WWP68MRN.txt

1 SANDPOINT, IDAHO, TUESDAY, JUNE 8, 1999, 9:30 A.M.

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4 COMMISSIONER SMITH: Good morning, ladies

5 and gentlemen. This is the time and place set for a

6 hearing in Idaho Public Utilities Commission Case

7 No. WWP-E-98-11, further identified as in the matter of

8 the application of The Washington Water Power Company,

9 now Avista Corporation, for an order approving increased

10 rates and charges for electric service in the State of

11 Idaho.

12 My name is Marsha Smith and I'll be

13 Chairing this hearing. On my left is Commissioner Dennis

14 Hansen who is also president of the Public Utilities

15 Commission and on my right is Commissioner Paul

16 Kjellander who is the third Commissioner for our state.

17 We'll begin this morning by taking the

18 appearances of the parties beginning with the Applicant.

19 MR. MEYER: Thank you. Appearing on behalf

20 of Applicant Avista, David J. Meyer, general counsel for

21 Avista.

22 COMMISSIONER SMITH: And for the Commission

23 Staff.

24 MR. WOODBURY: Scott Woodbury, Deputy

25 Attorney General, for Commission Staff.

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CSB REPORTING COLLOQUY
Wilder, Idaho 83676

1 COMMISSIONER SMITH: And for Intervenor

2 Potlatch.

3 MR. WARD: Conley Ward of the firm Givens,

4 Pursley on behalf of Potlatch Corporation.

5 COMMISSIONER SMITH: I don't believe there

6 are other parties. Oh, Mr. Shurtliff, sorry.

7 MR. SHURTLIFF: Thank you, Madam

8 Commissioner. Karl Shurtliff on behalf of the

9 Intervenors Hecla Mining Company, Silver Valley Resources

10 Corporation and Sunshine Mining and Refining Company.

11 COMMISSIONER SMITH: Can we just call you

12 the mining companies?

13 MR. SHURTLIFF: You can just call us the

14 good guys.

15 COMMISSIONER SMITH: All right, thank you,

16 Karl, and I believe that constitutes all the parties to

17 this case. Does anyone have a desire to make opening

18 statements before we turn to the Company's case? No?

19 With that, Mr. Meyer, we'll go to you.

20 MR. MEYER: We have just a few preliminary

21 housekeeping matters. First off, as I indicated to you

22 before the hearings began, we would propose to put our

23 witnesses on to stand cross on both their direct and

24 rebuttal, doing so one time around rather than recalling

25 them later on. I do reserve the right, however, to

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CSB REPORTING COLLOQUY
Wilder, Idaho 83676

1 recall any particular witness based on what transpires

2 during the subsequent cross and that has certainly worked

3 well for us before and with your permission.

4 COMMISSIONER SMITH: That's certainly

5 acceptable.

6 MR. MEYER: And the only other housekeeping

7 matter is we have, as you know, in our revised or in our

8 rebuttal case revised downward somewhat the proposed

9 revenue requirement and there will be just a couple of

10 changes made. The first witness up, Mr. Matthews, will

11 have just a small addition to make to his testimony to

12 reflect that revised revenue requirement. We do not

13 propose, however, to go through each and every witness in

14 their direct filing and adjust all the numbers downward

15 to reflect that.

16 I also handed out before the hearings began

17 some revised sheets that Mr. Hirschkorn will sponsor as a

18 separate exhibit that do incorporate the revised revenue

19 requirement figure and, finally, I know that Mr. Conley

20 and Mr. Shurtliff will work together to coordinate their

21 cross. They do represent common interests, Schedule 25

22 customers, and so, hopefully, that coordination will

23 occur and not prolong the hearings question mark?

24 COMMISSIONER SMITH: Well, Mr. Meyer,

25 everyone will be given the full opportunity to ask

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CSB REPORTING COLLOQUY
Wilder, Idaho 83676

1 whatever they believe is necessary to present the case

2 before the Commission.

3 MR. MEYER: Fair enough. Thank you. With

4 that, I call Mr. Matthews.

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6 THOMAS M. MATTHEWS,

7 produced as a witness at the instance of Avista

8 Corporation, having been first duly sworn, was examined

9 and testified as follows:

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11 DIRECT EXAMINATION

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13 BY MR. MEYER:

14 Q With that, for the record, would you please

15 state your name, your position and your employer?

16 A My name is Thomas Michael Matthews and I'm

17 the chairman, CEO and president of Avista Corporation.

18 Q And have you prepared direct testimony in

19 this proceeding?

20 A Yes, I have.

21 Q Do you have any changes to make to that?

22 A I have a couple of minor changes like

23 counsel talked about to make the additions. First of

24 all, on page 2, in line 10 I guess it is, that our

25 rebuttal filing after a few revisions as we went through

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CSB REPORTING MATTHEWS (Di)
Wilder, Idaho 83676 Avista

1 discussions and looking at some of the issues raised by

2 the Commission Staff, we proposed a revised revenue

3 requirement now of 13,456,000 which is resulting in an

4 overall 10.94 percent increase rather than the increase

5 that's noted there, and in one minor --

6 Q Before we proceed, why don't we indicate

7 which line number would be affected by that change and

8 reread it so the court reporter can enter that into the

9 record.

10 A The specific changes will be in lines 9 and

11 10 of page 2.

12 Q And the specific language that you would

13 propose to incorporate there reads as follows?

14 A Would be, "The Company filed for an overall

15 increase in revenue requirement of 14,223,000 for its

16 Idaho electric jurisdiction, equating to an 11.56 percent

17 increase. Our rebuttal filing proposes a revised revenue

18 requirement of 13,456,000, resulting in an overall 10.94

19 percent increase."

20 MR. MEYER: Everybody have that?

21 Q BY MR. MEYER: Okay, your next change?

22 A The only other change on page 10, line 6,

23 we noted that a word was left out to complete the meaning

24 of that sentence. The last sentence on lines 5 and 6

25 states that in recent years, overall margins from this

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CSB REPORTING MATTHEWS (Di)
Wilder, Idaho 83676 Avista

1 business have due primarily to increase competition. The

2 word "decreased" was left out, so it should read, "In

3 recent years, overall margins from this business have

4 decreased due primarily to increase competition."

5 Q Thank you. Are you also sponsoring what

6 have been marked as Exhibits 1, 2, and 3 for

7 identification?

8 A Yes, I am.

9 Q Do you have any changes to make to those

10 exhibits?

11 A No, I do not.

12 Q If I were to ask you the questions that

13 appear in your direct testimony with the corrections that

14 you've made, would your answers be the same?

15 A All the answers would be the same.

16 MR. MEYER: With that, I ask that

17 Mr. Matthews' direct testimony be entered into the record

18 as if read and move for the admission of Exhibits 1, 2

19 and 3.

20 COMMISSIONER SMITH: If there's no

21 objection, Mr. Matthews' testimony will be spread upon

22 the record as if read and Exhibits 1, 2 and 3 will be

23 admitted into the record.

24 (Avista Corporation Exhibit Nos. 1, 2

25 & 3 were admitted into the record.)

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CSB REPORTING MATTHEWS (Di)
Wilder, Idaho 83676 Avista

1 (The following prefiled testimony of

2 Mr. Thomas Matthews is spread upon the record.)

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CSB REPORTING MATTHEWS (Di)
Wilder, Idaho 83676 Avista

1 I. INTRODUCTION

2 Q. Please state your name, business address

3 and position with The Washington Water Power Company?

4 A. My name is Thomas M. Matthews. My business

5 address is East 1411 Mission Avenue, Spokane, Washington.

6 I am chairman of the Board and Chief Executive Officer of

7 The Washington Water Power Company (to be renamed Avista

8 Corporation, effective January 1, 1999).

9 Q. Would you please describe your education

10 and business experience?

11 A. Prior to joining the Company on July 1,

12 1998, I served as the president of Houston-based Dynegy,

13 formerly NGC Corporation, and was responsible for

14 oversight of Dynegy's worldwide operations, including its

15 gas liquids and gas pipeline subsidiary, the Company's

16 international division, the Company's power division, and

17 the corporate merger and acquisition, legal, regulatory,

18 and information technology functions. Dynegy is a

19 leading gatherer, processor, generator, transporter, and

20 marketer of energy products and services in North

21 America.

22 I previously held the position of vice president

23 of Texaco, Inc., president of Texaco's Global Gas and

24 Power Division, and president and chief executive officer

25 of Texaco Natural Gas, where I was responsible for

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Matthew, Di 1
WWP

1 worldwide power, natural gas processing, gas liquids, gas

2 pipelines and gas sales and marketing operations.

