20130624Comments.pdf

DONALD L. HOWELL, II i'.:: il :' . '
''
DEPUTY ATTORNEY GENERAL
rDAHo puBlrc uTrLrTrES C6MMTSSI6N iili:: J;jaj ?L: [.ii t: 52
PO BOX 83720
ir_. ,, -;,-r , :
BOISE, IDAHO 83720-0074 I 'li ';', ,'.,. r-, ,, .' . -,
[phone]
IDAHO BAR NO. 3366
Street Address for Express Mail:
472W. WASHINGTON
BOISE, IDAHO 83702-5918
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF )
ROCKY MOUNTATN POWER FOR ) CASE NO. PAC-E-13-6
AUTHORITY TO SELL THE ST. ANTHONY )
HYDROELECTRIC GENERATION PLANT )
LOCATED IN FREMONT COUNTY,IDAHO. ) COtvtMENTS OF THE) covrMrssroN srAFF
)
The Staff of the Idaho Public Utilities Commission, by and through its Attomey of Record,
Donald L. Howell II, Deputy Attorney General, submits the following comments in the above
referenced case.
BACKGROUND
On April 9,2013, PacifiCorp dba Rocky Mountain Power filed an Application pursuant to
Idaho Code $ 6l-328 for authority to sell a hydroelectric facility located within the city limits of
St. Anthony, Idaho.r This facility shares a FERC license with the nearby Ashton facility. The
hydro facility consists of a 1-unit powerhouse that contains submerged double horizontal K-style
turbines that were commissioned in 1915. Application at\4. The facility is powered by diverting
' When Rocky Mountain initially filed its Application, the entire sales agreement was marked confidential. After
discussions with Commission Staft the utility re-filed the sales agreement and several exhibits on May 17,2013, but
redacted certain information it claimed was trade secret pursuant to Rule 67 and ldaho Code $ 9-340D.
STAFF COMMENTS JI-INE 24,2013
water from the Henry's Fork of the Snake River. The turbine is rated at750 horsepower. The
o'head works" or diversion dam are also used to meet the utility's obligation to deliver water to the
Egin Bench Canals, Inc. The facility's generator has been out of operation since 2002 when the
shaft that connects the two turbines failed. Id.
A. The Statutory Standards
Idaho Code $ 6l-328 governs the sale of utility property located within the State of Idaho.
Briefly, this section provides that no electric utility may dispose of generating property "except
when authorized to do so by order of the public utilities commission." Idaho Code $ 6l-328(1).
Before authorizing a sale of utility property, the Commission must find: (1) that transaction is
consistent with the public interest; (2) the cost of and rates for supplying service will not be
increased by reason ofsuch transaction; and (3) the purchaser has the bona fide intent and
financial ability to operate and maintain said property in the public service. The utility bears the
burden of showing that the standards set out above have been satisfied. Idaho Code $ 6l-328(2).
The Commission has been vested with the authority to approve, reject or condition the
transaction. The Commission may attach such terms and conditions as in its judgment the public
convenience and necessity may require. Idoho Code $ 6l-328(4). In addition, the Commission
shall include in any authorization to dispose of utility facilities "the conditions required by the
director of the department of water resources under section 42-1701(6).' Id.z
B. The Application
As discussed in greater detail below, the Company analyzed three alternatives before
deciding that the sale of the facility was the most appropriate alternative. The utility maintains the
sale of the facility is in the public interest because it "represents the best balance of cost and risk
for customers. Discontinuance of operations associated with the St. Anthony hydroelectric
generating plant . . . will not adversely affect retail or wholesale customers." Application at fl 15.
The utility fuither maintains the loss of the plant's 0.625 MW generation capacity "will have no
material effect on Rocky Mountain Power's generation capacity which is comprised of
approximately 10,579 MW." /d (Footnote omitted) Moreover, the utility believes that St.
Anthony Hydro LLC has the financial ability and intent to operate the plant in the public interest
as demonstrated by its willingness to enter into a power purchase agreement (PPA).
