20141215Application.pdf

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ROCKY MOUNTAIN ] !:..i'i I
BH',J[YE#"", ?ilil 0[C I 5 P]1 lr' 0? 201 South Main, suire2300
Salt Lake City, Utah 84111
December 1,5,2014
VIA HAND DELIWRY
Jean D. Jewell
Commission Secretary
Idaho Public Utilities Commission
472W. Washington
Boise,ID 83702
Re: Case No. PAC-E-14-10
IN THE MATTER OF THE APPLICATION OF ROCKY MOUNTAIN POWER
F'OR APPROVAL OF THE TRANSACTION TO CLOSE THE DEER CREEK
MINE AND FOR A DEFERRED ACCOUNTING ORDER
Dear Ms. Jewell:
Please find enclosed an original and nine (9) copies of Rocky Mountain Power's Application in
the above referenced matter, along with Rocky Mountain Power's direct testimony and exhibits.
Also enclosed is a CD containing the Application, direct testimony, exhibits.
All formal correspondence and questions regarding this Application should be addressed to:
Ted Weston Daniel Solander
Rocky Mountain Power Rocky Mountain Power
201 South Main, Suite 2300 201 South Main Street, Suite 2400
Salt Lake city, utah 84111 salt Lake city, utah 841 1l
Telephone: [phone] Telephone: [phone]
Fax: [phone] Fax: [phone]
Email: [e-mail] Email: [e-mail]
Communications regarding discovery matters, including data requests issued to Rocky Mountain
Power, should be addressed to the following:
By E-mail (preferred): [e-mail]
By regular mail: Data Request Response Center
PacifiCorp
825 NE Multnomah St., Suite 2000
Portland, OR97232
Informal inquiries may be directed to Ted Weston, Idaho Regulatory Manager at (801) 220-
2963.
Very truly yours,
Vice President Regulation
Enclosures
REDACTED
Daniel E. Solander ISB No. 8931
Rocky Mountain Power
201 South Main Street, Suite 2400
Salt Lake City, Utah 84111
Telephone: [phone]
Facsimile: [phone]
daniel. solander@oac ifi corp.com
Richard R. Hall ISB No. 8080
Stoel Rives LLP
l0l S. Capitol Boulevard, Suite 1900
Boise, ID 83702-7705
Phone: [phone]
Fax: [phone]
[e-mail]
Attorneys for Roclgt Mountain P ow er
In the Matter of the Application of Rocky
Mountain Power forApproval of the
Transaction to close Deer Creek Mine and
for a Deferred Accounting Order
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IDAHO
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
CASE NO. PAC-E-I4-10
APPLICATION
APPLICATION FORAPPROVAL OF TRANSACTION AND FORA DEFERRED
ACCOTINTING ORDER
Comes now PacifiCorp, doing business as Rocky Mountain Power (the "Comp&try"),
hereby respectfully requests that the Idaho Public Utilities Commission (Commission), pursuant
to ldaho Code $ 6l-328, approve a transaction to close the Deer Creek Mine located near
Huntington, Utah, and related matters. The mine is currently operated by Energy West Mining
REDACTED
Company (Energy West), a wholly-owned subsidiary consolidated with PacifiCorp for regulatory
purposes. This application is filed by PacifiCorp, on its own and on behalf of Energy West.
The closure of the Deer Creek Mine consists of four major components: (l) the Company
will permanently close the Deer Creek Mine and incur direct closure costs (Closure); (2) Energy
West will withdraw from the United Mine Workers of America (UMWA) 1974 Pension Trust,
incurring a withdrawal liability; (3) the Company will sell certain mining assets as defined later
in the Application (Mining Assets); and (4) the Company will execute a replacement coal supply
agreement (CSA) for the Huntington power plant and an amended CSA for the Hunter power
plant. Energy West has also settled its retiree medical obligation related to Energy West union
participants (Retiree Medical Obligation). Together, the components of the Closure and
settlement of the Retiree Medical Obligation constitute the transaction to close the Deer Creek
Mine (Transaction).
In addition, the Company also makes application to the Commission for an accounting
order authorizing the Company to: (l) defer the costs associated with the Closure for future
recovery; (2) transfer the remaining plant balances for the Deer Creek Mine and Mining Assets
from electric plant in service and establish a regulatory asset to recover these costs for continuing
recovery; (3) defer all payments associated with the withdrawal from the 1974 Pension Trust for
future recovery; (4) defer any settlement losses associated with the Retiree Medical Obligation
for future recovery; and (5) defer the difference between the costs associated with the status quo
(operating the Deer Creek Mine) currently reflected in rates through base net power costs and the
incremental costs associated with the new Huntington power plant and amended Hunter power
plant CSAs, including any fuel costs to supply the Huntington and Hunter power plants, as
described in more detail later in this application.
