avug001.swtc.doc

SCOTT WOODBURY
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 1895

Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5983

Attorney for the Commission Staff

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF THE APPLICATION
OF AVISTA CORPORATION FOR AUTHORIZATION TO DEFER COSTS ASSOCIATED WITH THE HAMILTON
STREET BRIDGE SITE.
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CASE NO. AVU-G-00-1

COMMENTS OF THE COMMISSION STAFF

COMES NOW the Staff of the Idaho Public Utilities Commission, by and through its Attorney of record, Scott Woodbury, Deputy Attorney General, and in response to the Notice of Application, Notice of Modified Procedure and Notice of Comment/Protest Deadline issued on June 21, 2000, submits the following comments.

SYNOPSIS OF THE COMPANY’S APPLICATION
On May 23, 2000, Avista Corporation d.b.a. Avista Utilities – Washington Water Power Division (Idaho) filed an Application with the Idaho Public Utilities Commission requesting authority to defer clean-up costs associated with its previously owned Hamilton Street Bridge facility, including an allocation to Idaho of 31.574% and the accrual and deferral of related carrying charges. The Hamilton Street Bridge Site is located in Spokane, Washington and contains properties upon which a manufactured gas plant and a coal tar processing plant (collectively the Spokane Gas Plant) once operated. The Company reports that the Washington State Department of Transportation directed an environmental investigation of the site and documented the presence of hydrocarbon contaminated soils. Avista received notice from the State of Washington Department of Ecology (WDOE) that it had been designated as a potentially liable party with respect to hazardous substances located at the site.
The Spokane Gas Plant operated as a coal gasification plant in the early 1900s until 1948. The Company through a merger acquired the Hamilton Street Bridge property in 1958, together with gas distribution facilities in Washington and Idaho. The Company no longer owns the property.
Avista reports that it submitted a draft remedial investigation study to the WDOE and is reviewing its comments. The Company has also submitted a draft feasibility study to the WDOE. The feasibility study sets forth four preliminary cleanup alternatives priced from $304,000—total capital and monitoring cost (the Company’s preference) to $33,910,670. The final cleanup action plan is to be determined by the WDOE. Through May 11, 2000, Avista reports that it has incurred approximately $889,000 in incremental costs associated with the Company’s remedial investigation and feasibility study.
Avista is requesting Commission authorization to defer incremental costs associated with the remedial investigation, feasibility study, and remedial measures and monitoring of the Hamilton Street Bridge Site. Avista is proposing that incremental costs associated with the Hamilton Street Bridge Site be deferred in Account 186.2, Miscellaneous Deferred Debits. Avista is proposing that the recovery of the deferred costs, including carrying charges, be addressed in a future rate proceeding. Avista is proposing to accrue carrying charges using the interest rate authorized for customer deposits, which is currently 5.00% for the year 2000. Carrying charges would continue to accrue until the balance of the deferred costs and accrued carrying charges are determined and included in rate base and an amortization is recovered through customer rates. The allocation to the Washington and Idaho jurisdictions proposed by the Company is the gas jurisdiction four-factor allocation percentage in the Company’s current gas general rate case, i.e., 68.426% for Washington and 31.574% for Idaho.

BACKGROUND
Coal Gasification
Coal gasification is a process for converting coal partially or completely to combustible gases. Along with the production of large volumes of gas from coke, manufactured gas plants also produced large quantities of by-products during their operation from the early 19th century until the 1950’s. The by-products included coal tars, sludge, oils and other chemicals. Coal tar waste is the primary by-product of the gasification process. Coal tar and the other waste products from the manufactured gas plants frequently were disposed on site in unlined pits or injected underground. The disposal practice left behind coal tar contamination at many former manufactured gas plants. In the 1940’s the growing availability of low-cost natural gas led to its substitution for gases derived from coal. Avista’s predecessor operated a manufactured gas plant at the Hamilton Bridge site.
Avista is asking for deferral of costs related to the clean up of the site until a future date. The plant was probably operated in compliance with the applicable laws and standards of the day, but changes in environmental laws and regulations since the plant ceased operations has created actual and potential liability for Avista related to the investigation and remediation of the environmental contamination at the site.

Merger between The Washington Water Power Company and Spokane Natural Gas Company
On January 27, 1958, the Washington Water Power Company (Water Power) and the Spokane Natural Gas Company filed a Joint Application with the Idaho Public Utilities Commission requesting an order permitting the statutory merger of Spokane Natural Gas Company into the Washington Water Power Company, with Washington Water Power Company to be the surviving corporation. At the time of the merger, Water Power was engaged in the generation, transmission, and distribution of electricity in central and eastern Washington, and Northern Idaho. Spokane Natural Gas Company was engaged in the distribution of natural gas in Spokane County, including the City of Spokane, Washington; Pullman, Washington; and Moscow, Idaho and held franchises and certificates to distribute natural gas in other communities in Washington and Idaho, although it had not yet begun business operations in those other communities at the time of the merger. All the franchises, certificates, properties and facilities of Spokane Natural Gas Company were assigned to Water Power on the effective date of the merger. This included the Spokane Gas Plant site in question.

