Agenda Date: October 13, 1999 Item Number: 2_ Docket: UE-991262 Company Names: PacifiCorp Staff: Doug Kilpatrick, Electric Industry Coordinator Hank McIntosh, Regulatory Consultant, Energy Roland Martin, Regulatory Consultant, Energy Ken Elgin, Case Strategist Recommendation: Issue a notice of hearing in Docket No. UE-991262 regarding PacifiCorp’s application for authority to sell its interest in the coal-fired Centralia Power Plant and Centralia Coal Mine. In that hearing Staff recommends that the issues to be resolved be limited to the proper accounting treatment for Pacific’s share of the gain and near-term power supply benefits of the transaction. Staff also recommends that the Commission issue a conditional order dealing with the issues related to operation of the Centralia Power Plant by the purchaser, TECWA Power, Inc. as an exempt wholesale generator (EWG) in order to allow the Company make a timely filing with the Federal Energy Regulatory Commission. Background: On August 12, 1999, PacifiCorp filed an application for “An Order Approving the Sale of its Interest in (1) the Centralia Steam Electric Generating Plant, (2) the Ratebased Portion of the Centralia Coal Mine, and (3) related facilities; for a Determination of the Amount of And the Proper Ratemaking Treatment of the Gain Associated with the Sale, and for an EWG Determination.” PacifiCorp’s application sought an order authorizing the sale of its 47.5 percent ownership interest in the 1340-megawatt Centralia Power Plant (Centralia) and the ratebased portion (47.5 percent) of the adjacent Centralia Coal Mine (Mine) to TECWA Power, Inc. TECWA is a Washington corporation and a subsidiary of TransAlta Corporation, headquartered in Calgary, Alberta, Canada. The parent company, TransAlta, is a Canadian energy company with $5 billion (Canadian) in assets and is the leading producer of independent power in Canada. TECWA has agreed to purchase Centralia for $425,598,000 and the adjacent Centralia Mine for $101,400,000. Due to considerations regarding the relationship between the coal mine and the adjacent power plant, PacifiCorp has proposed to receive only its book breakeven value for the Mine. This will remove the Mine from PacifiCorp’s books with no earnings impact. The book breakeven value was estimated at $101 million at the time the agreements were signed, and is the value used in the Mine Sale Agreement. The remaining proceeds from the sale to TECWA of Centralia and the Mine will be split between the plant co-owners based on their plant ownership percentages. The plant is located five miles northwest of the City of Centralia, in Lewis County, Washington and entered service in 1972. The primary source of coal for the plant is the adjacent Centralia Mine, which is owned by PacifiCorp and operated by its wholly-owned subsidiary, the Centralia Mining Company. Over the past ten years 75 to 100 percent of the coal burned at Centralia has come from the Mine, with the remainder imported by rail from the Powder River Basin in Montana and Wyoming. PacifiCorp’s after-tax gain (on a total company basis) resulting from this sale is expected to be approximately $82.7 million. PacifiCorp proposes to divide the gain between shareholders and ratepayers consistent with a depreciation reserve methodology based on the relationship between net plant and gross plant. This relationship establishes the percentage of the capital costs of Centralia that have been recovered over time through customer’s rates and the percentage of these costs that remain on the Company’s books. PacifiCorp’s proposed methodology results in customers receiving 64 percent of the net gain and shareholders receiving 36 percent of the net gain. Ownership of the Centralia Plant: The Centralia plant is currently owned by eight entities. The current co-owners and their respective ownership shares are: Avista Corp. 15.0 percent, PacifiCorp 47.5 percent, Puget Sound Energy 7.0 percent, City of Seattle 8.0 percent, City of Tacoma 8.0 percent, Snohomish PUD 8.0 percent, Grays Harbor County PUD 4.0 percent, and Portland General Electric 2.5 percent. PacifiCorp is the sole owner of the adjacent Centralia Mine (Mine). The current Centralia Owner’s Agreement allows any co-owner of the power plant to veto proposed capital expenditure, irrespective of percentage owned. Continued operation of the plant is dependent upon installation of sulfur dioxide scrubbers and low nitrogen oxide burners to meet emission standards ordered by the Southwest Washington Pollution Control Authority. Some of the current ownership is not supportive of these emission control investments. Closure of the plant would result in mine closure costs, reclamation costs and plant decommissioning costs. Public Interest Determination: In their application, PacifiCorp states that approval of the proposed transaction is consistent with the public interest for many of the same reasons established in Avista Corp’s application under Docket No. UE-991255. Specifically, the applicant states the transaction is in the public interest because: •The installation of emission control equipment will place the power plant among the cleanest coal-fired plants in the United States, however, that installation could not have occurred without the unanimous consent of the current owners. As