3 I also held the position in Texaco as president of

4 Texaco Refining and Marketing, Inc. In this position, I

5 was responsible for nationwide gasoline marketing and

6 refinement.

7 Prior to joining Texaco, I spent eight years with

8 Tenneco as president of Tennessee Gas Pipeline Company

9 and executive vice president of Tenneco Gas. I also

10 spent 16 years

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1 with Exxon in various domestic and international

2 engineering, management and executive positions.

3 I received my bachelor of science degree in civil

4 engineering from Texas A & M University in 1965. I have

5 completed postgraduate training in petroleum and natural

6 gas engineering at the University of Oklahoma and

7 executive business training at Stanford and Columbia

8 Universities.

9 Q. What is the nature of the rate relief

10 requested by the Company in this proceeding?

11 A. The Company filed for an overall increase

12 in revenue requirement of $14,223,000 for its Idaho

13 electric jurisdiction, equating to an 11.56% increase.

14 Our rebuttal filing proposes a revised revenue

15 requirement of 13,456,000, resulting in an overall 10.94%

16 increase. This request is predicated on a 9.446% rate of

17 return, including a 12.00% return on equity. Other

18 witnesses, beginning with Mr. Dukich, will provide

19 detailed testimony with respect to the justification for,

20 and derivation of the requested rate relief. Suffice it

21 to say, however, that the Company's pro forma rate of

22 return of 6.94% for the test period is well below the

23 presently authorized rate of return of 10.95% as well as

24 the proposed rate of return of 9.446%, thereby

25 necessitating a rate increase of this magnitude.

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1 Q. What is the scope of your testimony?

2 A. I am testifying as the policy witness for

3 the Company, and, in addition to providing a brief

4 overview of the filing, will introduce the other

5 witnesses proffering testimony on the Company's behalf.

6 Finally, most of my testimony will be devoted to a more

7 general overview of the Company and its various lines of

8 business, in order to convey the overall strategic

9 direction of the Company and its subsidiaries,

10 distinguishing between regulated and unregulated

11 activity.

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1 Q. Would you please summarize the scope of the

2 testimony of other witnesses proffered by the Company in

3 this proceeding?

4 A. Yes. In addition to myself, the following

5 witnesses are presenting direct testimony on behalf of

6 the Company:

7 Thomas D. Dukich: As Manager of Rates, he will

8 provide additional background information with respect to

9 the Company's electric operations, as well as the

10 Company's proposed rate increase. He will also describe

11 the basis for adjusting upward the requested return on

12 equity to recognize and reward the Company for its

13 management initiatives.

14 William E. Avera: As a principal in Financial

15 Concepts and Applications (FINCAP), Inc., he has been

16 retained to present testimony with respect to the

17 Company's cost of capital and capital structure and will

18 testify in support of a 12.00% return on equity (11.75%

19 plus .25% incentive "adder") and an overall rate of

20 return of 9.446%.

21 Kelly Norwood: As a Regulatory Policy Analyst

22 with the company, he will explain the normalizing

23 adjustments to power supply revenues and expenses.

24 Don M. Falkner: As a Senior Rate Accountant with

25 the Company, he will generally cover accounting and

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1 financial data in support of the Company's need for the

2 increase in rates. He will also sponsor proformed

3 operating results, as well as system and jurisdictional

4 allocation factors.

5 Tara L. Knox: As a Rate Analyst, she will sponsor

6 the cost of service study. Her cost of service study

7 demonstrates that certain service schedules, most notably

8 Residential Schedule 1 and Extra Large General Service

9 Schedule 25, provide a return well below the overall

10 requested return of 9.446%.

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1 Brian J. Hirschkorn: As a Senior Rate Accountant

2 with the Company, he will cover the spread of the

3 proposed annual revenue increase of $14,223,000 (11.56%)

4 among the Company's general service schedules, as well as

5 the design of the proposed rates within each schedule,

6 including modifications to the basic and minimum charges.

7 He will also sponsor testimony with regard to certain

8 revenue normalization adjustments.

9 Q. Are you sponsoring any exhibits which have

10 been prepared by you or under your supervision?

11 A. Yes. I am sponsoring Exhibit No(s). 1

12 through 3.

13 II. OVERVIEW OF THE COMPANY

14 Q. Would you please provide an overview of the

15 Company and how it is organized?

16 A. The Washington Water Power Company provides

17 electric and natural gas service, at retail, to customers

18 located in Idaho and Washington. In addition, through

19 its operating division, WP Natural Gas, it provides

20 natural gas distribution service in Oregon and

21 California. The Company's corporate headquarters are in

22 Spokane, Washington, which serves as the Inland

23 Northwest's center for manufacturing, transportation,

24 health care, education, communication, agricultural and

25 service businesses.

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1 Since 1996, the Company has reorganized its

2 operations to take advantage of the changes in the

3 Company's business environment and to proactively respond

4 to regulatory and structural changes in the industry.

5 The Company's utility operations are organized into two

6 lines of business: The Energy Delivery Business includes

7 retail electric and natural gas distribution and

8 transmission services. The Generation and Resources

9 Business includes generation and production, resource

10 optimization, electric and natural gas commodity trading

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1 and wholesale marketing. Both the Energy Delivery and

2 Generation and Resources lines of business are currently

3 operated as separate business divisions within the

4 Company.

5 In February 1997, the Company's Board of Directors

6 approved creation of an internal holding company, since

7 renamed Avista Capital, Inc., which owns all of the

8 Company's non-regulated businesses. Avista Capital was

9 formed to segregate the Company's non-regulated

10 businesses from its regulated businesses and to support

11 financing of the non-regulated businesses as they develop

12 and expand. The Company also reorganized by adding a new

13 line of business, National Energy Trading and Marketing.

14 The National Energy Trading and Marketing business

15 includes Avista Advantage, Inc. (Avista Advantage) and

16 Avista Energy, Inc. (Avista Energy). The non-energy

17 business primarily consists of Pentzer Corporation

18 (Pentzer), which is the parent company to the majority of

19 the Company's non-energy businesses.

20 The following schematic illustrates the

21 relationship of the various business units and

22 subsidiaries to one another:

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7 (Chart contained in hard copy of transcript.)

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1 A. Energy Delivery Line of Business.

2 Q. Please generally describe the Energy

3 Delivery line of business?

4 A. Energy Delivery provides electricity and

5 natural gas distribution and transmission services in a

6 26,000 square mile area in eastern Washington and

7 northern Idaho with a population of approximately

8 825,000. Energy Delivery also provides natural gas

9 service in a 4,000 square mile area in northeast and

10 southwest Oregon and in the South Lake Tahoe region of

11 California, with the population in these areas

12 approximating 495,000.

13 At the end of 1997, retail electric service was

14 supplied to approximately 301,000 customers in eastern

15 Washington and northern Idaho; retail natural gas service

16 was supplied to approximately 251,000 customers in parts

17 of Washington, Idaho, Oregon and California. In Idaho,

18 in particular, the Company served 99,545 electric and

19 48,502 natural gas customers as of the end of 1997.

20 The Company expects economic growth to continue in

21 its eastern Washington and northern Idaho service area.

22 The Company, along with others in the service area, is

23 continuing its efforts to facilitate expansion of

24 existing businesses and attract new businesses to the

25 Inland Northwest. Agriculture, mining and lumber were

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1 the primary industries for many years, but health care,

2 education, electronic and other manufacturing, tourism

3 and the service sectors have become increasingly

4 important industries that operate in the Company's

5 service area. The Company also anticipates that strong

6 economic growth will continue in its Oregon service area.

7 The Company believes that residential and

8 commercial electric load growth will average

9 approximately 2.1% annually for the next five years,

10 primarily due to increases in both population and the

11 number of businesses in its service territory. The

12 number of electric

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1 customers is expected to increase and the average annual

2 usage by residential customers is expected to remain

3 steady on a weather-adjusted basis. The Company

4 anticipates natural gas load growth, including

5 transportation volumes, in its Washington and Idaho

6 service area to average approximately 2.9% annually for

7 the next five years.

8 Q. Are you also sponsoring an exhibit which

9 shows a more detailed breakdown, by customer class, of

10 customer usage characteristics?

11 A. Yes, I am. Exhibit No. 1 compares, over

12 time, electric revenues, sales, and number of customers

13 by class of service, for the years 1988 and 1997, for

14 both total system and State of Idaho. I am also

15 sponsoring Exhibit No. 2, consisting of an excerpt from

16 the Company's Form 10-K for the period ending December

17 31, 1997, as it relates to basic operating statistics for

18 the prior three years. Again, this is simply meant to

19 provide additional information, at the outset, with

20 respect to the Company's electric operations generally.