Sale of the Hamilton Street Bridge Site
According to the Company, the sale that included the Hamilton Street Bridge Site took place on March 23, 1978. The sale price was $100,000. The original cost was $45,912. The gain on the sale was $94,088. Staff can find no documentation of the Idaho ratepayers sharing in the gain on the sale of the property.

RESPONSIBILITY FOR THE HAZARDOUS WASTE CLEAN UP
Potentially Liable Parties
While the gas manufacturing operations of a defunct predecessor corporation caused the contamination, Avista is a continuation of the predecessor corporation through the merger. Therefore, Avista has been named as a “potentially liable party” (PLP) by the State of Washington’s Department of Ecology. According to Staff’s First Production Request, Request No. 2, Burlington Northern Santa Fe Railroad and Spokane River Properties are also named as potentially liable parties.

Sharing between the Ratepayer and the Shareholder
Staff recommends that the costs for the clean up be shared between the ratepayers and the shareholders. Staff believes that the shareholders were the beneficiary of the sale of the property that included the Hamilton Street Bridge site. Staff has found no evidence that the ratepayers of Idaho shared in any gains on the sale of the property. Staff cannot determine at this time if the Spokane gas plant site was ever included in Idaho’s rate base. If not, it may not be appropriate for the clean up to be paid for by Idaho ratepayers. If it is determined that the Idaho jurisdiction should participate in the clean up, Staff asserts that the costs generated from the necessary clean up at the Hamilton Street Bridge site should be shared by the ratepayers and the shareholders. The sharing of costs will encourage the Company to mitigate the cost of the clean up and provide additional incentive for the Company to spend wisely. Staff recommends that the sharing percentage determination should consider prior rate base treatment of the site, the gain on the sale, prudence of the expenditures and all tax deductions available on the clean up costs.
STAFF’S PROPOSAL FOR DEFERRED ACCOUNTING
Deferral Background
Order No. 28097, Case No. WWP-E-98-11, Avista's most recent rate case, sets the precedent for the current filing. In that order, the Commission stated, "When it became aware that the uninsured ice storm costs would be substantial, the Company had the opportunity to request rate relief or deferral of these costs for future recovery." This statement certainly prompted the Company to file for deferral of the future hazardous waste costs associated with the Hamilton Bridge cleanup site. The Commission has, in other cases, ordered deferred accounting for extraordinary cost recovery. In Idaho Power Case No. IPC-E-94-5, the Commission denied recovery of the Pacific Hide hazardous waste clean up costs that the Company had already incurred. In Order No. 25880, the Commission found that,
The proscription against retroactive ratemaking means that Pacific Hide amounts spend by IPCo in the past are not recoverable through future rates unless they were preserved for that purpose by deferral or other regulatory action. When it became aware the clean-up costs would be substantial, the Company had the opportunity to request rate relief or deferral of these costs for future recovery. It did neither. Had the Company requested deferral of these costs and the Commission had approved it, we could now amortize this expenditure. However, that is not the case and we are without a means to provide recovery of this expense retroactively.

Previous Commission ordered deferred accounts
In Order 27045, Case No. IPC-E-96-26, the Commission states, "Rather, we are authorizing the Company to capitalize and defer its investment in NEEA and to bring it before this Commission for cost recovery at a future date when the prudence of the expenditures can be determined."

Interest on the deferred balances
Staff recommends that there be no carrying charges on the accrued deferred balance for the hazardous waste clean up expenses. The Company has not justified accruing interest on the deferred balance. The clean up expenses will serve to neither extend the life of the plant, nor forestall the need for more plant, like plant investments or demand side management expenditures. The contaminated site is not in rate base, nor is the property still owned by Avista. Deferred accounting will allow Avista to request recovery of the costs at a future date. This is a benefit to the Company that supports no interest accruing on the balance. If deferral were not approved, no interest would accrue and even the cost recovery could be questionable.
The Commission, in Order No. 28097 and Order No. 25880, did not mention or authorize interest. The intent of the Commission was that the deferral was to facilitate later recovery of the amortization of the deferred expenses in rates. If the Company were not to request deferral, they would be asking for retroactive ratemaking treatment of an extraordinary expense. The Commission was silent as to the accumulation of interest on the deferred balance. This expense has not been proposed or endorsed by the Commission. Ideally the ratepayer would pay for clean up costs and anticipated removal costs while the plant is in use. However, waste clean up was not anticipated, and the need for such cleanup is more likely to occur after the facility is retired from use. Environmental laws have been toughened markedly over the past 20 years.
These costs are properly treated as necessary, ongoing business expenses, even though Avista no longer owns the property. The responsibility and recovery are left to be determined at a future date.

