20040317Decision Memo.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
COMMISSIONER SMITH
COMMISSIONER HANSEN
COMMISSION SECRETARY
COMMISSION STAFF
LEGAL STAFF
FROM:SCOTT WOODBURY
DATE:MARCH 17,2004
RE:CASE NO. P AC-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.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
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., ~d 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 (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.
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. 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 ofthe 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 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
consultant, 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
DECISION MEMORANDUM
2004. Timely comments were filed by Commission Staff and one Norman E. Anderson of Kuna
Idaho. Mr. Anderson 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, Mr. Anderson
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 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.
Code language regarding exempt wholesale generators (see Staff Comments, Attachment A, 15
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 are 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 predicts 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
DECISION MEMORANDUM
Company s 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
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.
The Skookumchuck project has an electrical capacity of only 1 MWh. Moreover
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 approximately 3 000 MWh per year, and over the last four
years the output has been limited to about 1 000 MG hours per year. This represents a very low
capacity factor for a hydroelectric plant.
Finally, Staff notes that the project no longer represents "core business" assets to any
of the current Owners because they no longer have any ownership interest in the Centralia Steam
Plant. Operation of such a small plant located so far from any other PacifiCorp facilities, Staff
contends, is problematic.
In summary, 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. Staff agrees. 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 ofthe water flows in the Skookumchuck
River for providing cooling water to the Centralia Power Plant. Staff agrees that the Company
DECISION MEMORANDUM
ratepayers will not be harmed by the sale, thus Staff believes 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.
Commission Decision
PacifiCorp requests a Commission Order determining that the operation of
Skookumchuck as an "eligible facility" upon sale (1) will benefit consumers, (2) is in the public
interest, and (3) does not violate state law. The EWG determination requested is a requirement
pursuant to Section 32 of the Public Utility Holding Company Act of 1935 (PUHCA) (codified
at 15 U.C. ~ 79z-5a(c). Staff recommends that the Company s Application be approved. Does
the Commission find it reasonable to grant the Company s Application and to provide the
required EWG determinations?
Scott Woodbury
VldIM:PACEO401 sw2
DECISION MEMORANDUM