21 Later witnesses are prepared to respond to the specifics

22 of Exhibit No(s). 1 and 2.

23 Q. How do you assess the Company's performance

24 in the Energy Delivery line of business?

25 A. What makes the Company unique is its

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1 exceptional customer service, competitive pricing,

2 cost-effective delivery, and record of price stability,

3 as further discussed by witness Dukich. According to a

4 1997 study of 94 U.S. electric utilities, the Company was

5 rated second in competitive efficiency, achieving a

6 rating of 99.99 percent. Another survey, sponsored by

7 the publication Public Utilities Fortnightly, ranks the

8 Company in a tie for fifth place for overall efficiency.

9 In a separate independent survey conducted by Theodore

10 Barry & Associates, Inc. (TB&A), the Company ranked

11 number one out of 34

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1 national utilities in overall cost of customer service

2 and number two in low cost of service when combined with

3 overall customer satisfaction.

4 In addition, the Company has embarked on a number

5 of growth-driven strategies aimed at expanding its

6 customer base and acquiring physical assets, specifically

7 power generation assets and electric and gas transmission

8 and distribution assets.

9 The Company is positioned to capitalize on these

10 advantages by responding to customer needs and fostering

11 business growth and economic development in existing

12 markets and moving into new service areas through

13 expansions and acquisitions.

14 Q. How do you assess the market for the

15 Company's transmission services?

16 A. Our Transmission Services group continues

17 to expand its market with a full range of transmission

18 services across our system and enjoys a strong position

19 in the regional market, based on its reputation and

20 experience. Our Transmission Services group will have

21 substantial influence in any future efforts to develop a

22 regional independent transmission grid operator (IGO) or

23 independent grid scheduler (IGS).

24 Q. What value-added products and services does

25 the Company intend to offer?

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1 A. The focus of products and services is to

2 respond to customer needs. Emphasis in 1998 continues to

3 be on the introduction of additional customer billing and

4 energy services. Current and potential products and

5 services include Internet billing and account services,

6 automatic billing, back-up generation, surge suppression,

7 load management, and others.

8 Q. How does the Company plan to maintain its

9 leadership in areas of customer service?

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1 A. The focus for call center operations in

2 1998 is to ensure continued measurable industry

3 leadership in customer satisfaction and efficiency (as

4 demonstrated in the 1997 Theodore Barry benchmarking

5 study) for our call center and credit operations.

6 Strategies include leveraging the capabilities of the IVR

7 (voice-driven system) by introducing specialized

8 services, attaining productivity efficiencies, and

9 enhancing outage management response.

10 Q. Does the Company face competition within

11 its service area and how does it intend to address these

12 challenges?

13 A. Yes. Whatever form industry restructuring

14 takes, the Company continues to face aggressive

15 competition on the fringes and within its service area

16 with customer-owned electric cooperatives and PUDs.

17 Principal competitive concerns at this time are the

18 cooperatives' lower commercial rates and their ability,

19 as non-regulated entities, to offer customers more

20 financially flexible service extension arrangements.

21 Energy Delivery will continue to pursue cost control by

22 investigating work process improvements in every area of

23 its operation and by continuing efforts to achieve

24 savings in its material supply chain.

25 B. Generation and Resources Line of Business

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1 Q. Please describe the Generation and Resource

2 line of business?

3 A. The Generation and Resource line of

4 business manages the Company's electric energy resource

5 portfolio, which is used to serve Energy Delivery's

6 retail electric customers and Generation and Resources'

7 wholesale electric customers. This line of business is

8 separate and apart from the trading and marketing

9 activities otherwise conducted by the Company's

10 subsidiary Avista Energy, Inc., as will be discussed

11 later. Through its resource optimization team within

12 Generation and Resources, the Company markets power

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1 throughout the 11 western states that comprise the

2 Western Systems Coordinating Council. For the 12 months

3 ended September 30, 1998, the Company sold more than 18.5

4 million megawatt hours of electricity into western

5 wholesale energy markets, with more than 80 percent of

6 that total in short-term sales. Wholesale revenues for

7 the 12 months ended September 30, 1998, were $418.7

8 million. In recent years, overall margins from this

9 business have decreased due primarily to increase

10 competition.

11 Our Generation and Resources business has about

12 $620 million in assets, with an overall cost of

13 production of 2.2 cents per kilowatt-hour. The primary

14 business focus of Generation and Resources is to optimize

15 the availability and operation of generation resources.

16 The Company owns and operates nine hydroelectric

17 projects, a wood-waste fueled generating station and two

18 natural gas combustion turbine (CT) peaking units. The

19 Company also owns a 15% share in two coal-fired

20 generating facilities and leases two additional gas CT

21 peaking units. With this diverse energy resource

22 portfolio, the Company remains one of the nation's

23 lowest-cost producers and sellers of electric energy

24 services. At December 31, 1997, the Company's total

25 owned resources available were 58% hydroelectric and 42%

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1 thermal. Exhibit 3 includes the Company's resource

2 statistics.

3 The Company's wholesale marketing and trading

4 business units within the Generation and Resources line

5 of business are a secondary, but very important part of

6 the Company's overall business strategy. For many years,

7 the Company has entered into a number of long-term power

8 sales contracts that have increased its wholesale

9 electric revenues, and the Company is continuing to

10 actively pursue electric wholesale marketing and energy

11 trading business opportunities. Energy trading includes

12 short-term sales and purchases such as next hour, next

13 day and monthly blocks of energy. Wholesale marketing

14 includes sales and

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1 purchases under long-term contracts with one-year and

2 longer terms. Wholesale sales are affected by weather

3 and streamflow conditions and may eventually be affected

4 by the restructuring of the electric utility industry

5 related to retail direct access.

6 Q. What are the challenges that face this line

7 of business?

8 A. Challenges facing Generation and Resources

9 include evolving technologies which provide alternate

10 energy supplies and deregulation of electric and natural

11 gas markets. Generation and Resources continues to

12 compete in the wholesale electric market with other

13 western utilities, federal marketing agencies and power

14 marketers. It is expected that competition to sell

15 energy will remain vigorous due to increased competition

16 and surplus capacity in the western United States,

17 driving down margins. Competition in the sale of

18 capacity and energy is influenced by many factors,

19 including the availability of capacity in the western

20 United States, the availability and price of natural gas,

21 and transmission availability. Business challenges

22 affecting the energy trading business include new

23 entrants in the wholesale market, such as power brokers

24 and marketers, and declining per unit margins.

25 Q. What efforts has the Company undertaken to

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1 relicense its hydroelectric plants?

2 A. The Company is a licensee under the Federal

3 Power Act, which regulates certain of the Company's

4 generation resources and is administered by the FERC.

5 The Cabinet Gorge and Noxon Rapids plants are

6 currently in the process of relicensing with an

7 expiration date on the existing license of February 2001.

8 The Company filed a Notice of Intent to relicense in 1996

9 and has since consulted with resource agencies, Native

10 American tribes, special interest groups and the general

11 public regarding its licensing.

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1 The Company's goal is to develop settlement agreements

2 with all parties, which will form the basis for the

3 license application expected to be submitted in February

4 1999. The focus will be on negotiating settlement

5 agreements and preparing a collaboratively written

6 environmental assessment and license application. An

7 Environmental Impact Statement (EIS) will be written by

8 the FERC in the period between application filing and

9 issuance of a new license.

10 The Company's approach to relicensing departs from

11 the conventional FERC process. Early FERC involvement

12 and EIS scoping has occurred prior to the application,

13 and the consultation process has been expanded to a

14 comprehensive collaborative process including all

15 stakeholders. The collaborative process used by the

16 Company is nationally recognized as the model for FERC's

17 alternative approach to relicensing.

18 The Company has presented to the participants a

19 proposed comprehensive package of protection, mitigation

20 and enhancement measures that addresses impacts resulting

21 from the continued operations of the Cabinet Gorge and

22 Noxon Rapids projects. The comprehensive package

23 includes issues such as fisheries, water quality,

24 wildlife, recreation, land use, cultural resources and

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1 interests of over 40 organizations and 100 individuals.

2 Q. How does this business lend itself to the

3 Company's strategic position?

4 A. A key strength of the Generation and

5 Resources business is its position as one of the

6 lowest-cost energy providers in the country. An

7 objective is to further reduce the Company's already

8 low-cost of generation by 10 percent by the year 2001.

