary of TransAlta. TransAlta is the indirect owner of the Centralia Power Plant and
the Centralia Coal Mine. In 2000, the Owners sold the Centralia Power Plant to a direct wholly-
owned subsidiary of TransAlta, TECW A Power, Inc., and PacifiCorp sold the Centralia coal
mine to another direct wholly-owned subsidiary of TransAlta, TECW A Fuel, Inc. TransAlta
Centralia Generation LLC, a direct wholly-owned subsidiary of TECW A Power, Inc., owns and
operates the Centralia Power Plant as an EWG.
ORDER NO. 29453
The Skookumchuck Project is an earth-filled dam and hydroelectric generating plant
located in the vicinity of Centralia, Washington on property adjacent to the Centralia Power
Plant. The Skookumchuck Dam was constructed in 1973 as a water storage facility for the
Centralia Power Plant. In 1991 , a generating plant with a capacity of approximately 1 MW was
constructed at the dam. The Project was granted an exemption from licensing as a hydropower
facility by the Federal Energy Regulatory Commission (FERC) pursuant to 16 U.C. ~ 2705(d),
which allows exemptions for facilities less than 5 MW. The Project is, however, subject to dam
safety regulations by the FERC.
PacifiCorp proposes to sell and transfer to Washington LLC the dam, powerhouse
water rights, land, easements and other assets of the Project, including certain fixtures, contracts
and other rights. The sale and transfer of the Project is governed by the Skookumchuck facility'
Purchase and Sale Agreement between the Owners and Washington LLC, dated November 25
2003
, ("
Sale Agreement"), which is attached to the pre-filed direct testimony of Company
witness Randy A. Landolt.
The aggregate sale price of the transaction is approximately $7.57 million, adjusted
for changes in PacifiCorp s net book value of the facilities from September 30, 2003 to the
closing date. See Section 2.3(a) of the Sale Agreement. PacifiCorp s share of this amount is
47.5%. The sale price is determined in such a manner that PacifiCorp will receive its net book
value of the assets being transferred, with no appreciable gain or loss. Payment will be made by
wire transfer at closing.
PacifiCorp is informed that Washington LLC will continue operation of the Project to
provide cooling water supply to the Centralia Power Plant and that it will produce power from
the Project either as an EWG or as a Qualifying Facility under the Public Utility Regulatory
Policies Act of 1978 (PURPA). None of the electrical output of the Project will be used to serve
PacifiCorp s retail customers, except perhaps indirectly through the wholesale power markets.
To qualify as an EWG, Washington LLC must be engaged exclusively in the business
of owning or operating an "eligible facility" and selling electric energy at wholesale. If the costs
of a generation facility were included in the rates of a regulated utility on October 24, 1992 (the
date of enactment of Section 32 of PUHCA), then in order for the facility to be considered an
eligible facility," every state Commission having jurisdiction over such rates must specifically
determine that allowing the facility to become an eligible facility (1) will benefit consumers, (2)
ORDER NO. 29453
is in the public interest, and (3) does not violate state law. 15 U.C. ~ 79z-5a(c). Thus, the
Commission and each of PacifiCorp s other state regulatory commission s must make these
determinations regarding PacifiCorp s transfer of the Skookumchuck Project.
A. Compliance with State Law
Because the Project assets are located in the state of Washington, PacifiCorp contends
that Idaho s property transfer statute Idaho Code ~ 61-328 , is not applicable to the contemplated
sale. Accordingly, the Company contends that the sale of the Project to Washington LLC and
allowing the generating facilities to become an eligible facility will not violate Idaho state law.
B. Benefits to Customers
PacifiCorp proposes to transfer the project to Washington LLC because the sale is a
lower cost option than continuing to invest in and operate and maintain the Project.
The Skookumchuck Project has an electrical capacity of 1 MW, but because the
Project is operated for purposes of supplying cooling water to the Centralia Power Plant
PacifiCorp states that it has relatively low energy output. Over the last eight years, the average
annual production has been 3 000 MWh. The Project's bus-bar cost in fiscal year 2003 (12
months ending March 31 , 2003) was approximately $255 per MWh. The facility is
interconnected with the distribution system of Puget Sound Energy, Inc. (PSE) and historically
all of the power from the Project has been sold to PSE.