REDACTED
Finally, the Company hereby requests that the Commission determine that the Company's
decision to consummate the Transaction is prudent.
The sale of the Mining Assets and the execution of the CSAs are contractually contingent
upon regulatory approval and Transaction closure on or before May 31, 2015. To the extent
possible, the Company respectfully requests that the Commission issue its order by May 27,
2015. This will allow the Company two business days prior to the deadline for closing the
Transaction, and Commission approval represents the last expected regulatory action needed to
complete the Transaction. The Company will promptly provide information requested by the
Commission or interested parties and will further participate in technical conferences and
hearings as required by the Commission or as requested by interested parties to facilitate
issuance of an order on or prior to May 27,2015.
In support of this Application, the Company states as follows:
L THE APPLICANT
A. TheApplicant
l. Rocky Mountain Power is a division of PacifiCorp. PacifiCorp is an Oregon
corporation that provides electric service to retail customers through its Rocky Mountain Power
division in the states of Wyoming, Utah and Idaho, and through its Pacific Power division in the
states of Oregon, California and Washington.
2. The Company is a regulated public utility in the state of Idaho and is subject to
the Commission's jurisdiction with respect to its prices and terms of electric service to retail
customers in Wyoming. The Company serves approximately 74,000 customers and has
approximately 150 employees in Idaho.
REDACTED
3. This Application is filed pursuantto ldaho Code $ 6l-328, requiring Commission
authorization for the sale of utility property located in the state of ldaho, Idaho Code $ 6l-524
and RP 52, which authorize the Commission to prescribe the accounting to be used by public
utilities subject to its jurisdiction, and ldaho Code $ 6l-541, pursuant to which the Commission
may specifr in advance the ratemaking treatment for certain costs associated with generation
facilities or transmission facilities.
The Company requests that all notices, correspondence and pleadings with respect to this
Application be sent to:
For Rocky Mountain Power:
Ted Weston
Idaho Regulatory Affairs Manager
Rocky Mountain Power
201 South Main Street, Suite 2300
Salt Lake City, UT 84111
Telephone : (80 l) 220 -29 63
ted.weston@nacifi corp.com
Daniel E. Solander
Senior Counsel
Rocky Mountain Power
201 South Main Street, Suite 2400
salt Lake city, uT 84lll
Daniel. solander@Facifi corp.com
With a copy to:
Richard R. Hall ISB No. 8080Stoel Rives LLP
101 S. Capitol Boulevard, Suite 1900
Boise, lD 83702-7705
Phone: [phone]
Fax: [phone]
[e-mail]
REDACTED
In addition, formal correspondence and requests for additional information regarding this
matter should be addressed to:
Informal inquiries related to
datareq uest@ftaci fi corp.com
Data Request Response Center
PacifiCorp
825 NE Multnomah, Suite 2000
Portland, Oregon 97232
this Application should be directed to Ted Weston, Idaho
Regulatory Affairs Manager, at [phone].
II. BACKGROUND
A. The Closure of The Deer Creek Mine
The Deer Creek Mine is located in Emery County, Utah and is operated by Energy West.
It was acquired by the Company in 1977 and produces on average 3.5 million tons of coal
annually. The mine's depreciable life currently runs through its expected reserve depletion in
2019.
The Deer Creek Mine is the primary source of coal for the nearby Huntington power
plant, which annually consumes on average 2.8 to 2.9 million tons. The mine also supplies some
coal to the Hunter power plant. The mine was expected to meet the coal supply needs of the
Huntington power plant and a portion of the coal supply needs of the Hunter power plant until
the mine's reserve depletion, forecasted in 2019.
The Company is proposing to close the Deer Creek Mine now for two primary reasons.
First, the mine's mining costs and pension liabilities are sharply increasing. Second, the mine is
producing lower quality coal which, in turn, has reduced the volume of coal produced. At the
same time, the coal market in Utah has changed, market supplies are more available, and the
By E-mail (preferred):
By regular mail:
REDACTED
advantages of owning coal mining assets in Utah have lessened. Together, these issues have
combined to make continued operation of the Deer Creek Mine less economic than closure.
1. Increasing Mining Costs and Pension Liabilities
The workforce at the Deer Creek Mine is represented by the UMWA. Mining costs have
sharply escalated at the mine, particularly related to pension liability and health care costs. The
most recent UMWA agreement expired in January 2013. After almost two years of negotiations,
Energy West reached a labor settlement with the UMWA on October 31, 2014. While the
settlement allows Energy West to settle its Retiree Medical Obligation in exchange for a transfer
of certain assets to UMWA, Energy West was unable to contain other rising costs through the
labor settlement.