9 We are also considered one of the premier

10 operators of hydroelectric facilities in the nation, as

11 evidenced by our industry-leading plant availability

12 rating of 98 percent. An

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1 objective of the Company is to leverage our expertise as

2 a hydro operator to gain access to additional generation.

3 Additionally, our collaborative approach to hydro

4 relicensing has been held up as a model for the industry

5 by the Federal Energy Regulatory Commission.

6 Q. Has the industry witnessed increased

7 competition and consolidation of competitors?

8 A. Yes. Competitors are becoming larger, more

9 aggressive, and better capitalized. The Company's

10 existing sales contracts are expiring and new margins are

11 thinner and more difficult to achieve. The Company,

12 however, continues to build relationships and will

13 continue to develop creative products and services.

14 BPA sales contracts with many PUDs, DSIs, etc.

15 will expire in September 2001. This will create market

16 opportunities for the Company. The Company has already

17 marketed power to some of these entities and will pursue

18 further opportunities.

19 C. National Energy Trading and Marketing.

20 Q. Turning now to the National Energy Trading

21 and Marketing line of business, would you please provide

22 an overview?

23 A. Avista Capital, Inc. (the Company's

24 internal holding company) is the parent company to the

25 Company's National Energy Trading and Marketing

32

Matthew, Di 13
WWP

1 businesses. As a result of reorganizing the Company to

2 proactively respond to deregulation, the Company added a

3 new line of business, National Energy Trading and

4 Marketing. Avista Energy, Inc. and Avista Advantage,

5 Inc. conduct the National Energy Trading and Marketing

6 businesses. National Energy Trading and Marketing

7 efforts focus on a national basis, which includes

8 conducting business in the Western Systems Coordinating

9 Council (WSCC). Wholesale

10

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17

18

19

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21

22

23

24

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33

Matthew, Di 13A
WWP

1 trading and marketing in the WSCC are also being done in

2 the Generation and Resources line of business, although

3 to a lesser degree than Avista Energy.

4 Q. You mentioned in your testimony that Avista

5 Capital, Inc. serves as the internal holding company for

6 WWP's non-regulated subsidiaries. Would you please

7 describe the principal subsidiaries, beginning with

8 Avista Energy, Inc.

9 A. Avista Energy is one of the nation's

10 fastest growing electric and natural gas marketing and

11 trading companies, having advanced to the top ranks of

12 most active electricity sellers in the country. This

13 exponential growth in electricity and gas sales is

14 supported by Avista Energy's strong fundamental market

15 expertise, and disciplined by strict risk management

16 policies and procedures.

17 On December 17, 1998, Avista Energy announced it

18 has reached an agreement to purchase Vitol Gas & Electric

19 LLC, one of the top 20 energy marketing companies in the

20 United States. The acquisition provides Avista Energy

21 the platform to continue the substantial growth of its

22 North American trading and marketing business. In the

23 third quarter of this year, Avista Energy was ranged 11th

24 nationally and Vitol Gas & Electric was ranked 18th

25 nationally in megawatt-hour sales, based on figures

34

Matthew, Di 14
WWP

1 compiled by Power Markets Week (Nov. 16, 1998, issue).

2 Together the two firms would have achieved power sales

3 exceeding 38 million megawatt hours in the third quarter

4 of 1998 and would have been ranked 6th in sales among all

5 U.S. power marketers. By combining the resources of

6 Avista Energy and Vitol Gas & Electric, we have placed

7 ourselves squarely among the top 10 energy marketing and

8 trading companies in the nation. More importantly, we'll

9 now have the presence and market position needed to

10 continue the growth of our marketing business and

11 optimize generation anywhere in the country. To this

12 point, Avista Energy has done the majority of

13

14 /

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16 /

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18 /

19

20

21

22

23

24

25

35

Matthew, Di 14A
WWP

1 its business in western markets, while most of Vitol Gas

2 & Electric's business has taken place in markets east of

3 the Rocky Mountains.

4 Following a profitable first year of operation,

5 Avista Energy continues to pursue strategies that expand

6 the Company's capabilities into the deregulating energy

7 market. Near term strategies focus on achieving

8 additional growth through a combination of trading,

9 wholesale sales and asset related opportunities. The

10 company will continue to support these objectives with a

11 balanced and focused marketing and trading effort.

12 Avista Energy's reputation for innovation,

13 customer focus and technical expertise continues to

14 create business and partnership opportunities. An

15 existing production-related alliance with Chelan County

16 Public Utility District has recently been complemented by

17 an additional alliance with Riverside (California) Public

18 Utilities.

19 Q. What is Avista Advantage, Inc. and what

20 does it do?

21 A. Avista Advantage is the leading provider of

22 Internet-based speciality billing and information

23 services with thousands of managed-sites across the

24 country. It has developed a distinctive line of services

25 that starts with a proprietary customer information

36

Matthew, Di 15
WWP

1 system. The system impacts the customer's bottom line by

2 providing several valuable tools in one: a consolidated

3 billing tool; an accounting/auditing tool; and an energy

4 management tool. Avista Advantage conveniently delivers

5 all of these services through the Internet.

6 Q. Has the Company recently announced the

7 formation of Avista Power, Inc., for the purpose of

8 developing independent power projects?

9 A. Yes, it has. Indeed, Avista Power has

10 already formed an alliance with Cogentrix, in order to

11 construct gas-fired electric generation in Washington,

12 Idaho and

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18 /

19

20

21

22

23

24

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37

Matthew, Di 15A
WWP

1 Oregon, and already has plans in place for the

2 construction of a 270 MW gas-fired turbine project.

3 Q. Please discuss Avista Labs, Inc.?

4 A. Avista Labs provides a unique approach to

5 PEM (proton exchange membrane) fuel cell design

6 positioning it at the forefront of a technology which

7 could forever change the energy industry and the concept

8 of distributed power generation. Avista Lab's primary

9 product is a modular fuel cell generator (operating on

10 bottled or other sources of pure hydrogen) which can be

11 scaled to match the application from 60 watts to

12 virtually any reasonably sized application by connecting

13 the modular components in series and/or parallel to

14 achieve the desired installation.

15 In October, Avista Labs' approach to the

16 development of this technology was reinforced when it was

17 selected to receive a $2 million technology development

18 award from the United States Department of Commerce's

19 National Institute of Standards and Technology Advanced

20 Technology Program (ATP). Of the 67 competing applicants

21 Avista Labs was selected as one of only 13 projects to

22 partner with the ATP in the development of premium power

23 solutions and received the coveted ATP Premium Power

24 program support.

25 Q. Next, would you please provide an overview

38

Matthew, Di 16
WWP

1 of Avista Fiber, Inc.?

2 A. Avista Fiber designs, builds and manages

3 metropolitan area fiber optic networks. The company is

4 building the communication systems which provide easy

5 access to all telecommunications companies for our

6 customers. Currently, Avista Fiber is serving over fifty

7 multi-site customers using 9,360 strand miles of fiber.

8 Avista Fiber's mission "to provide competitive

9 alternatives in telecommunications utilizing fiber optic

10 technology" has been strongly endorsed by the medical and

11 the

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17 /

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19

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21

22

23

24

25

39

Matthew, Di 16A
WWP

1 educational community. Because of this, Avista Fiber has

2 been awarded a project to build a private dark fiber

3 network for the seven major hospital facilities in the

4 Spokane area. In addition, there will be another 15 to

5 20 medical facilities that will be connected to the

6 original seven hospitals later this year.

7 Just recently, Avista Fiber was awarded a large

8 contract to provide dark fiber to the EMAN consortium in

9 the Spokane area. EMAN is a group of local school

10 districts, community colleges and universities who have

11 come together to build a telecommunications network

12 connecting up to 120 schools.

13 Q. Also, in the telecommunications area, what

14 is Avista Communications, Inc. and its market?

15 A. The Company in late November 1998 reached

16 an agreement in principle to purchase controlling

17 ownership in One Eighty Communications, Inc. The new

18 company will be renamed Avista Communications, Inc. and

19 will provide local high-speed telecommunications services

20 to under-served Northwest communities.

21 One Eighty Communications is a competitive local

22 exchange carrier (CLEC) formed in August 1998 to provide

23 local dial tone and data services to commercial accounts

24 in communities with populations under 250,000. One

25 Eighty Communications is already developing markets in

40

Matthew, Di 17
WWP

1 Lewiston, Idaho, and Billings, Montana.

2 The Company's investment in this business is a

3 natural extension of the company's commitment to

4 providing quality Infrastructure services throughout the

5 region.

6 Q. Finally, please describe Pentzer and its

7 operations?