'On June 19,2Ol3,the ldaho Department of Water Resources (IDWR) filed comments in this case. The Director of
IDWR stated in his comments that the sale would not "cause injury to other water right holders, and I do not propose
to add conditions to the sale of the water right." IDWR Comments at l.
STAFF COMMENTS JUNE 24,2013
STAFF ANALYSIS
Staff has reviewed the analysis performed by the Company that led to the sales agreement
of the St. Anthony hydro project, the RFP process, and its proposed accounting treatment should
the sale be approved by the Commission. Staff believes the sale of the St. Anthony hydro facility
is the preferred option. Staff believes the proposed sale is in the public interest and satisfies the
standards set forth in ldaho Code $ 6l-328(1), and does not adversely affect Rocky Mountain
customers.
Staff Review of the Sale
Rocky Mountain Power initially evaluated three altematives before deciding the sale of the
facility (Alternative 4) was the most appropriate alternative. The first three options are:
Alternative 1: make the necessary repairs and upgrade the facility
to increase the amount of generation from the plan;
Alternative 2: perform minimum repairs to the failed shafts, replace
the wooden flume feeding water into the turbine; and
Alternative 3: decommission of the generating facility in 2013.
The Company employed a financial analysis model that is routinely used in making its
hydro investment decisions. The model calculates the 40-Year Present Value of Revenue
Requirement (PVRR) and 40-Year Nominal Levelized Cost in $A{Wh based on assumptions of,
among other things, capital cost, O&M cost, and prices associated with replacement or foregone
generation. Under all three alternatives, the analysis demonstrated that net costs would exceed
benefits. The Company consequently evaluated the option of selling the plant "as is"
("Alternative 4"), with the assumption that the power would be purchased back from the new
owner via a PPA.
Staff reviewed the Net (Cost)/Benefit-PVRR for each of the four alternatives, as well as
the costs included in each alternative. As part of its review, Staff met with the Company (via
webinar) to examine the decision model and the input assumptions utilized in its analysis. Staff
believes Rocky Mountain relied on reasonable estimates of capital and O&M costs, as well as
decommissioning costs. The Company's analysis employs its forward market price curve to value
the generated (Alternatives I and2) or lost energy (Alternatives 3 and 4) from the project, which
Staff will fuither discuss below. Alternative 4 also included costs based on the PPA to offset the
revenue associated with the energy "freed up" for sale into the market. Staff believes the
STAFF COMMENTS JLINE 24,2013
assumptions were applied consistently among the alternatives, and with the exception of the
reliance on market prices in the benefit/cost analysis, are fundamentally sound.
Based on the Company's analysis, the sale of the asset, Alternative 4, produced the most
favorable Net (Cost)/Benefit-PVRR and Levelized Annual Cost by a wide margin. Alternative 4
was nearly twice as beneficial over decommissioning, four times as beneficial as Alternative 2 and
eight times as beneficial as Alternative 1. The large disparity is due mainly to the considerable
upfront capital outlays necessary for upgrading the facilities and ongoing O&M, as well as the
upfront decommissioning costs.
Staff notes that even though Alternative 4 was the best performing option, it still produced
a net cost to the Company. The net cost includes expenses associated with the facility sale
(consisting of legal costs, FERC processing costs, regulatory processing costs and internal labor
costs), and ongoing O&M until the transfer of the asset is complete. The remaining balance
consists primarily of the difference between the PURPA and market rates for 2013-2033.3 The net
loss is de minimus given the size of the transaction relative to PacifiCorp's customer-generated
revenue, and would not result in a rate increase, thus satisffing condition2 of ldaho Code
$ 6l-328(3).