Energy West is obligated to make contributions to the 1974 Pension Trust, a multi-
employer pension plan in which assets are pooled so that contributions by one employer are used
to provide benefits to employees of other participating employers. The financial condition of the
1974 Pension Trust has deteriorated dramatically over the last several years. As of the last
valuation on June 30, 2013, the deficit between the market value of the assets and the present
value of the vested benefits was approximately $5.5 billion.
The only way for Energy West to limit its future financial obligations to the 1974 Pension
Trust is to withdraw from the plan. Involuntary withdrawal would occur upon the last
contributory hour being worked by the Company's UMWA workforce. This could be effectuated
by sale or closure of the Deer Creek Mine. Beginning in 2012, Energy West sought potential
buyers for the Deer Creek Mine but did not receive any competitive offers. Mine closure is now
the exclusive means by which Energy West may limit its pension liability.
REDACTED
At the time of withdrawal, Energy West will be obligated to pay a withdrawal liability
equal to its proportionate share of the unfunded vested benefits as of the last valuation date. The
most recent estimate of the withdrawal liability is approximately $126 million, an amount that
will balloon if Energy West continues to participate in the plan.
Under the most recent labor settlement, Energy West remains responsible for almost 100
percent of the healthcare costs for active workers, with employees paying only a very minimal
co-payment and with no premium cost sharing. Energy West's health-care costs are now
considerably higher than the health-care costs of the Company's other union workforce.
2. Lower Coal Quality and Reduced Production
As Energy West sought to develop additional areas of the Deer Creek Mine's reserves, it
discovered significant volumes of high ash and high sulfur coal. When the mine produces high
ash and high sulfur coal, Energy West must transfer most of the coal from the Huntington power
plant to the Preparation Plant for blending with lower ash coals to meet coal quality
specifications. Limitations on physical transfer capacity and maximum stockpile capacity at the
Huntington power plant require the Deer Creek Mine to reduce production when this blending is
necessary.
In situations of poor coal quality, the Deer Creek Mine is required to operate on a single
ten-hour shift instead of two ten-hour shifts. As a result, the mine's annual production is
significantly reduced with associated increases in overall production costs.
III. THE TRANSACTION
A. Sale of Mining Assets
Because of the changes in the Company's fuel supply strategy for the Huntington and
Hunter power plants, the Company proposes to sell the Mining Assets to its CSA supplier, Bowie
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Resource Partners, LLC (Bowie): (1) the Preparation Plant and related assets located in Emery
County, Utah (collectively, the "Preparation Plant"); (2) the central warehouse facility and
related assets located in Emery County, Utah (Central Warehouse); and (3) the Trail Mountain
Mine and related assets located in Emery County, Utah (Trail Mountain Mine); collectively,
referred to as the "Mining Assets".l Accordingly, the Company requests that the Commission
approve the sale of the Mining Assets to Bowie and find such sale prudent.
Bowie is a Delaware limited liability company and one of the nation's largest western
bituminous coal producers. Bowie has a diverse portfolio of four mining operations in Utah and
Colorado that annually produces an aggregate of 14 million tons of high-BTU, low-sulfur
bituminous coal. Bowie's mines include some of the most productive and longest, continuously-
operating mines in the United States. It has three longwall mining operations, the Bowie Mine,
the Skyline Mine, and the Sufco Mine. It also has one room-and-pillar operation, the Dugout
Canyon Mine.
Bowie is also a current coal supplier for the Hunter power plant pursuant to a coal supply
agreement entered into in 1999.
1. Sale of the Preparation Plant
On December 12, 2014, the Company and Bowie entered into the Asset Purchase and
Sale Agreement for the Preparation Plant (Preparation Plant APA), attached to the direct
testimony of Ms. Cindy A. Crane as Confidential Exhibit No. l.
Under the Preparation Plant APA, the Company agrees to sell and Bowie agrees to
purchase the Preparation Plant for
In addition, Bowie
I The Transaction also includes the sale of the assets of Fossil Rock Fuels LLC, a wholly owned subsidiary of the
Company. These assets are not in Idaho rates, so the application does not address this aspect ofthe Transaction.
agrees to pay the Company, at closing, the value of the Company's working capital assets
(consisting primarily of parts and supplies inventories) used in connection with the Preparation
Plant. Bowie also agrees to assume and discharge certain liabilities, including all reclamation and
asset retirement obligations related to the Preparation Plant Assets.
2. Sale of the Central Warehouse
On December 12, 2014, the Company and Bowie entered into the Asset Purchase and
Sale Agreement for the Central Warehouse (Central Warehouse APA), attached to the direct
testimony of Ms. Crane as Confidential Exhibit No. 2.