8 A. Pentzer Corporation is a wholly owned

9 subsidiary of Avista Capital and is the parent company

10 for a majority of Avista's non-energy subsidiaries. At

11 September 30, 1998,

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15 /

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17 /

18

19

20

21

22

23

24

25

41

Matthew, Di 17A
WWP

1 Pentzer had $256 million in total assets and $140 million

2 in shareholder equity. At September 30, 1998, Pentzer's

3 portfolio included approximately 2,000 employees situated

4 in a variety of companies.

5 Q. Do you have any concluding remarks which

6 serve to summarize the thrust of your testimony?

7 A. Yes, I do. I have provided rather

8 extensive testimony concerning the Company's various

9 lines of business, in order to demonstrate the Company's

10 resolve to diversify and take advantage of the

11 opportunities brought about by a rapidly-evolving utility

12 industry. The Company is well-positioned by virtue of

13 its efforts to-date. We intend to build on what we have

14 already accomplished. The pace of change will accelerate

15 and we welcome the opportunities that will present

16 themselves.

17 Even though the Company has a number of

18 non-regulated business initiatives underway, the

19 Company's core business and source of substantial

20 earnings remains its retail electric and natural gas

21 operations in the various states in which it serves.

22 That is why it is imperative that the Company be given a

23 reasonable opportunity to earn a fair rate of return,

24 commensurate with the risks it faces in a

25 constantly-changing market; meanwhile, the Company

42

Matthew, Di 18
WWP

1 understands how important it is to continue to provide

2 safe and reliable service to its retail customers, doing

3 so at competitive and affordable rates.

4 Q. Does that conclude your direct testimony?

5 A. Yes, it does.

6

7

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Matthew, Di 18A
WWP

1 (The following proceedings were had in

2 open hearing.)

3 MR. MEYER: With that, Mr. Matthews is

4 available for cross.

5 COMMISSIONER SMITH: Mr. Shurtliff, do you

6 have questions for Mr. Matthews?

7 MR. SHURTLIFF: No questions.

8 COMMISSIONER SMITH: Mr. Ward?

9 MR. WARD: Yes.

10

11 CROSS-EXAMINATION

12

13 BY MR. WARD:

14 Q Mr. Matthews, if you would turn to page 9

15 of your testimony, on lines 9 through 19 you discuss the

16 competition the Company is facing for customers on the

17 fringes of its service territory. Do you recall that

18 testimony?

19 A Yes, I do.

20 Q Is that competition primarily for

21 commercial customers?

22 A The most active competition right now is

23 primarily for commercial customers, although there is

24 significant competition also for residential customers.

25 Q Okay. On page 13 of your testimony, at

44

CSB REPORTING MATTHEWS (X)
Wilder, Idaho 83676 Avista

1 lines 1 and 2, there's a sentence there at the top that

2 begins with the word "an" on page 12 and continues on,

3 "An objective of the Company is to leverage our

4 expertise as a hydro operator to gain access to

5 additional generation."

6 Now, the word "leverage" is something of a

7 buzz word in business circles. Would you agree with me

8 that the typical use of that term indicates the ability

9 to derive value in one area of business from recognized

10 expertise or resources in another area?

11 A Yes. In the form you're using, yes, I'd

12 agree with that.

13 Q Does your energy trading business to some

14 degree leverage off your utility business?

15 A It leverages somewhat. It has an expertise

16 of its own that takes risk in a way that the normal

17 utility business, you might say, doesn't take risk, but,

18 yes, with the assets it can trade around from the

19 standpoint of selling surplus power during the times we

20 have surplus power and things like that, so in that

21 fashion, it's able to leverage because it has some

22 additional product to sell at that time.

23 MR. MEYER: Excuse me, may I for

24 clarification?

25 COMMISSIONER SMITH: Mr. Meyer.

45

CSB REPORTING MATTHEWS (X)
Wilder, Idaho 83676 Avista

1 MR. MEYER: Are you referring to the energy

2 trading division within Avista Corporation or Avista

3 Energy's separate trading affiliate?

4 MR. WARD: I'm really referring to both,

5 but if Mr. Matthews wants to distinguish, I have no

6 objection.

7 THE WITNESS: I was talking about that that

8 exists within the utility.

9 Q BY MR. WARD: What about Avista Energy

10 itself, does it leverage somewhat off the utility?

11 A Not necessarily. Most of its leveraging,

12 particularly in this hydro area, is with other parties,

13 such as the Chelan Public Utility District and with

14 Bonneville and the relationship they have with

15 Bonneville, not much off the utility assets.

16 Q Do you think it's likely that a company

17 that had no presence in the utility industry could have

18 grown in the fashion that Avista Energy has over the last

19 two to three years as an energy trader?

20 A Yes. In fact, if you'd look probably at

21 the top 25 energy traders in the country today, you'd

22 find probably at least half of them that had no presence

23 in the utility business in the last three years.

24 Q Okay. When you reorganized WWP into Avista

25 and separated functions into regulated and nonregulated

46

CSB REPORTING MATTHEWS (X)
Wilder, Idaho 83676 Avista

1 lines of business, why didn't you move all of the energy

2 trading activities into the Avista Energy component of

3 the structure?

4 A That was done before I came last fall, but

5 to my best knowledge, you know, looking at how we

6 organized it and how the Company did it, is the fact that

7 that short-term daily scheduling and real-time activity

8 of the generation of the Company had always been within

9 the utility and so the idea of working efficiencies from

10 utilizing the generation fit best within the utility and

11 some of that also fits best because of the structure that

12 the regulatory schemes have been set up on, the

13 differences between how you run regulated and

14 nonregulated, both generation and transmission and

15 marketing and scheduling and dispatching, and so some of

16 those functions remain within the utility from a

17 regulatory standpoint and some of them remain within the

18 utility because that's where they've always been from an

19 efficiency and the credits of those revenues to the

20 customers, they've always been there.

21 Q Mr. Matthews, I follow the

22 regulatory/nonregulatory distinction, but isn't it a fact

23 that in this case the Company is asking for essentially

24 nonregulated treatment not only of the trading activities

25 of Avista Energy in the nonregulated line of business,

47

CSB REPORTING MATTHEWS (X)
Wilder, Idaho 83676 Avista

1 but also for the trading activities, the speculative, as

2 they're called, trading activities, within the utility

3 function itself?

4 A Yes, from a speculative activity

5 standpoint, because we're saying that if it stays within

6 the utility, the utility has to bear the risk of the

7 losses as well as the benefit of the gains and so we're

8 saying rather than expose the utility to the risk of the

9 losses on that speculative part only, we'll just keep it

10 out.

11 Q Doesn't that in fact negate many of the

12 advantages of separating your lines of business into

13 regulated and nonregulated entities?

14 A No, not to my mind it doesn't.

15 MR. WARD: Madam Chair, if I may approach

16 the witness.

17 COMMISSIONER SMITH: Certainly, Mr. Ward.

18 (Mr. Ward approached the witness.)

19 Q BY MR. WARD: Mr. Matthews, I've just

20 handed you a newspaper article or a newspaper clipping

21 that I take it is an account of a shareholders meeting of

22 Avista Corporation; is that correct?

23 A Yes, it is.

24 Q And when did that meeting occur?

25 A I think that meeting was May the 12th, I

48

CSB REPORTING MATTHEWS (X)
Wilder, Idaho 83676 Avista

1 think that's right, or 13th, maybe the 13th.

2 Q Have you seen that clipping before?

3 A Yes, I have.

4 Q I want to ask you a couple of questions

5 about the article itself. In the bottom -- well,

6 starting with the first paragraph in the opening theme of

7 the article, it says that Avista plans to initiate a

8 buyback of stock; is that correct?

9 A That's correct.

10 Q And in the second paragraph, it says, "Cash

11 for the buybacks will be generated internally, in part by

12 selling assets such as the Centralia Generating Plant, he

13 said," that refers to you.

14 "That deal, announced earlier this week,

15 will net Avista about $60 million, Matthews said," and

16 first of all, have you completed a deal for the sale of

17 your interest in Centralia?

18 A We've completed an agreement to sell which

19 is subject to regulatory approval and may close within a

20 year if it closes, so you might say the contracts have

21 been agreed to, but no deal has been closed because it's

22 at least 12 to 18 months out.

23 Q So when you originally said within a year,

24 would it be within roughly a year from now or within 12

25 or so months?

49

CSB REPORTING MATTHEWS (X)
Wilder, Idaho 83676 Avista

1 A It's anticipated by the buyer that they

2 hope to get the sale closed within a year, but if you

3 look at recent approvals on such generating sales, we

4 anticipate it will take much longer.