a new single owner, TECWA will be in a position to make these investments so as to continue operation of both the plant and the adjacent mine thereby assuring on-going employment for the majority of the approximately 675 workers at the plant and mine. •Continued operation of the 1340 megawatt Centralia will benefit the region due to its strategic location along the Interstate 5 corridor where it provides voltage stabilization for the transmission system on the west side of the state. •Electric customers will benefit from the Company’s ability to conduct resource optimization decisions independently of other resource co-owners through market purchases. •The sale eliminates future uncertainties for the current ownership and their customers regarding mine reclamation and plant decommissioning costs. Consideration of recent Commission Orders: In addition to the foregoing, Commission Regulatory Services Division Staff (Staff) has evaluated the impact of the sale on PacifiCorp’s power supply costs in order to be consistent with the policy objectives contained in the Commission’s recent Third Supplemental Order in Docket No. UE-990267 (Colstrip). In the Colstrip Docket Puget Sound Energy proposed to sell its share of the Colstrip Generation and Transmission Facilities. In its order the Commission stated: “There are several ways of judging possible benefits of a sale. One is to study whether there will be a gain, and how much the gain will be. Another benefit (or risk) is the possibility of lower (or higher) power costs to replace [the facility’s] energy, and the net effect of these through time. There may also be other benefits or costs.” (Order @ 10) The Commission in its Order reaffirmed that any proposed sale must balance the interests of ratepayers, shareholders and the broader public. The Commission reasoned that there is a connection between this principle and how a utility should account for the gain and power supply benefits that arise from the transaction. Since the Colstrip transaction produces no net power-cost savings over a twenty-year time frame, PSE is required to defer all the gain from the transaction and all of the near-term power supply benefits in order to protect ratepayers from the expected future losses. Staff has evaluated both the gain and the near-term power supply benefits of PacifiCorp’s proposed transaction in light of this language in Colstrip. In PacifiCorp’s case, Staff first evaluated the projected impact of the sale on power replacement costs. Using market projections, and comparing these to the cost of power from continued ownership of Centralia (with emissions upgrades) over a twenty year period, the analysis produces similar results to PSE’s Colstrip sale. The analysis shows some near-term power supply benefits and expected long-term losses from the sale. Therefore, in order to be consistent with the Commission’s policy that the transaction must balance shareholder, ratepayer and the broader public interests, PacifiCorp would need to defer the gain and near-term power supply benefits of the proposal. Staff requested that Pacific amend its application so that the issues surrounding the treatment of the gain and near-term power supply expenses be deferred until the Company files its rate case as anticipated later this year. However, Pacific has indicated that it cannot proceed with the transaction unless it has a final determination from the Commission on the regulatory treatment of the gain and other associated benefits. Because of this, Staff and the Company have agreed that the current filing should be set for hearing on limited issues. Exempt Wholesale Generator Determination: As set forth in PacifiCorp’s Application, TECWA intends to seek Federal Energy Regulatory Commission (FERC) approval to own and operate the Centralia Plant with exempt wholesale generator status. Because the Centralia Plant is currently in PacifiCorp’s rate base for its jurisdictional sales of electricity in this state, 15 U.S.C. 79z-5a(c) requires that TECWA include with its EWG application to FERC a statement that the Washington Utilities and Transportation Commission has determined that allowing the facility to be a wholesale facility operated by an EWG: “(1) will benefit consumers; (2) is in the public interest; and (3) does not violate state law.” The parties agree that ownership of the Centralia Plant by TECWA is consistent with the criteria under 15 U.S.C. 79z-5a(c) and the Commission should file a conditional Order stating such, similar to the treatment afforded PSE under the Second Supplemental Order in Colstrip. Recommendation: Staff believes that the proposed sale by PacifiCorp of its share in the Centralia Coal Plant and Mine is in the public interest, if Pacific defers the gain on the sale for consideration in the rate case it plans to file at the end of 1999. The recommendation is based upon Staff’s analysis of the Commission’ s decision in Colstrip. Since Pacific asserts that it must resolve the issues surrounding the accounting treatment for the gain on the sale, Staff recommends the Commission set this matter for hearing on these limited accounting issues. Staff also recommends that the Commission issue a conditional order on the purchaser’s EWG status enabling Pacific to make a timely filing with the FERC.