As one of the owners of the Project, PacifiCorp must pay its proportionate share of
the costs of the Project. The Company analysis and forecast predict that ratepayers will see
lower costs if the Project is sold because the projected cost of power from the Project
substantially exceeds the Projected cost of market power. Moreover, the expected impact of the
sale is to lower the Company s future revenue requirement by removing the Project from the
Company s rate base and revenue requirement. The expected present value of the future
reduction in Idaho revenue requirement is approximately $700 000.
The proposed transaction eliminates the risk that PacifiCorp will be required to fund
its share of expenditures for ensuring the structural integrity of the Skookumchuck Dam.
PacifiCorp s share of this investment is estimated to be $4 million. PacifiCorp contends that the
benefits from the proposed sale outweigh the risks of rising costs of continuing to own and
operate the Project. Continued operation of the Project as a hydroelectric project, the Company
contends, would be uneconomic, and such operation would not be in the public interest.
ORDER NO. 29453
C. Public Interest Standard
PacifiCorp contends that the transfer of the Skookumchuck Project to Washington
LLC is in the public interest because it will benefit PacifiCorp s customers by lowering the
Company s cost of providing electrical service. In addition, the transfer will give TransAlta
greater control of the water flows in the Skookumchuck River for providing cooling water to the
Centralia Power Plant, thus increasing the electrical output of the Centralia Power Plant for the
benefit of all electricity consumers.
Washington LLC, the Company contends, cannot process its EWG Application with
the FERC until all of the Company regulatory commissions have made the three
determinations required by Section 32 of PUHCA. Accordingly, PacifiCorp requests that the
Commission process the matter expeditiously and pursuant to Modified Procedure, i., by
written submission rather than hearing. Reference Commission Rules of Procedure, IDAP A
31.01.01.201-204.
Exhibits to the Company s Application include the following: (1) Application Exhibit
No.1: Original Cost, Accumulated Depreciation and Net Book Value of Assets to be Transferred
as well as the proposed journal entries to record the transfer.
(2)The prefiled direct testimony of Randy A. Landolt, PacifiCorp s managIng
director of hydro resources, which describes the proposed sale, including how the sale is in the
public interest. The Sale Agreement, which is the instrument governing the contemplated sale, is
included as Exhibit No.1 to the pre-filed testimony ofMr. Landolt.
(3) The prefiled direct testimony of Craig P. Johnson, PacifiCorp s regulatory
coJ.?-sultant, describing the ratemaking impacts of the proposed sale.
On February 20, 2004, the Commission issued Notices of Application and Modified
Procedure in Case No. PAC-04-1. The deadline for filing written comments was March 11
2004. Timely comments were filed by Commission Staff and an individual commenter from
Kuna, Idaho. The commenter states that with regional electricity needs increasing it seems
inappropriate that any public utility be permitted to sell off a power generating facility. The only
way PacifiCorp ought to be allowed to remove the facility from its resource portfolio, the
commenter contends, is that it commits to an equal generating capacity from another source.
Commission Staff in its filed comments concludes that the proposed sale (1) will benefit
ORDER NO. 29453
consumers, (2) is in the public interest, and (3) does not violate Idaho state law. Staff
recommends approval of the Company s Application. Staff also recommends that the Company
be required to file final accounting entries with the Commission within 45 days of closing.
Staff Comments
Commission Staff in its Comments states that it has reviewed the referenced u.S.
Code language regarding exempt wholesale generators (see Staff Comments, Attachment A, 15
u.S.c.A. ~ 79z-5a). As to the applicability of Section 32 of PUHCA and the requirement of
Commission eligible facility determinations, Staff represents that the ownership interest of
PacifiCorp in the Skookumchuck facilities is a part of the utility s rate base in Idaho on which
PacifiCorp receives a return on investment and is now and has been included in the rate base of
PacifiCorp since or prior to October 24, 1992. Based on Staffs review of the Idaho Code, Staff
represents that it has discovered no Idaho laws that address the issues raised by the Company
request, and none (including Idaho Code 61-328) prohibit or limit the authority of Washington
LLC as an EWG to operate Skookumchuck as a wholesale facility.