5 Q Now, Mr. Matthews, I know to your credit

6 you probably haven't spent your life dealing with

7 ratemaking cases, but I have to ask you a relatively

8 technical question. You're aware, are you not, that the

9 Company is proposing a 1997 test year in this case?

10 A That's correct.

11 Q Are you also aware that the pro forma year

12 for power supply adjustments runs from June -- excuse me,

13 July of 1999 through June of 2000, if you know?

14 A Yes, I do.

15 Q Now, so there's a possibility that this

16 sale will close within the next 12 months, within that

17 period of July, '99 through June, 2000?

18 A There's a remote possibility it may close

19 during that 12 months.

20 Q Did you sell your entire interest in

21 Centralia?

22 A Yes, we did.

23 Q And my memory is that's roughly 200

24 megawatts of capacity; is that correct?

25 A That's correct.

50

CSB REPORTING MATTHEWS (X)
Wilder, Idaho 83676 Avista

1 Q What was the sale price if it's not

2 confidential?

3 A It has not been announced.

4 Q All right. Now, what is the purpose of

5 buying back a company's stock, generally speaking?

6 A The purpose of buying back a company's

7 stock is generally when it's viewed to be greatly

8 undervalued in the market and when you have, you might

9 say, surplus cash that does not have immediate need for

10 investments and so you try to buy back stock to basically

11 increase shareholder value. When doing so, you're

12 increasing earnings per share and you're increasing the

13 shareholder value of the stock.

14 MR. WARD: Madam Chair, I think that's all

15 the questions I have for Mr. Matthews, but I would like

16 to make a motion at this time.

17 COMMISSIONER SMITH: Yes, Mr. Ward.

18 MR. WARD: My motion essentially is this,

19 that the Company's case be dismissed without prejudice to

20 refiling or reopening at an appropriate time when the

21 Centralia sale matter is settled and I will be happy to

22 explain the basis for that motion, if the Chair wishes.

23 COMMISSIONER SMITH: Please.

24 MR. WARD: First of all, as we will find

25 out even more dramatically as this case goes along but is

51

CSB REPORTING MATTHEWS (X)
Wilder, Idaho 83676 Avista

1 nevertheless apparent on the face of the exhibits, the

2 Company has filed a rate case with a 1997 test year, it's

3 true; however, it's reached forward into the '99-2000

4 period for its power supply adjustments and to determine

5 all power supply costs. If in fact Centralia is sold

6 during that period, several things have to happen.

7 One, of course, there will be a deletion

8 from rate base and, number two, there will be an effect

9 on the power supply expenses and it can't simply be

10 determined by making a simple subtraction from power

11 supply expenses or addition for that matter. You have to

12 once again rerun the power supply model and do all of the

13 things that we do to determine power supply costs.

14 Three, if the Commission follows its normal

15 procedure and normal precedent, there will be a

16 distribution back to ratepayers in some fashion of the

17 depreciation paid on the plant that is disposed of and,

18 of course, four, we have the question of whether the

19 Commission will approve the transaction at all under

20 61-328 Idaho Code, it has the authority to either approve

21 or deny the proposed transaction.

22 Now, what all this means is there is a

23 substantial probability that this sale if it is approved

24 will fall within what is effectively the test year for

25 power supply purposes and if it does not fall within it,

52

CSB REPORTING MATTHEWS (X)
Wilder, Idaho 83676 Avista

1 it will fall shortly thereafter. It cannot simply

2 proceed now and say, well, we'll set the rates now and

3 we'll adjust later. The reason why you cannot is the

4 Company has chosen this period as the basis for its rate

5 case, so what you would get is a mismatching of revenues,

6 expenses and accounting items and that mismatching would

7 be to the serious prejudice of the ratepayers,

8 particularly if there is a subsequent return to

9 ratepayers in the form of a credit or otherwise of the

10 depreciation paid on the plant.

11 Now, I make my motion without prejudice

12 because I do not -- it's certainly not fair to the

13 Company to say go back and start over and rerun all these

14 costs -- I mean incur all these costs for a rate case if

15 they still have a rate case after this deal is done, but

16 I think the question of whether they will have a rate

17 case is very significant. There is in fact in the Idaho

18 allocated revenue deficiency only a roughly $9 million

19 deficiency before it's grossed up for taxes.

20 Any combination of reduction in power

21 supply, reduction in rate base or rebates or credits to

22 the customers for depreciation previously paid that

23 totals $9 million removes, simply wipes out the Company's

24 rate case without any other adjustment if they succeed on

25 every single other contention; nevertheless, if there's

53

CSB REPORTING MATTHEWS (X)
Wilder, Idaho 83676 Avista

1 any combination of those factors that totals $9 million,

2 there is no rate case, and on a 200 megawatt plant, I

3 submit that while I do not know the figures and cannot

4 know them without further identification that there's a

5 substantial probability that that $9 million figure will

6 be met or exceeded, so I would move that the Commission

7 dismiss this case without prejudice until such time as

8 the Centralia matter is settled.

9 Thank you.

10 COMMISSIONER SMITH: Thank you, Mr. Ward.

11 Mr. Woodbury, do you have a position on

12 Mr. Ward's motion?

13 MR. WOODBURY: It's a good motion, but I

14 have some -- you know, Mr. Matthews indicated that the

15 purchase price was unannounced, but I believe that the

16 purchase price has been disclosed as reported in

17 Clearing Up and Mr. Matthews can indicate whether that

18 representation is correct, but it says they're selling a

19 1340 megawatt facility to the operator of a Canada-based

20 energy company, Trans Alta Corporation, for U.S.

21 $554,000,000. $100 million of the sale price is for the

22 Centralia coal mine which is wholly owned by --

23 COMMISSIONER SMITH: Mr. Woodbury, I'm

24 really interested more if you have a position on

25 Mr. Ward's motion and wish to speak in favor of it or

54

CSB REPORTING MATTHEWS (X)
Wilder, Idaho 83676 Avista

1 against it.

2 MR. WOODBURY: I appreciate that. I'm not

3 prepared at this time to offer anything further. Staff

4 does not oppose the motion.

5 COMMISSIONER SMITH: Mr. Meyer, I assume

6 you have a position.

7 MR. MEYER: I sure do. I'll start by

8 saying we oppose the motion. I think Mr. Ward hoped to

9 establish more through his foundation work with this

10 witness when he began his cross-examination, he didn't

11 get there and he didn't lay the appropriate foundation

12 for such a motion. I believe Mr. Ward hoped to establish

13 that the sale was certain, that it would happen in the

14 very near term, that there were definite, decided plans

15 for use of the proceeds, that there were plans for

16 replacing the some 200 megawatts of power that would be

17 lost given the sale.

18 He walked through those areas with his

19 cross, he didn't get the answers he needed to support

20 such a motion, all of which is by way of saying there are

21 substantial uncertainties as alluded to by Mr. Matthews

22 that don't allow for the pro forming in of known and

23 measurable changes associated with the Centralia sale.

24 The uncertainties: Number one,

25 uncertainties as to timing. Mr. Matthews alluded to a

55

CSB REPORTING MATTHEWS (X)
Wilder, Idaho 83676 Avista

1 sale that if it occurs might be 12 to 18 months out.

2 That presupposes regulatory approvals in multiple

3 jurisdictions by multiple parties. It assumes that any

4 conditions that may be layered on to the sale from the

5 transfer of property by the various commissions would be

6 acceptable to the seller and to the buyers, and it's not

7 just this jurisdiction, it is Washington, it is Oregon,

8 it's Utah, so substantial uncertainties even as to the

9 conditioning process, the regulatory approvals and the

10 timing of those approvals.

11 Secondly, what about the 200 megawatts that

12 we receive at present? A reasonable substitute, a

13 cost-effective substitute, has to be found for that. If

14 one were going to pro form out of rate base an expense,

15 the Centralia costs, the Centralia investment, one would

16 just on a fairness have to pro form in some reasonable

17 substitute for that.

18 Mr. Matthews has alluded to none. We don't

19 have a definite plan yet and Mr. Ward was unable to

20 establish a requisite degree of definiteness and

21 certainty that would support his motion, so for all of

22 those reasons, this is not the sort of pro forma

23 adjustment that could be made at the eleventh hour.

24 Essentially, what Mr. Ward proposes is a

25 freeze. He says it's without prejudice, but as a

56

CSB REPORTING MATTHEWS (X)
Wilder, Idaho 83676 Avista

1 practical matter, until these uncertainties are resolved,

2 the Company would be frozen out of the rate case arena

3 for a year or two until all of those uncertainties would

4 be addressed and that would be a patently unfair result

5 and so we oppose the motion.

