20050124_1078.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLAND ER
CO MMISSI 0 NER SMITH
COMMISSIONER HANSEN
COMMISSION SECRETARY
COMMISSION STAFF
FROM:DON HOWELL
DATE:JANUARY 20, 2005
RE:A VISTA'S APPLICATION TO INCLUDE ITS RECENT PURCHASE OF
COYOTE SPRINGS 2 FROM MIRANT IN ITS IDAHO RATE BASE, CASE
NO. A VU-05-
On January 19, 2005 , Avista filed an Application requesting authority to increase its
Idaho electric rate base by $62.5 million based upon its recent purchase of Mirant-Oregon s half
of the Coyote Springs 2 generating plant. Prior to the purchase, A vista and Mirant-Oregon each
owned half of the plant. A vista calculates that the addition to rate base would increase the
Company s annual revenue requirement by approximately 1.89%, or $3.235 million. Rather than
increasing its rates, A vista proposes a $3.2 million reduction in the customer PCA surcharge.
Consequently, purchase of the plant would result in no net rate change to customers. The
proposed reduction in the PCA surcharge would extend recovery of the deferred power cost
balance by approximately 12 months to September 2007. Application at 7.
BACKGROUND
A. The Plant and Initial Operations
Coyote Springs 2 is a 280 MW natural gas-fired, combined-cycle combustion turbine
plant located in Morrow County, Oregon. The Coyote Springs site was originally developed by
Portland General Electric (PGE) and was designed for two gas-fired units. Coyote Springs 1 was
completed in 1995 and is owned and operated by PGE. A vista began construction of adj acent
Coyote Springs 2 in January 2001 in conformance with its 2000 Integrated Resource Plan (IRP).
Avista has an operating agreement with PGE for PGE to operate both units at Coyote Springs.
Application at 11-12.
DECISION MEMORANDUM
Like other hydro-based electric utilities in the West, A vista experienced extremely
low water conditions coupled with unprecedented high wholesale market prices in 2000-2001.
The combination of these conditions created serious financial challenges for A vista.
particular, the Company was not able to secure financing for Coyote Springs 2. It subsequently
entered into an Agreement with Mirant Corporation to sell half of the Coyote Springs 2 project to
Mirant-Oregon.In their Agreement, Mirant agreed to pay one-half of the capital costs of
building the plant. A vista s costs for its half of Coyote Springs 2 were $108 million. Id. at 13;
11.
Although Coyote Springs 2 was originally scheduled to begin commercial operation
in June 2002 , operation of the project was delayed until July 2003 "because of the Enron
bankruptcy, and problems with the generator step-up transformer Id. at 13 (footnote omitted).
After replacement of the transformer, A vista claims that Coyote Springs 2 has operated with a
high availability factor of 97.6% and a forced-outage rate of less than 2%. Recent tests
conducted in December 2004 also showed a favorable heat rate of 6 814 Btu/kWh. To avoid
reoccurrence of problems with the step-up transformer, A vista has purchased a spare transformer
from a different manufacturer. The spare transformer is now located at the plant and is included
in A vista s incremental investment of Coyote Springs 2. Id.
B. The Purchase Transaction
In July 2003 , Mirant filed for Chapter 11 bankruptcy protection. Mirant and Avista
subsequently entered into discussions about A vista purchasing Mirant's half of the plant. Id.
14. A vista and Mirant-Oregon executed a Letter of Intent and subsequently executed a Purchase
and Sales Agreement on October 13, 2004. Id.; Exh. L. As set out in greater detail in the
Purchase and Sale Agreement, the negotiated purchase price is $62.5 million. According
Avista, the $62.5 million purchase price equates to a cost of$439/kWh of installed capacity (140
MW). This price represents approximately 58% of Mirant's equivalent cost , i., $108 million.
Id. at 20. To satisfy bankruptcy concerns, the Purchase Agreement also contained a competitive
auction provision that allowed other parties to bid for Mirant's half of the project. No other bids
were submitted. The bankruptcy court approved A vista s $62.5 million bid for the plant on
December 15 2004. Id. at 26.
1 Mirant-Oregon LLC is a subsidiary of Mirant and was the actual half-owner of Coyote Springs 2.
DECISION MEMORANDUM
In November 2004, A vista also submitted a Section 203 petition to FERC requesting
permission to transfer the plant from Mirant to Avista. No person commented or intervened in
the FERC proceeding. Consequently, FERC approved the transfer to A vista on December 30
2004. On January 20, A vista assumed ownership and began operating the entire plant. Id.
C. Benefits from the Purchase
As previously stated, Avista maintains that the purchase of the plant was very
advantageous to ratepayers. Avista retained Navigant Consulting to conduct an analysis of the
transaction. Exhibit K. As part of its analysis, Navigant reviewed other comparable transactions
of combined cycle plants and determined that the average value of comparable natural gas plants
in the western United States was $569/kW - well in excess of Avista s cost of $439/kW for
Mirant's share. Application at 6; Table at 24. Navigant also concluded that Avista s purchase
price was below the economic value of the plant which was in the range of $67 million.
