Agenda Date: October 13, 1999 Item Number: 2_ Docket: UE-991255 Company Name: Avista Corp. Staff: Doug Kilpatrick, Electric Industry Coordinator Hank McIntosh, Regulatory Consultant, Energy Roland Martin, Regulatory Consultant, Energy Ken Elgin, Case Strategist Recommendation: Issue an Order authorizing Avista Corporation to sell its interest in the coal-fired Centralia Power Plant and defer treatment of the gain on sale to its next general rate case. The Order authorizing the sale should also find that operation of the Centralia Power Plant by the purchaser, TECWA Power, Inc. complies with the requirements of Federal statutes in order for the purchaser to operate the facility as an exempt wholesale generator (EWG). Background: On August 6, 1999, Avista Corporation (Avista or the Company) filed an application for “Authority to Sell its Interest in the Coal-Fired Centralia Power Plant.” Avista’s application sought an order authorizing the sale of its 15 percent ownership interest in the 1340-megawatt Centralia Power Plant (Centralia) 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. Avista’s after-tax gain resulting from this sale (on a total company basis) is expected to be approximately $30 million. Avista intends to defer all of the gain and will propose an allocation between shareholders and ratepayers along with a ratemaking treatment of the customer share in its upcoming rate proceeding. 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. Ownership of the Centralia Plant: The Centralia plant is currently owned by eight separate 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 its application, Avista states that approval of the proposed transaction is consistent with the public interest for the following reasons: •The installation of emission control equipment will place the power plant among the cleanest coal-fired plants in the United States, however, that installation can not occur 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 Plant 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. •Avista’s 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 Avista and its customers regarding mine reclamation, potential environmental taxes on combustion plants, 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 Avista’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 Avista’s proposed transaction in light of this language in Colstrip. In Avista’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 significant 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, Avista would need to defer the gain and near-term power supply benefits of the proposal. The Company’s application proposes to defer all the gain associated with the transaction in order to allow Staff and all other interested parties the opportunity to recommend how the gain should be treated in a future rate case. The associated near-term power cost savings would be captured in the rate case Avista plans to file imminently. Staff, therefore, believes that Avista’s proposal meets the public interest test established by the Commission in Colstrip. The Commission will have a near-term opportunity to capture the benefits for ratepayers consistent with the decision made in the Colstrip case. Exempt Wholesale Generator Determination: As set forth in Avista’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 Avista’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.” Staff agrees 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 an Order stating such. Considerations: Staff finds that the proposed sale by Avista of its share in the Centralia Coal Plant is consistent with the public interest. This finding is based on both the qualitative and quantitative benefits described by the Company in its Application and work papers provided to Staff. Qualitative benefits include: •Prospective ownership of the plant by a single owner able to make capital improvement decisions regarding emissions controls; •a new owner well regarded as an efficient operator of coal-fired power plants and the largest independent power operator in Canada; •elimination of future uncertainties regarding environmental remediation costs for both the mine and the power plant; and •the opportunity for Avista to manage its power supply portfolio absent the need to reach consensus with co-owners. Quantitative benefits include: •The ability of the Commission to determine an appropriate sharing of the gain on sale between shareholders and ratepayers and inclusion of on-going power supply costs in general rates during the Company’s upcoming rate proceeding expected to begin within approximately 30 days. Recommendation: Based of the foregoing, Staff recommends the Commission issue an Order approving Avista Corporation’s application for authority to sell its interest in the coal-fired Centralia Power Plant and defer treatment of the gain on sale to its next general rate case and declaring that operation of the Centralia Power Plant by the purchaser, TECWA Power, Inc. as an exempt wholesale generator (EWG) will (1) benefit consumers; (2) is in the public interest; and (3) does not violate state law.