6 COMMISSIONER SMITH: Mr. Shurtliff, did you

7 care to weigh in on this motion?

8 MR. SHURTLIFF: Madam Commissioner, we

9 would join the motion for the reasons articulated by

10 Mr. Ward and I would note that Mr. Meyer -- you know, it

11 seems to me the only thing uncertain about the prospect

12 of the sale of the Centralia property is the

13 uncertainties of timing and it's certain to happen, but

14 the conditions surrounding it are a bit uncertain, so in

15 that regard, I think it speaks well to the predicate for

16 the motion; that is, we don't know and this Commission is

17 being asked to make a decision knowing for certain

18 changes of this magnitude are going to occur, but

19 uncertain as to some of the nuances of that and so I

20 would suggest that Mr. Ward's motion as to timing is

21 appropriate.

22 COMMISSIONER SMITH: We're going to be at

23 ease for a few moments.

24 MR. WARD: Madam Chair?

25 COMMISSIONER SMITH: Mr. Ward.

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CSB REPORTING MATTHEWS (X)
Wilder, Idaho 83676 Avista

1 MR. WARD: Can I respond?

2 COMMISSIONER SMITH: You certainly may.

3 MR. WARD: Just one point that Mr. Meyer

4 made regarding the question of replacement of supply. It

5 seems to me it's very clear that the Company only does --

6 only takes this action if it believes it can find a

7 cheaper source of supply; otherwise, you don't sell and

8 in fact, if you look through the discovery, what you'll

9 see is on a naked gross basis that the variable cost of

10 Centralia is very slightly above the current market price

11 that we're using in power supply and you can't rely on

12 that because you have to actually run the model to see

13 how it really relates. You can't rely on averages, but

14 the point is the suggestion that, well, even if we sell

15 it, we'll have to go out and get, as they suggested, a

16 more expensive alternative is simply not well-founded and

17 that's all I wanted to add.

18 COMMISSIONER SMITH: Thank you, Mr. Ward.

19 We'll be at ease for a few minutes.

20 (Pause in proceedings.)

21 COMMISSIONER SMITH: All right, we'll go

22 back on the record. The Commission has discussed and

23 considered Mr. Ward's motion and feels the need to

24 discuss and consider it some more, so, Mr. Ward, we're

25 going to hold your motion, go forward with our hearing

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1 and we'll rule on it at a later date. I think we think

2 that perhaps there may be information that comes out

3 during the course of the hearing that may help us

4 consider it more fully. With that, we will hold our

5 ruling until the conclusion of the case.

6 Mr. Meyer.

7 MR. MEYER: May I just weigh in?

8 Mr. Norwood, a later witness, will also be in a position

9 to address the issues surrounding the Centralia sale,

10 issues surrounding certainty and he did sponsor the other

11 power supply pro forma adjustments that were in fact

12 known and measurable and agreed to with Staff. The

13 Company's concern about letting this decision on the

14 motion linger beyond the close of these proceedings is

15 the reaction that the investment community will have to

16 that sort of uncertainty overhanging for the next two to

17 three months, because the investment community has read

18 and assimilated the Staff case, they've developed

19 expectations and to really put a cloud over the outcome

20 of the proceedings in terms of whether or not we would be

21 forced to withdraw and refile at some later date I think

22 would have a strong negative effect, all of which is by

23 way of encouraging the Commission, if it will, to resolve

24 that motion by the close of these evidentiary

25 proceedings, if possible.

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1 And, lastly, it was contemplated by the

2 Company that, in any event, we would in all likelihood be

3 back to you with an application regarding the transfer of

4 these properties and that would also provide another

5 forum on a more focused basis to address these issues

6 separate and apart from this proceeding, and in that

7 separate and single issue proceeding issues concerning

8 use of proceeds, alternative plans could be revisited,

9 but, again, that would be a separate proceeding separate

10 and apart from this.

11 Thank you.

12 COMMISSIONER SMITH: Thank you, Mr. Meyer,

13 and I think we will note your concerns, but I don't make

14 any promises and Mr. Ward is free to renew his motion --

15 MR. WARD: Madam Chair, may I just briefly

16 respond?

17 COMMISSIONER SMITH: Certainly.

18 MR. WARD: One, as to the idea of having

19 Mr. Norwood testify, if it's at any length, about the

20 Centralia plant, then, obviously, I'm going to have some

21 objections with regard to lack of notice, but that's to

22 be left for a later time. I would say that I do realize

23 that the motion places the Commission in an awkward

24 position and to the best of my memory, it's the first

25 time I've ever moved for a dismissal, but the concerns of

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1 the Company don't negate the reasons why the motion was

2 made and I'll leave it at that.

3 COMMISSIONER SMITH: Thank you, Mr. Ward

4 and Mr. Meyer, and, Mr. Ward, did you have further cross

5 of Mr. Matthews?

6 MR. WARD: I did not.

7 COMMISSIONER SMITH: Mr. Woodbury.

8 MR. WOODBURY: Thank you, Madam Chair.

9

10 CROSS-EXAMINATION

11

12 BY MR. WOODBURY:

13 Q Hello, Mr. Matthews. This is your first

14 time testifying on behalf of Avista. In your position

15 with Dynegy --

16 A Correct.

17 Q -- did you ever have occasion to testify

18 before regulators?

19 A Only at the FERC.

20 Q And I understand -- I was wondering whether

21 the position of Les Bryan was still vacant, but you've

22 assumed the role of president, also?

23 A Correct.

24 Q Okay, and the organizational chart for

25 management that we should be concerned with consists of

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1 yourself and then Edward Turner and Gary Ely?

2 A And John Larson who is our CFO and David

3 Meyer who is our general counsel and then we have

4 additional officers, an officer for human resources,

5 treasurer.

6 Q Okay. If I could, just before we leave the

7 issue of Centralia, Mr. Meyer has indicated that Kelly

8 Norwood would be testifying later and he would be the

9 better person to ask questions of with respect to

10 depreciated book value of the plant, wouldn't he?

11 A On the detail of numbers, yeah, Kelly would

12 be better.

13 Q The agreement of sale itself, the sale to

14 Trans Alta, is there a sunset provision in that contract?

15 A There is a sunset. Trans Alta has the

16 option to walk away if it's not approved within a finite

17 period of time.

18 Q And when is that period of time?

19 A Their first option, I think, is at 12

20 months and at that point in time if they walk away it

21 returns back to us and we'd keep it in our portfolio.

22 Q The numbers that I related earlier from

23 Clearing Up, I'm assuming that you had not seen that?

24 A No, the question that Mr. Ward asked me was

25 related to our piece. Yeah, I was aware that Trans Alta

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1 had made the announcement as to gross price of the total

2 asset.

3 Q Okay, and I understand from the Company's

4 testimony elsewhere that under normal streamflow

5 conditions the Company considers that it is at near

6 load/resource balance now; is that true?

7 A Yeah, that's true in general, but from our

8 own assets, you know, we have only about a 60 percent

9 coverage. 40 percent of our coverage is on a purchased

10 power basis and then even that gets fairly seasonal. You

11 know, we have great coverage in the first quarter and

12 fourth quarter, but we have a lot of, you might say,

13 purchased power activity that we have to do in the second

14 and third quarter to cover our power loads.

15 Q As chairman and CEO, does responsibility

16 for how this regulated utility is operated ultimately

17 rest with you?

18 A Yes.

19 Q And would you agree that the Company has an

20 obligation to comply with Commission orders or to seek

21 administrative or judicial relief?

22 A Yes.

23 Q You essentially provide some of the

24 background of Avista and the many enterprises that

25 comprise it and you speak of Avista Labs and some of the

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1 fuel cell technology and investment there and looking at

2 a report that was in a paper on April 28th, it's stated

3 that Avista Labs has chosen a manufacturer partner for

4 the fuel cell it hopes to field test this spring and

5 delivery of the first unit is scheduled for May 31st.

6 Did that delivery happen?

7 A No, they're a week late.

8 Q And then beginning in June, it says, Avista

9 Labs will install PEM fuel cell generators about the size

10 of a microwave oven at demonstration sites throughout the

11 United States. Are there any identified demonstration

12 sites in Idaho?

13 A In Idaho, not that I'm aware of. There are

14 in Montana with the University. There may be one in

15 Research Park in Idaho that we're still in negotiation

16 on, but most of the demonstration sites are across the

17 country from Alaska to Hawaii to Maine, in airports,

18 Air Force bases, FAA towers, national parks,

19 universities, a few office buildings and a few residences

20 and a couple of government buildings, like the Oregon

21 National Lab and things like that.

22 Q Another one of your enterprises is Avista

23 Power, Inc. and they're involved in a project just down

24 the road here in Rathdrum?