Commenting on the benefit to customers, Staff notes that the aggregate sale price of
the transaction is approximately $7.57 million, adjusted for changes in PacifiCorp s net book
value of the facilities from September 30, 2003 , to the closing date. PacifiCorp s share of this
amount is 47.5%. The sale price is determined in such a manner that PacifiCorp will receive its
net book value of the assets being transferred.
estimates a net loss from the sale of $68 613.
After taxes and closing costs, PacifiCorp
Despite the relatively small projected financial loss on the sale, Staff believes there
are other factors that should also be considered by the Commission. The Company s analysis
and market price forecast predict that ratepayers will see lower costs if the project is sold because
the projected cost of power from the project substantially exceeds the projected cost of market
power. According to PacifiCorp, the expected impact of the sale is to lower the Company
future revenue requirement by removing the project from the Company s rate base and revenue
requirement. The Company calculates the expected present value of the future reduction in
Idaho revenue requirement is approximately $700 000 on a present value basis. Staff accepts
these calculations for the sale analysis.
PacifiCorp notes that the proposed transaction eliminates the risk that the Company
will be required to fund its share of expenditures for ensuring the structural integrity of the
ORDER NO. 29453
Skookumchuck Dam. The Company believes that it is likely the FERC will mandate dam
modifications to meet stability criteria. PacifiCorp s share of this investment is estimated to be
$4 million.
Staff agrees with the Company that the benefits from the proposed sale outweigh the
risks and rising costs of continuing to own and operate the Project. Continued operation of the
project as a hydroelectric project would be uneconomic, and such operation would not be in the
public interest. All things considered, Staff believes that selling the project is a lower cost long-
term option than continuing to invest in and operate and maintain the project.
Staff believes that the appropriate measure of whether the public interest standard is
met is the effect of the sale on PacifiCorp s ratepayers. PacifiCorp contends that the transfer of
the Skookumchuck project to Washington LLC is in the public interest because it will benefit
PacifiCorp s customers by lowering the Company s cost of providing electrical service. In
addition, the transfer will give TransAlta greater control of the water flows in the Skookumchuck
River for providing cooling water to the Centralia Power Plant. Staff agrees that the Company
ratepayers will not be harmed by the sale, and concludes that the sale does, in fact, meet the
public interest standard.
PacifiCorp as co-owner of the Project with a 47.5% interest in the Project has been
one of the primary parties in the sales negotiation. Negotiation costs and all other costs of the
sale are being directly assigned to a work order associated with the sale. Labor costs for legal
and technical services represent the largest component of the sales cost for PacifiCorp. Because
the Project is being sold at PacifiCorp s book value, the gain or loss on the sale of the Project is
determined by the sales cost and any reimbursement offsets. PacifiCorp does not propose to
recover any of the costs of sale, i., loss on the sale, from customers. If a test year includes
these costs, they will be normalized out of the results. PacifiCorp states that if a gain should
occur on the sale, that it will be passed 100% to customers.
Staff recommends that PacifiCorp be directed to file the final accounting entries
associated with the sale within 45 days of closing. PacifiCorp accepts this recommendation.
Any revenue requirement reduction from not operating the project will be reflected in
PacifiCorp s results of operation. As such, Staff represents that this change will be reflected in a
future PacifiCorp rate proceeding.
ORDER NO. 29453
Commission Findings
The Commission has reviewed the filings of record in Case No. PAC-04-
including the Application and accompanying testimonies and exhibits, the filed public comments
and the comments and recommendations of Commission Staff. Based on our review of the
record in this case, we continue to find Modified Procedure regarding the issue of EWG
Eligible Facility" status to be reasonable. Reference IDAP A 31.01.01.204.
PacifiCorp apprises the Commission in this case of the proposed sale by the utility of
its ownership interest in Skookumchuck, a small hydroelectric plant located in the State of
Washington. As set forth in PacifiCorp s Application, the purchaser ofSkookumchuck, 2677588
Washington LLC, intends to seek FERC approval to own and operate the Skookumchuck hydro-
electric plant facilities with Exempt Wholesale Generator (EWG) status.