Under the Central Vy'arehouse APA, there is no stated monetary consideration for the
transfer of the Central Warehouse from the Company to Bowie. As consideration for the transfer,
Bowie agrees to assume and discharge certain liabilities, including all asset retirement
obligations for the Central Warehouse Assets.
3. Sale of the Trail Mountain Mine
In 1992, the Company purchased Trail Mountain Mine. Coal production began at the
Trail Mountain Mine with continuous miningin 1994, but ended in 2001 due to the depletion of
existing reserves, the long lead time to acquire adjacent reserves, and the availability of
competitively priced external coal. Although closed in 2001, the Trail Mountain Mine has not
been reclaimed.
On December 12, 2014, the Company and Bowie entered into the Asset Purchase and
Sale Agreement for the Trail Mountain Mine (Trail Mountain APA), attached to the direct
testimony of Ms. Crane as Confidential Exhibit No. 3.
REDACTED
Under the Trail Mountain APA, there is no stated monetary consideration for the transfer of
the Trail Mountain Mine to Bowie. As consideration for the transfer, Bowie agrees to assume and
discharge certain liabilities, including all mine reclamation and asset retirement obligations for
the Trail Mountain Assets.
B. Conditions Precedent to Closing the Asset Purchase Agreements
The Preparation Plant APA, the Central Warehouse APA, and the Trail Mountain APA are
each contractually conditioned on obtaining all necessary regulatory approvals and close of the
Transaction on or before May 31, 2015.
C. Long-Term Coal SupplyAgreement for the Huntington Power Plant
Along with the asset purchase agreements, on December 12, 2014, the Company and
Bowie entered into a long-term coal supply agreement for the Huntington power plant
(Huntington CSA), attached to the direct testimony of Ms. Crane as Confidential Exhibit No. 4.
Under the Huntington CSA, Bowie agrees to supply the Company's coal requirements for the
Huntington power plant from the close of the Transaction to December 31, 2029, subject to
minimum and maximum obligations and according to certain quality specifications.
Over the term of the Huntington CSA, the price per ton escalates in steps from ! to I
for the fi.rt I delivered in any contract year, with a reduction in price of f per
ton for delivery in excess during the contract year.
The Huntington CSA is also contractually conditioned on obtaining all necessary
regulatory approvals and close of the Transaction on or before May 31, 2015.
As discussed in the direct testimony of Ms. Crane and Mr. Seth Schwartz, the terms of
the Huntington CSA are favorable and the delivered fuel prices are projected to be lower than the
estimated costs to continue mining the Deer Creek Mine until depletion in 2019 and obtaining
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coal from the market thereafter. In addition, the Huntington CSA provides the Company with
broad termination rights in the event existing or new environmental obligations adversely affect
the Company's ability to burn coal at the Huntington power plant.
D. Amended Long-Term Coal Supply Agreement for the Hunter Power Plant
ln 1999, the Company and Arch Coal Sales Company (Arch) entered into a coal supply
agreement for the Hunter power plant. In 2013, Bowie acquired Arch's Utah mines, took
assignment of the agreement and became the primary supplier of coal to the Hunter power plant.
The current term of the agreement extends through December 31,2020.
Based on varying coal qualities and economic supply opportunities, coal for the Hunter
power plant is also supplemented by other coal supplies, including from the Deer Creek Mine.
Following the close of the Transaction, Bowie will acquire title to the Preparation Plant, along
with the obligation to undertake any required stockpiling and blending for the Hunter power
plant. As a result of the change in ownership and operation of the Preparation Plant, an
amendment to the existing coal supply agreement for the Hunter power plant (Hunter CSA) is
necessary to change the point and duration at which coal quality is measured. Additional
revisions relating to annual coal nomination dates are also addressed in the Hunter CSA, affached
to the direct testimony of Ms. Crane as Confidential Exhibit No. 5.
IV. PUBLIC INTEREST AND CUSTOMER BENEFIT OF THE TRANSACTION
The Company recommends approval of the closure of the Deer Creek Mine and the sale
of the Mining Assets to Bowie because the Transaction results in a lower cost option than
continuing to invest in and operate the Deer Creek Mine through depletion of reserves in 2019.