Staff recognizes the decision model utilized in the Company's analysis is its standard for
evaluating hydro projects, but the use of market price for power may be inappropriate given the
size of the facility. The capacity of the plant is such that any increased or decreased output would
not conceivably lead to a market sale or purchase. More likely, the Company would accommodate
the change in generation through the use of its other plants. But since the plant accounts for only a
slight fraction of the Company's generation fleet (0.6 MW+l0,579 MW), Staff presumes that the
cost (benefit) of the replaced (offset) generation would largely go unnoticed in Rocky Mountain's
annual net power supply cost.a Staff believes the decision surrounding the St. Anthony hydro
project ultimately boils down to whether the stream of PUPRA payments outweigh the upfront
capital and ongoing O&M expenses of the plant. Based on the assumptions in the Company's
model, it is clear that relieving itself of ownership is in the best interest of Rocky Mountain and its
customers. Staff therefore concurs with the Company that selling the St Anthony Hydroelectric
plant is the most cost effective alternative.
'Staffhas reviewed and commented on the proposed PPA in Case No. PAC-E-13-07.
a Put in perspective, the average annual value of cost of replacement power in the Company's analysis was
approximately $200,000. The Company's last ECAM filing showed a net power cost of $1.5 billion in2012.
STAFF COMMENTS JLNE 24,2013
The RFP Process
Upon determining that selling the facility "as is" was the most cost-effective alternative,
the Company prepared a Request for Proposals (RFP) and distributed the RFP to 3l parties that
expressed interest in acquiring the facility. Application at fl 10. Of the 3l parties that received the
RFP package, l3 completed the nondisclosure agreement and were given access to confidential
operation records and accounting information. Six parties provided letters of interest and only
three submitted conforming offers. Of the final three, the bid submitted by St. Anthony Hydro,
LLC was selected as the "the best balance between cost and risk." Id. atl12. St. Anthony Hydro
proposes to restore the facility to operation and enter into a PPA with Rocky Mountain and sell the
facility's output to Rocky Mountain at PURPA avoided cost rates. The PPA is contingent upon
the Commission's approval of Rocky Mountain selling its facility to St. Anthony Hydro. PPA
$ 2.1. As Staff discussed in its comments in PAC-E-13-07, the negotiation and approval of the
sale using 2012 PURPA rates further meets the conditions of sale outline d in ldaho Code $ 6l-
328(3).
The Company evaluated bidders on a number of criteria, including experience with owning
and operating small hydro projects and the ability to provide indemnification to the Egin Canal
Corporation, who are co-operators of the canal. St. Anthony Hydro offered the preferred
purchase option of the three finalists, and has considerable experience designing and operating
small hydro projects. The buyer was also the only bidder who showed clear ability to assume
Rocky Mountain Power's maintenance and regulatory responsibilities of its share of the canal.
Staff reviewed the letter of interest and financial statements presented by the buyer, as well as a
letter of credit submitted by NW Farm Credit Services. Once construction timelines are met by
the end of 2013, St. Anthony Hydro will qualiff for tax incentives on the project, funher
improving the financial ability to operate the facility. The Company's filing demonstrates that St.
Anthony Hydro has the financial ability and intent to operate and maintain the St Anthony plant in
the public interest, thus satisfying the third condition of ldaho Code $ 61-328(3).
RECs
The parties agreed to split ownership of the renewable energy credits (RECs), where
Rocky Mountain would receive the RECs for the first ten years of the PPA, and the QF would
retain them thereafter. St. Anthony Hydro was also the only bidder who would agree to that
arangement. The Company did not include REC revenues in its initial analysis, though, given the
STAFF COMMENTS JLINE 24,2013
currently depressed values and immature voluntary REC market in the West, Staff believes the
incremental dollar benefit from partial REC ownership is minimal.
