Agenda Date: October 13, 1999 Item Number: 2_ Docket: UE-991409 Company Names: Puget Sound Energy 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-991409 regarding Puget Sound Energy’ s (PSE or the Company) application for authority to sell its interest in the coal-fired Centralia Power Plant with limited accounting issues. 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 September 13, 1999, Puget Sound Energy (PSE) filed an application for “(1) Approval of the Proposed Sale of PSE’s Share of the Centralia Facilities, and (2) Authorization to Amortize the Gain Over a Five Year Period.” In this application, PSE proposes to apply the same methodology with regard to disposition of the net gain on sale that it proposed in it’s application for sale of the Colstrip Facilities in Docket No. UE-980267 (Colstrip). That is, PSE proposes to amortize the net gain from the sale of the Centralia Power Plant (Centralia) for ratemaking purposes over a five year period commencing January 1, 2000. PSE’s after-tax gain resulting from this sale is expected to be approximately $13.5 million. The proposed purchaser of the Centralia plant and mine is 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. The 1340 megawatt coal-fired Centralia Power 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. 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. Considerations: The issues in this application are essentially identical to those faced by the Commission in the recently decided Colstrip application filed under Docket No. UE-990267. Because of this, the Regulatory Services Division Staff (Staff) has analyzed PSE’s current application in the same way it did there. Staff evaluated both the gain on sale and the near-term power supply benefits of PSE’ s proposed transaction in light of the Commission’s Third Supplemental Order in Colstrip. Staff’s analysis produces similar results to PSE’s proposed 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, PSE would need to defer the gain and near-term power supply benefits of the Centralia sale. As set forth in PSE’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 PSE’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). Recommendation: Because the critical issues in this case are consistent with those in the recently concluded Colstrip case Staff believes the outcome here should be also be consistent. Staff therefore recommends the Commission set the proposed Centralia property transfer for hearing with the limited issue of applying consistent accounting on the net gain and power supply benefits to Centralia as was ordered for Colstrip. In addition the Commission should issue a conditional order finding that ownership of Centralia by TECWA is consistent with the criteria under 15 U.S.C. §79z-5a(c). This will provide similar treatment to that afforded PSE and the purchaser under the Second Supplemental Order in Colstrip