20040213Decision Memo.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
CO MMISSI 0 NER SMITH
COMMISSIONER HANSEN
COMMISSION SECRETARY
COMMISSION STAFF
LEGAL
FROM:SCOTT WOODBURY
DATE:FEBRUARY 13, 2004
RE:CASE NO. PAC-04-1 (PacifiCorp)
DETERMINATION OF EWG "ELIGIBLE FACILITY" STATUS
SKOOKUMCHUCK HYDROELECTRIC PLANT
On February 12, 2004, PacifiCorp 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, A vista Corporation, Public Utility
District No.1 of Snohomish County, Puget Sound Energy, Inc., City of Tacoma, City of Seattle
and Public Utility District No. I 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 adj acent 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 Proj ect 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
DECISION MEMORANDUM
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.
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 ofthe 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. 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.
DECISION MEMORANDUM
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)
is in the public interest, and (3) does not violate state law. 16 US.C. ~ 79(z-5a)(c). Thus, the
Commission and each of PacifiCorp s other state regulatory commission s must make these
determinations regarding PacifiCorp s transfer ofthe 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 Proj ect.
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.
DECISION MEMORANDUM
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.
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 describe 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
consultant, describing the ratemaking impacts of the proposed sale.
PacifiCorp s regulatory
Commission Decision
PacifiCorp requests a Commission Order: (a) determining that the proposed transfer
of the Skookumchuck Project to Washington LLC and allowing the Project to become an
DECISION MEMORANDUM
eligible facility" within the meaning of Section 32 of PUHCA (1) will benefit consumers, (2) is
in the public interest, and (3) does not violate Idaho state law. Staff concurs with the Company
request for Modified Procedure. Does the Commission agree that Modified Procedure is
appropriate?
Scott Woodbury
Vld/M:PACEO401
DECISION MEMORANDUM