Water Right
PacifiCorp has a water right for its hydroelectric facility of 700 cubic feet per second (cfs),
non-consumptive use for hydro power operation. Water Right No. 21-12914. The priority date
for the water right is December 20,1912, Application at $ 5. The utility was granted an extension
of time by the Idaho Department of Water Resources (IDWR) to resume beneficial use of the
water right until December 31,2012. On March l2,20l2,IDWR accepted the utility's application
to place the facility's water rights in the State water supply bank. Consequently, the water rights
will remain valid in the water supply bank until June 30, zon.s The parties anticipate that if the
Commission approves the Application to sell the facility, the water rights will be withdrawn from
the bank and transferred to the new owner when the plant resumes operations.6
Accounting Treatment of the Sale
Although Rocky Mountain has determined, and Staff agrees, that the best altemative is to
sell the hydro facility "as is," the transaction "will result in [a] sale below remaining book value of
the facility, akin of the decommissioning alternative." Id. atfl 11. Because this plant is operated
under a FERC license, the utility will reflect the sale under FERC accounting procedures. Net
proceeds will be included in FERC Account 108 as pan of the Ashton-St. Anthony project. The
Company maintains that this accounting procedure is consistent with past practices and approvals
such as when the Cove Development was decommissioned on the Bear River. .Id
Rocky Mountain utilizes composite depreciation accounting methods consistent with past
practices and approvals.T This is an approved method within the industry where assets are
aggregated to reduce recordkeeping costs of determining periodic depreciation. Under this
method, dispositions are recorded under the assumption the book value of the disposed item
exactly equals the proceeds received and no gain or loss is recorded. Staff has reviewed the
proposed entries for recording the sale of the St Anthony plant and found them to be consistent
with past practices and in accordance with generally accepted accounting principles (GAAP)8.
The exact book value of the transactions and entries will not be known until equipment sales are
ssee supra n.2.uln a companion application in Case No. PAC-E-13-07, the Company and St. Anthony Hydro anticipate that once
repaired, the facility will resume operation on or about November 30, 2013.
'Case No. PAC-E-07-5, McDougalExhibit Part II p. 8, I l. See a/so PacifiCorp l0-k filing dated Dec.3l,2012
(Auditors Notes to the Consolidated Financial Statements #2).TGAAP Codification Topic 360.
STAFF COMMENTS JUNE 24,2013
closed. Id. atl14. Therefore, Staff recommends the Company file the final accounting entries
associated with the sale within 45 days of closing.
RECOMMENDATIONS
Staff recommends the Commission approve Rocky Mountain Power's Application for the
authority to sell the St Anthony Hydroelectric Generation Plant located in Fremont County, Idaho.
Staff believes the transaction satisfies the utility sale of property criteria set forth in ldaho Code
$61-328. Staff also believes the proposed accounting treatment is reasonable and recommends
Rocky Mountain Power be directed to file the final accounting entries associated with the sale
within 45 days of closing.
Respectfully submitted this Z/t' day of June 2013.
Technical Staff:Bryan Lanspery
Sandra Walker
i:umisc/comments/pace l3.6dhblsw comments
Deputy Attomey General
STAFF COMMENTS JUNE 24,20T3
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 24th DAY OF JUNE 2013,
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN CASE
NO. PAC.E-I3-06, BY E-MAILING AND MAILING A COPY THEREOF, POSTAGE
PREPAID, TO THE FOLLOWING:
TED WESTON
ID REGULATORY AFFAIRS MANAGER
ROCKY MOUNTAIN POWER
201 S MAIN ST STE 23OO
SALT LAKE CITY UT 84I I I
E-MAIL: ted.weston@facifi corp.com
DATA REQUEST RESPONSE CENTER
E.MAIL ONLY:
datareq uest@pacificom. com
DANIEL E SOLANDER
SENIOR COUNSEL
ROCKY MOUNTAIN POWER
201 S MAIN ST STE 23OO
SALT LAKE CITY UT 84I11
E-MAIL: [e-mail]
BRUCE GRISWOLD
DIRECTOR, SHORT-TERM ORIGINATION
PACIFICORP
825 NE MULTNOMAH SUITE 18OO
PORTLAND OR 97232
bruce. griswoldpacifi com. com
SECRETARY
CERTIFICATE OF SERVICE