Accordingly, the Company requests that the Commission approve the Transaction and find the
Company's decision to consummate the Transaction to be prudent and in the public interest.
ll
REDACTED
The Company's analysis, attached to the direct testimony of Ms. Crane as Confidential
Exhibit No. 6 demonstrates that its customers will benefit from the Deer Creek Mine Closure,
withdrawal from the UMWAs 1974 Pension Trust, sale of the Mining Assets, and execution of
the CSAs. To measure the impact on revenue requirement, three present value differential
scenarios were developed: (l) the Keep Case vs. the Transaction Case, (2) the Keep Case vs. the
Market Case and (3) the Market Case vs. the Transaction Case. The analysis also compares the
net present value of the revenue requirement for each of three scenarios for three time periods,
from now through 2029 (the term of the Huntington CSA), 2036 (the current depreciable life for
the Huntington power plant) and2042 (the current depreciable life for the Hunter power plant).
The Company's analysis for all three analysis periods, 2029,2036 and 2042, shows that
customers are better off in the Transaction Case, with between SI und $I
in net present value revenue requirement reductions compared to the Keep or Market Cases. The
Company's Keep Case vs. Market Case only produces between $I urd I
in revenue requirement reduction benefit, therefore demonstrating even further that the
Transaction Case is in the best interest of customers. The financial analysis and impact of the
sale on customers is discussed in greater detail in the direct testimony of Ms. Crane.
V. REQUEST FOR ORDERAUTHORIZING ACCOUNTING TREATMENT
AND DEFERRAL
The Company respectfully requests authorization to record and defer certain costs
associated with the Transaction as described below, with the deferred amounts subject to a
carrying cost equal to the Company's current authorized rate of return during the deferral period
unless associated with amounts already included in rate base. Specifically, the Company seeks
authorization to defer costs associated with: (l) the costs associated with the Closure; (2) the
unrecovered investment in the Deer Creek Mine and the Mining Assets; (3) the liability for all
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REDACTED
future estimated payments associated with the withdrawal from the UMWA 1974 Pension Trust;
(4) any settlement losses associated with the Retiree Medical Obligation; and (5) the incremental
costs and benefits of fueling costs related to the transaction.
The Application relies on the Uniform System of Accounts and Generally Accepted
Accounting Principles, which allows deferral of identifiable utility expenses or revenues to the
period in which the underlying expense or revenue will be included in determining customers'
rates. The deferrals will facilitate the Company's ability to recover the prudently incurred costs to
consummate the Transaction and effectuate the UMWA pension withdrawal for which the
Company seeks approval in this Application. In support of these requests, the Company provides
the following:
A. Description of Utility Expense
A detailed description of the total costs for which the Company is seeking deferred
accounting from the Commission is attached to the direct testimony of Mr. Douglas Stuver as
Confidential Exhibit No. 7. At a high-level, the estimated costs associated with the Transaction,
including estimated unrecovered investment in the Deer Creek Mine and the Mining Assets to be
sold, are as follows (in millions):
Deer Creek Mine Closure
U n recovered I nvestment
Deer Creek Mine
Mining Assets
UMWA 1974 Pension Tru
l3
REDACTED
1. Deer Creek Mine Closure
The Company will incur costs associated with the Deer Creek Mine Closure following
cessation of mining. As described in Mr. Stuver's direct testimony, these costs include:
(l) supplemental unemployment and medical benefits to be provided to union employees;
(2) severance benefits to be provided to non-union employees; (3) certain royalties;
(4) unrecovered reclamation costs; and (5) on-going labor costs associated with the closure work
and the installation of bulkheads in the coal seams and to seal the mine portals. While a
significant portion of these costs will be recognized for accounting purposes in 2014, certain of
these costs will be incurred in 2015 and 2016. The Company estimates these costs will be
approximatrty I on a total-Company basis, or approximatrlv I on an Idaho-
allocated basis and proposes that the amounts ultimately recovered be trued-up to reflect the
actual costs incurred, including a carrying charge equal to the Company's authorized rate of
return. The Company proposes to defer these closure-related costs into a regulatory asset,
account 182.3, until later incorporated in base rates and recovered over an amortization period of
five years with the unrecovered balance included in rate base, reduced by any accrued and
unpaid closure costs.
2. Unrecovered Investment
The Company will incur a loss on the sale of the Mining Assets
Accordingly, the Company expects to have a
totalunrecoveredinvestmentassociatedwiththeTransactionofapproximatelyfona
total-Companybasis,orapproximately]nanIdaho-allocatedbasis.Specifically,the
unrecovered investment of approximately
approximately $5 million of construction
$86 million in the Deer Creek Mine includes
work-in-progress and preliminary survey and
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investigation costs. Further, the unrecovered investment of approximat.lv I in the
Mining Assets includes approximately: (1) $20 million for the Preparation Plant (excluding any
consideration associated with the sale) and includes $0.5 million of construction work-in-
progress; (2) S0.3 million for the Central Warehouse, with no offset for proceeds from the sale to
Bowie; and (3) $0.7 million for the Trail Mountain Mine, comprised substantially of Utah
distribution assets, with no offset for any proceeds from the sale to Bowie. The unrecovered
investment is summarized in the following table:
The Company proposes to establish several regulatory assets and to transfer the
unrecovered investment from the relevant subaccounts of FERC Account No. 101, Plant in
Service (predominantly FERC Account No. 399, Mining Facilities) to FERC Account No. 182.3,
Regulatory Assets. These amounts are estimates, and deferred amounts will be trued-up to acfual
costs.