The Skookumchuck generation facilities, we find, are currently in the Company
Idaho jurisdiction ratebase. PacifiCorp s retail electric rates in this state thus provide the
Company with a return on its Skookumchuck investment. Because of this, 15 U.C. ~ 79z-5a(c)
requires that Washington LLC include in its EWG Application to FERC a statement that this
Commission has determined that allowing the plant to be a wholesale facility operated by an
EWG (1) will benefit consumers; (2) is in the public interest; and (3) does not violate state law.
The appropriateness of a utility selling generating resources when regional electricity
needs are increasing was an issue raised by a commenting party. Framed differently, the issue is
whether the proposed sale is in the public interest. In response, we note that Skookumchuck has
an electrical generating capacity of only 1 MW. Moreover, because the Skookumchuck dam is
operated for purposes of supplying cooling water to the adjacent Centralia Power Plant
PacifiCorp states that the Skookumchuck hydroelectric plant has relatively low energy output.
Over the last four years PacifiCorp notes that the average annual production of Skookumchuck
has been only 1 000 MWh per year. This is a very low capacity factor for a hydroelectric plant.
As represented in the Company s Application, Skookumchuck is no longer a "core business
asset for any oCthe current Owners. This is because PacifiCorp and the Skookumchuck Owners
no longer have any ownership interest in the adjacent Centralia Power Plant. Continued
operation and maintenance by PacifiCorp of such a small hydroelectric plant and dam located so
far from the Company s other electric facilities, we find, does not make economic sense.
ORDER NO. 29453
This Commission has jurisdiction over the Idaho rates and charges of PacifiCorp. As
we indicated above, a portion of those rates and charges represents recovery of PacifiCorp
ratebase investment in the Skookumchuck generation facilities. We find that the proposed sale
by PacifiCorp of its ownership interest in Skookumchuck is in the public interest and the interest
of the Company s Idaho customers. We further find that the proposed sale of Skookumchuck by
PacifiCorp to 2677588 Washington LLC and Company filing complies with the intent and meets
the standards of Idaho Code ~ 61-328(3)a-c. Based on the filings of record in Case No. PAC-
04-, the Commission finds the EWG "eligible facility" determinations required under 15 D.
~ 79z-5a( c) to be factual.
CONCLUSIONS OF LAW
The Idaho Public Utilities Commission has jurisdiction over the Application of
PacifiCorp dba Utah Power & Light Company, an electric utility, and issues presented therein
pursuant to the authority and power granted under Title 61 of the Idaho Code and the
Commission s Rules of Procedure, IDAP A 31.01.01.000 et seq.
ORDER
In consideration of the foregoing and as more particularly described above, IT IS
HEREBY ORDERED and the Commission does hereby make the following determinations:
PacifiCorp s Application for EWG determinations under 15 u.S.C. ~ 79z-5a(c) is
granted and the Commission accordingly finds that allowing the Skookumchuck hydroelectric
generation facility to become an "eligible facility" and sell electric energy at wholesale (1) will
benefit consumers, (2) is in the public interest, and (3) does not violate Idaho state law.
II.
The Commission by this Order further approves the proposed sale by PacifiCorp of
its interest in the Skookumchuck Project facilities to 2677588 Washington LLC. PacifiCorp is
directed to file the final accounting entries associated with the sale of Skookumchuck Project
facilities with the Commission within 45 days of closing.
THIS IS A FINAL ORDER. Any person interested in this Order (or in issues finally
decided by this Order) may petition for reconsideration within twenty-one (21) days of the
service date of this Order with regard to any matter decided in this Order. Within seven (7) days
ORDER NO. 29453
after any person has petitioned for reconsideration, any other person may cross-petition for
reconsideration. See Idaho Code ~ 61-626.
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this :L "
day of 2004.
PAUL KJELL ER, PRESIDENT
~~
MARSHA H. SMITH, COMMISSIONER
ENNIS S. HANSEN, COMMISSIONER
ATTEST:
J a D. Jewell
Commission Secretary
vld/O:PACE0401
ORDER NO. 29453