Avista asserts that the purchase is also in compliance with the Company s most
recent IRP from April 2003. In its IRP, the Company identified a need to acquire approximately
149 aMW from natural gas-fired combined-cycle resources. Thus, acquiring the remaining half
of Coyote Springs (140 MW) is consistent with the Company s 2003 IRP long-term resource
strategy. Application at 14-15. In terms of the Company s annual loads and resources
acquisition of Mirant's share of Coyote Springs 2 covers the forecasted supply deficits identified
in the first, third, and fourth quarters of CY s 2005-2007. Id. at 15-19; Exh. H.
Next, Avista insists full ownership of Coyote Springs 2 improves the Company
ability to economically operate the plant. Full ownership allows A vista to now make dispatching
decisions days and months ahead of actual operations. In addition, decisions can be made faster
in the event of unexpected plant outages or in the event capital upgrades or repairs are necessary.
Id. at 21.
Finally, as of January 20, 2005 90% of any margins earned from the recently
purchased half will be credited to customers through the PCA. The proposed operating results
and net power supply expenses, are contained in Exhibits A and M, respectively.
D. No Net Change in Rates
The Company states in its Application that it "is not seeking an increase in overall
rates presently in effect." Application at 2. Avista maintains that adding the $62.5 million
purchase price to rate base would increase its base rates by $3.235 million, or 1.89%. To offset
DECISION MEMORANDUM
this increase, A vista proposes to decrease the present PCA surcharge by $3.182 million or 1.9%.
These offsetting adjustments would allow the Company to earn its authorized rate of return of
9.25% (recently approved in the Company s 2004 rate case, Case No. A VU-04-1).
E. Transmission
Coyote Springs 2 is physically interconnected to the transmission system of the
Bonneville Power Administration (BPA) which wheels power to Avista s system. In its
Application Avista notes that at present no additional annual long-term firm transmission
capability is available from BP A to move more power from Coyote Springs 2 to the Company
system. This constraint is primarily limited to the second quarter of each year when BP A'
spring hydroelectric run-offs are at high levels. However, the Company reports that transmission
capacity is generally available in the first, third and fourth quarters of the year when A vista
normally needs generation (as previously mentioned). Id. at 22.
A vista also notes that it has the option to acquire Mirant's higher position in BP A'
queue for long-term transmission requests. Avista has also made its own long-term firm
transmission request to BPA. Avista plans to participate in BPA's 2005 open season for upgrade
of the John Day-McNary Transmission Line that connects Coyote Springs 2 to Avista s system.
A vista does not foresee problems with acquiring sufficient natural gas transportation.
F. Request for Modified Procedure
A vista maintains that this Application represents a single-issue case. The Company
also notes that this case follows closely on the heels "of a thorough examination of the
Company s books and records in the context of it just-completed rate case.Id. at
Consequently, Avista requests that this Application be processed under Modified Procedure.
The Company proposes an extended comment period until March 1 and a two-week reply period
for the Company. The extended comment period would allow interested parties to also conduct
discovery. The Company states that it "stands ready to quickly respond to discovery requests.
To this end, Avista invites Staff and Interested Parties to immediately provide any discovery
requests to Avista.Id. at 9.
STAFF RECOMMENDATION
Given the nature of this is a single-issue case following the Company s rate case
Staff believes that it is appropriate to utilize Modified Procedure to process this Application. In
addition, A vista will individually notify all of its customers via bill stuffer of this Application.
DECISION MEMORANDUM
Finally, Avista does not seek any net increase to its existing rates because the Company intends
to offset the proposed increase in base rates by an equal decrease in its PCA surcharge. Given
these factors, the Staff believes it is reasonable for the Commission to process this case via
Modified Procedure.
In summary, Avista requests authority to: (1) increase its Idaho rate base and
expenses associated with the purchase; (2) increase its base rate tariffs to reflect the purchase; (3)
modify its PCA tariff to reflect a corresponding decrease in rates (so there is no net change in
rates) .
COMMISSION DECISION
1. Does the Commission wish to process this case under Modified Procedure?
2. Although there is no proposed net rate increase, does the Commission desire for
the Staff to conduct workshops to disseminate information regarding the Company
Application?
3. Does the Commission find the suggested extended comment cycle reasonable?
4. Does the Commission wish to require anything else?
Don Howell
Vld/M:AVUEO501 dh
DECISION MEMORANDUM