The Company proposes to amortize these amounts on a basis consistent with the current
rate of depreciation reflected in base rates. The Company proposes that at the time rates are next
reset, the remaining unrecovered investments in the Deer Creek Mine and the Mining Assets be
amortized and recovered over a period of three years.
Deer Creek Mine S85
Mining Assets
Central Warehouse SO
TrailMountain Mine Sf
l5
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Until such time that rates are reset through the Company's next general rate case, the
Company requests permission to recover the unrecovered investment in the Deer Creek Mine
and the Mining Assets through the inclusion of the amortization in the Energy Cost Adjustment
Mechanism (ECAM) or other appropriate mechanism without application of any existing sharing
bands and the unamortized balance be subject to a return set at the Company's allowed rate of
retum in order to provide the Company full recovery of unrecovered investment.
The Company is currently authorized to recover 100 percent of its depreciation expense
in base rates related to Deer Creek and the Mining Assets. That recovery is accomplished
through recovery of fuel costs included in base net power costs and the ECAM. While
incremental changes in net power costs that are not reflected in base rates are subject to the
sharing mechanism, the base rate charges, including depreciation, are not. Accordingly, it would
not be equitable to apply the l0 percent sharing band to these costs as a result of consummating
the Transaction that benefits customers. The Company also requests that it continue to earn a
return on the unrecovered investments based upon the amount currently reflected in rates.
3. UMWA 1974 Pension Trust Withdrawal
The Company has assumed that the annual installment payment method to satisfy its
withdrawal liability will be elected. At the time of withdrawal, Energy West will pursue
discussions with the 1974 Pension Trust to determine if either the lump sum option or a
negotiated one-time pre-payment of the annual installments is more economical for customers
than the on-going annual installment payments.
In the meantime, the Company proposes to defer the accounting loss associated with the
1974 Pension Trust withdrawal liability, with recovery of annual payments to occur until they are
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no longer required.2 The Company estimates that the present value of this liability on an
accounting basis (required to be discounted at a risk-free rate) will b. $I on a total-
Company basis, or approximately $f on an Idaho-allocated basis.
The annual installment payment is expected to be approximately $3 million. Because this
payment is not sufficient to pay down the principal, the $3 million annual payment will be
treated for now as continuing in perpetuity. As a result, the regulatory asset (and withdrawal
liability) will not amortize and, therefore, would not be subject to adjustment. In the future, when
the plan terminates or the accrual of future benefits is frozen, the liability will then be adjusted to
reflect the future expected payments. In that event, the Company would propose that the
regulatory asset also be adjusted to reflect the remaining payments and begin to amortize the
regulatory asset concurrent with recovery in rates over that remaining payment period. The
Company proposes that both the regulatory asset and withdrawal liability be included in rate
base. The amounts will be offsetting unless or until the plan terminates or the lump-sum scenario
is pursued. In the event the lump sum option is elected or a negotiated pre-payment of the
installment payments is achieved, the Company proposes that the amount be deferred until the
next rate reset, with rate base treatment of the unrecovered amount.
4. Retiree Medical Obligation
The Company proposes to defer the estimated I accounting loss associated with
the settlement of its Retiree Medical Obligation. The settlement loss is computed under generally
accepted accounting principles as described in more detail in Mr. Stuver's direct testimony and
represents amounts that would have been charged to expense in the future absent the settlement.
The Company will defer any settlement loss into a separate subaccount for account 182.3,
2 Annual contributions to the 1974 Pension Trust are currently reflected in base net power costs and are expected to
equal the on-going withdrawal payments under the annual installment method.
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regulatory assets, for unrecognized amounts associated with the retiree medical plan (otherwise
known as FAS 106). The Company proposes that the component of the regulatory asset related to
the sefflement loss be amortized and recovered over a period of three years beginning with the
next rate case, while the remainder of the FAS 106 regulatory asset continues to be amortized in
accordance with FAS 106.