THE PRUDENCE OF THE EXPENSES
The clean up costs, once Avista’s portion is determined, are expenses that may normally occur for utilities. It is important to recognize this responsibility and as stated, “in Order No. 27200, Case No. IPC-E-96-26, ratepayers are protected and will be assured that the Company’s investment will be recovered from ratepayers only if it can be declared prudent.” These factors argue for the deferral until prudence of the expenditures can be established.
The actual costs are unknown at this time and more information is needed before prudence can be determined. In Order 27200, Case No. IPC-E-96-26, "ratepayers are protected and will be assured that the Company's investment will be recovered from ratepayers only if it can be declared prudent."
There are several questions that need to be answered, and items that need to be verified, when Staff audits to determine if the amounts in the proposed deferred account have been spent prudently. These are:

1. Verify when and to whom the Hamilton Street Bridge site, part of the Spokane Gas Plant, was sold.
2. Verify the treatment of the gain on the sale of the plant. To what accounts was it booked? When was it booked?
3. When did Avista become aware that this site would need hazardous waste clean up?
4. What measures has Avista taken to mitigate the costs of the hazardous waste clean up?
5. What, if any environmental clean up costs are currently built into rates?
6. Verify how all clean up expenses were spent and the prudence of those expenditures.

JURISDICTIONAL ALLOCATION
The last general rate case for Avista Utilities, gas operations, was Case No. WWP-G-88-5. Final Order No. 22749 was issued in that case in September 1989. Avista has had gas tracker rate adjustments since then, but there has not been a general gas rate case since the 1988 case. In that order, the Commission states:
The interjurisdictional allocation formula used for purposes of assigning revenues, expenses and rate base to the states of Idaho and Washington has been revised in order to reflect the reduced level of firm deliveries in the state of Idaho. Kihara, Tr. p. 489. Staff concluded after analysis that the Company’s interjurisdiction allocation method adequately handles the diversity of costs between the jurisdictions. Schunke, Tr. p. 848. The Commission agrees that the Company’s interjurisdictional allocation formula adequately reflects the Idaho jurisdictional customers’ revenue responsibility.

Avista’s interjurisdictional allocation formula for its gas operation has not been formally reviewed since the last general rate case. The Commission Staff, in 1992, performed a general audit of The Washington Water Power Company. As part of their audit, the interjurisdictional allocation formula was reviewed. The “Report of General Audit – 1992 Test Year” audit report that resulted from the general audit in 1993 states:

The Company is currently in the process of changing the methods, calculations and procedures used to allocate common investments and costs among services (gas, electric & WPNG) and regulatory jurisdictions (Washington, Idaho & FERC). The Company provided a summary of its allocations study to the Staff in March of 1993. The Study used the twelve month period ended September 30, 1992. The Staff met with the Company on April 22, 1993 to discuss the Company's proposal. The Staff at that time told the Company its study looked reasonable but specifically disclaimed any authority or appearances of official approval of the study. The Company was told that the study would have to be supported by the Company in any formal proceeding before the Commission in which the study was used for allocation purposes.

The current jurisdictional allocation formula has not been formally reviewed by Staff. Staff’s preliminary review for this proceeding supports acceptance of the jurisdictional allocation formula and cost allocations for Avista Utilities – gas operations for booking the deferred gas clean-up costs.
The actual percentage allocated to Idaho at the time of the deferral using the allocation methodology will change periodically as the factors are updated.

STAFF RECOMMENDATIONS
1. Staff recommends that the expenses be booked to Account 186.2, Miscellaneous
Deferred Debits as proposed by the Company using the current allocation
method.
2. Staff recommends that the reasonableness of the expenses be determined at a
future date when the Company requests recovery in rates.
3. Staff recommends that no interest accrue on the deferred account balance.
4. Staff recommends that the amount in the deferred account be amortized. The
current expenditures should be amortized over a five-year period beginning in
January 2001. Amounts incurred after December 31, 2000 should be amortized
over a five-year period beginning the January following the date it is booked.
5. Staff recommends that there be a review of all environmental expenses booked to
the deferred account prior to any recovery in current rates.
6. Staff recommends that the environmental expenses be shared between the
ratepayers and the shareholders. The sharing should be determined at the time
the costs are included in rates. The items listed in the discussion above should be
examined to determine the sharing, and litigated if necessary at that time.

Dated at Boise, Idaho, this day of July 2000.

_______________________
Scott Woodbury
Deputy Attorney General

Technical Staff: Terri Carlock
Kathy Stockton

TC:SW:gdk:i:wpfiles/umisc/comments/avug001.swtc

STAFF COMMENTS 8 JULY 21, 2000