5. Incremental Costs/Benefits of Fueling Costs related to the Transaction
Currently, the Company recovers the costs to fuel the Huntinglon and Hunter power
plants as a component of the Company's net power costs, including depreciation of the Deer
Creek Mine and the Mining Assets included in base net power costs as noted above. After the
Deer Creek Mine closure and sale of the Mining Assets, the Company will continue to incur
costs to fuel these plants through the inclusion ofthe costs of the Huntington and Hunter CSAs.
As discussed in more detail in the direct testimony of Ms. Crane, to the extent that the
costs of the Huntington and Hunter CSAs and other replacement fuel costs for the Huntington
and Hunter power plants plus the amortization of the unrecovered investments during the
deferral period exceed the current revenue requirement associated with the costs to fuel the
Huntington and Hunter power plants (inclusive of the depreciation expense associated with the
Deer Creek Mine and Mining Assets), the Company proposes such amounts be deferred for
future recovery. Conversely, if the costs of the new fuel supply portfolio plus amortization of the
unrecovered investments during the deferral period are less than the current revenue requirement
associated with the costs to fuel the Huntington and Hunter power plants (inclusive of the
depreciation expense), the Company proposes such amount be deferred for future return to
customers. The Company proposes that the amount be deferred through the ECAM without
application of any existing sharing bands in order to fully reflect the incremental costs or benefits
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associated with the replacement fuel supply. When base net power costs are reset in the
Company's next general rate case, the Company proposes that costs to fuel the Huntington and
Hunter power plants be reset to reflect the CSAs and then-current forecast of costs to fuel the
plants.
In order to determine the amount of the incremental fueling cost differential, the
Company proposes to multiply the total MMBtu (consumed) for the two plants included in base
net power costs times the difference between the weighted-average cost per MMBtu (consumed)
included in base net power costs for the Huntington and Hunter power plants and the actual
weighted-average cost per MMBtu (consumed) during the deferral period.3 The actual weighted-
average cost per MMBtu during the deferral period will be determined on a basis consistent with
the agreed-upon methodology of the ECAM.
B. Impact of No Deferral
In the absence of being permitted to establish the requested regulatory assets and
associated accounting treatment, the Company would charge the amounts proposed to be
deferred generally to account 501, fuel expense. These costs are expected to occur for the most
part in the fourth quarter of 2014, with certain costs to be incurred in 2015 and2016. This would
result in charges of approximately I for the Deer Creek Mine Closure costs,
unrecovered investments and the Retiree Medical Obligation settlement loss, and I ro.
the UMWA pension withdrawal (under the installment method). Substantially all of the aggregate
I charge would flow through the next ECAM rate change.
The Company proposes that the Commission approve this Application and authorize
deferral of the costs. The Company proposes to amortize the deferred amounts described above
3 The weighted-average cost per MMBtu included in base net power costs and actual results will both include the
annual payments to the 1974 Pension Trust. The Commission established base net power costs on January 10,2012
in Case No. PAC-E-ll-12.
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to account 501, fuel costs, with the exception of the sefflement loss on the Retiree Medical
Obligation, which the Company proposes be amortized as part of the Company's on-going retiree
medical plan costs. To the extent the regulatory asset associated with the 1974 Pension Trust
withdrawal is not being amortized, the Company proposes that the on-going annual payments to
the 1974 Pension Trust continue to be charged to account 501, fuel costs. The Company further
proposes rate base treatment of any unamortized regulatory assets, net of the 1974 Pension Trust
withdrawal obligation and certain other liabilities described in Mr. Stuver's direct testimony.
Until the Commission approves this Application and authorizes recovery the Company will
defer the costs as described above to the extent recovery is considered probable and requests a
carrying charge during the deferral period equal to the Company's authorized rate of return on
any amounts not already included in rate base.
VL REQUEST FOR PRUDENCE DETERMINATION
In addition to approving the Closure, sale of the Mining Assets, execution of the Coal
Supply Agreements and authorizing deferred accounting, the Company requests that the
Commission determine that the Company's decision to enter into the Transaction is prudent. This
request is supported by the testimony and exhibits of Ms. Cindy Crane, Mr. Seth Schwartz and
Mr. Douglas Stuver filed with this Application.
Idaho Code $61-541 provides that the Commission may specifr in advance the
ratemaking treatment for costs associated with new electric generation facilities or transmission
facilities, or major additions to those facilities. While that section does not apply directly to the
Transaction, the reasons for clarifring and establishing in advance the ratemaking treatment for
electric generation or transmission facilities apply with equal force to the Transaction. When it
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enacted $61-541, the Legislature intended to ensure that utility expenditures were prudent and
"pose less risk of financial loss," while benefiting customers with a more transparent process that
permits public input prior to costs being incurred. RSl87l6 Statement of Purpose (2009).
The direct testimony of Ms. Crane includes a detailed description of the Company's
decision to undertake the Transaction. Ms. Crane's direct testimony includes an analysis of the
Company's projected total system revenue requirement with and without the Transaction. The
direct testimony of Mr. Schwartz includes further information supporting the prudence of the
Transaction.
Through the testimonies of Ms. Crane and Mr. Schwartz, the Company provides
sufficient data and information to permit an analysis and verification of the conclusions reached
by the Company. The direct testimony of Mr. Stuver includes financial information
demonstrating adequate financial capability to implement the Company's decision to enter into
the Transaction. The proposed contracts the Company has negotiated are appended to Ms.
Crane's testimony filed with this Application. Finally, no additional government approvals, other
than the approvals of the Company's public utility commissions in some of the states in which it
operates, are needed or required to enter into the Transaction.
The Company's decision to enter into the Transaction is in the public interest, and is
expected to result in the acquisition of coal resources at the lowest reasonable costs to the
Company's Utah retail customers.
The Company is requesting a prudence determination even though the Company is not
concurrently requesting that all of the costs of the Transaction be included in rates at this time. In
this case, the magnitude of the potential risk to the Company and customers associated with
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foregoing this opportunity together with the scope of the requested Transaction, support the
Commission's determination of prudence at this stage of the implementation process.
As described above and in the supporting testimony, the Transaction is the culmination of
a lengthy process whereby Energy West attempted to mitigate its pension and other labor liability
exposure through a multi-pronged strategy, including negotiations with the UMWA and
attempting to sell the Deer Creek Mine. The effort has been in process for several years. At the
same time, due to changes in the coal industry, the value to customers of the Company owning
its own coal supply in Utah was diminishing compared to market alternatives. When the
mitigation eflorts proved unsuccessful together with the realities of the coal supply market
fundamentals in Utah, the Company concluded that the next rational step was to pursue closure
of the Deer Creek Mine. The Company's analysis demonstrates that the Closure of the mine,
together with the remaining elements of the Transaction will provide significant long-term
customer benefits. However, the Transaction is a significant undertaking affecting both the
Company's long-term coal fuel strategy and mining assets in Utah and Energy West's mining
costs and pension liabilities. The Company acknowledges the significance and scope of the
Transaction, and has affempted to address the concerns of the Commission and interested parties
related to the Transaction before closing the Transaction so that the Commission can examine the
prudence of the Company's decision to consummate the Transaction now.
VII. PREFILEDTESTIMONYANDATTACHMENTS
ACCOMPANYING APPLICATION
The following witnesses sponsor testimony in support of this Application:
1. Cindy A. Crane, President and CEO, Rocky Mountain Power, will provide
testimony on the proposed Transaction with Bowie and the closure of the Deer Creek Mine, and
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explain why the Transaction is in the best interest of Rocky Mountain Power and its customers
and is in the public interest;
2. Douglas K. Stuver, Senior Vice President and Chief Financial Officer of
PacifiCorp, will provide testimony on the proposed accounting and regulatory treatment of the
Transaction, including the financial impacts of the withdrawal from the 1974 Pension Trust and
sefflement of the Retiree Medical Obligation; and
3. Seth Schwartz, President of Energy Ventures Analysis, Inc., will provide
testimony on the 1974 Pension Trust, the financial impacts of Energy West's withdrawal liability
associated with the plan, and the benefits of the Transaction related to securing a long-term
supply of coal for the Huntington and Hunter Plants and closure of the Deer Creek Mine.
VIII. REQUEST FOR RELIEF
WHEREFORE, the Company respectfully requests relief as follows:
l. Notice a scheduling conference as soon as practicable for interested parties to
review the application and file comments and reply comments on this request, and for any
technical conferences deemed useful for the Commission or interested parties, and for a hearing
on the approval and for other processes and procedures deemed reasonable or necessary by the
Commission;
2. Authorize the Company to defer the costs and apply the accounting treatment as
described in this Application to continue with or facilitate future recovery of all costs associated
with the Transaction, UWMA pension withdrawal and settlement of the Retiree Medical
Obligation;
3. Determine that the Company's decision to consummate the Transaction is prudent
and in the public interest;
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4. Approve the Application to close the Deer Creek Mine, sell the Mining Assets and
enter into the Coal Supply Agreements as described in the Application on or before May 27,
2015; and
5. Grant such other relief as the Commission deems necessary and proper.
DAIED: December 15, 2014.
Respectfu lly submitted,
ROCKY MOI.JNTAIN POWER
T/-i lel^
Daniel E. Solander
Sernior Counsel
Rocky Mountain Power
Richard Hall
Stoel Rives LLP
Attorneys for Roclcy Mountain P ow er
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