25 A Correct.

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1 Q And that's a proposed 270 megawatt

2 gas-fired turbine and is that sited adjacent or near the

3 current --

4 A It's sited near the current. It would be,

5 I guess, about two miles west-southwest of the current

6 site.

7 Q And it's never envisioned that this will

8 become a utility resource?

9 A Not right now, but it's a possibility. One

10 of the issues is that if in a year or two if Centralia

11 does sell amd we need more regulated generation, we will

12 replace it with regulated generation in all probability,

13 so that that Rathdrum unit or another Rathdrum unit might

14 be a possible addition to our regulated fleet.

15 Q Looking at a Clearing Up article that came

16 out November 30th of '98, shortly after you assumed

17 control of Avista --

18 A I like to say leadership, not control, but

19 there might be others in the audience that would differ

20 with me.

21 Q -- you felt that there was just --

22 essentially, you saw an urgent need for lots of changes

23 and are we speaking of changes within the regulated

24 utility?

25 A Of both regulated and nonregulated.

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1 Q And you state that there was a -- a culture

2 change was needed, both at Water Power where you say, "We

3 got pretty comfortable, pretty laid back filing rate

4 cases the past dozen years." By that, are you saying

5 that the Company perhaps would have been more prudent in

6 coming in earlier with a rate case?

7 A Not necessarily. You know, previously is

8 not the issue. One is that I like to always have a

9 regulated business that if I have an allowed rate of

10 return, I like to be able to earn it; otherwise, I'm not

11 returning the benefits to the shareholders and if you

12 look at our returns, probably there was really no

13 justification coming in until after '97 and then we were

14 coming in, you might say, as appropriate, as quickly as

15 we could in all jurisdictions, and primarily the reason I

16 say that, too, is in the other areas where I have run

17 regulated utilities in the East and Southeast and South,

18 a lot of places people used to file annual rate cases and

19 file a general rate case every year just to keep up with

20 changes in cost, particularly when you're in a high

21 growth area and some of it is the fact we've got to be

22 more proactive in trying to at least earn the returns

23 that the Commission allows us to earn.

24 Q You've also indicated here that a greater

25 sense of urgency is needed and that rate cases need to be

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1 completed in three months, not a year.

2 A That's my dream.

3 Q That's your dream, okay.

4 A And that came from a lot of my early

5 experience when I ran interstate pipeline businesses for

6 Tenneco. You know, a lot of the issues at the Federal

7 Energy Regulatory Commission, they have 90-day decision

8 points they have to make or things go into effect, so in

9 essence they were able to make things happen quicker or

10 the company got the benefit of the doubt, you might say.

11 Q In speaking of capital allocations, you

12 indicate that Water Power needs to put its money where it

13 makes the most money and that you can make twice the --

14 you said that if you can make twice the return on the

15 non-utility side, why would you spend money on the

16 utility side, you know, those are the kinds of questions

17 that need to be thrown back at regulatory agencies.

18 A The issue there --

19 Q You do understand the difference between

20 regulated and nonregulated?

21 A Yes, and it's a risk profile as to -- you

22 know, my goal on our regulated side, our regulated side

23 is the core part of the Company, it's the core part of

24 the business, that we've got to continue to nurture and

25 grow and that's why here you can see at Sandpoint since

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1 we've acquired the properties from PacifiCorp that we

2 have continued to grow, service levels have gone up and

3 customer service has gone up and reliability has gone

4 up.

5 We have poured money into the system and my

6 target every year on the utility side is I want to at

7 least reinvest depreciation and then more if we're in a

8 growing area and so that -- but then as I look at, as an

9 example right now, we're looking at projects should I

10 extend gas service to Sagle and Bayview just south of

11 here. It has a very marginal rate of return because of

12 our current line extension policies and the few customers

13 out there, but it needs to be done, but from a capital

14 allocation policy, do I look at extending that gas

15 service line to Sagle and Bayview or do I build a new

16 unit at Rathdrum and I'd compare that from a

17 discretionary capital availability standpoint, but it

18 doesn't get back to whether or not we reinvest

19 substantial sums in the core part of our business which

20 has got to be nurtured and grown.

21 Q You're not talking about diverting money

22 from the core part of the business that those monies are

23 needed to maintain adequate service in accordance with

24 your statutory duties?

25 A No. Just like when we talk about the stock

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1 buyback, that's not money from the Centralia sale. You

2 know, we sold at our Pentzer investment company, we're

3 going to be selling two companies this year for over

4 $240 million in cash, that's from the nonregulated side

5 and that's the money that we're using to invest back in

6 the stock buyback and that's the money we're using to

7 invest in the Rathdrum turbine and that's the money we're

8 using to invest in Avista Energy, not diverted from the

9 regulated side. If anybody had those set of ideas in

10 their mind, you know, they're dreaming.

11 Q They also quoted you on some comments

12 regarding competitive markets and you stated that you

13 can't have subsidies running around on solar, wind and

14 renewables and other things such as that and that add-ons

15 inhibit the market and create artificial price barriers

16 and you seem to express opposition to public purpose

17 credits and I was wondering what your thoughts are

18 regarding the Company's DSM surcharge.

19 A Well, the comments I made there were about

20 competitive purposes from the standpoint you look at the

21 Northwest here, those sort of public purposes dollars

22 aren't put on all users. Co-ops and PUDs get to escape

23 from them, you might say, so when we have competition for

24 new customers, we're in a different sort of rate

25 situation when we look at the public purposes add-ons we

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1 have.

2 Now, as to DSM dollars, they've been a good

3 investment for us and for the community and for our

4 service territory in all five states. If you look at the

5 places the money that has been made, as an example, one

6 of the ways that Silver Valley Resources and Sunshine

7 Mining have stayed on is they have had substantial -- I

8 think the last numbers I looked at, over 4 million

9 megawatts were under DSM programs. Some of the other

10 special things we've done to keep other industrial and

11 commercial customers on have been because of DSM monies

12 and so the DSM monies are wisely spent for energy

13 conservation, but also for keeping jobs.

14 Q You speak of the Company's commitment to

15 respond to customer needs, are you aware of a recent BPA

16 study which indicated that essentially the public wants

17 electric utilities to invest in DSM and alternative

18 energies?

19 A I'm not aware of the BPA study. I would

20 question it on the surface as to whether the public in

21 general wants us to invest in those things, but they

22 fringe -- the minority of the public does, but I'd

23 question that as a broad --

24 Q Have you reviewed that study?

25 A I'm not aware of that study.

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1 Q You speak in your testimony of the changes

2 that are occurring within the industry, regulatory and

3 structural changes, and the Company's need to react

4 proactively, I guess. Do you find the increasing number

5 of utility mergers to be a positive or perhaps troubling

6 development?

7 A It's really both and you can say that it's

8 a positive development for some of them when you look at

9 shareholder benefits. It's a question of whether or not

10 it's a benefit to the customers in all areas. In some of

11 the mergers that have been announced over the last

12 year-and-a-half, it will be a benefit to customers

13 because it will give the benefit of an undercapitalized

14 utility some, you might say, deeper pockets.

15 One of the worries I have is in some of the

16 mergers as to whether or not the synergies or cost

17 savings required to make the deals economically

18 attractive are going to result in service deterioration

19 and people have got to watch that and that's why we

20 talked about that when I came up here last fall, one of

21 the things I wanted, the Northwest begged for aggregation

22 of small utilities because there's too many small people

23 around that may not survive unless we can get together,

24 but as we begin negotiating, the price expectations were

25 so high because of other deals done in the rest of the

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1 country and the cost cuts we'd have to make to make them

2 attractive were so much we backed off. We said at these

3 prices these don't make any sense.

4 Q These were your comments to the

5 stockholders at the most recent meeting saying there was

6 really nothing in the Northwest that you felt would

7 provide the return that you wanted in the first year?

8 A Nothing would be attractive at the current

9 stock price expectations because it has to be accrued in

10 the earnings. You've got to be able to keep service

11 commitments up and you don't want to have to make cost

12 cuts throughout your business just to make deals

13 attractive.

14 Q You've realized in Idaho a 46 percent

15 increase in customers within 12 years since your last

16 rate case and a significantly lower percentage within the

17 other part of your service territory, and you state that

18 you believe it will continue to grow at a rate of about

19 2.1 percent.

20 A Correct.

21 Q Or at least for the next five years?

22 A This is right.

23 Q Is this an internal Company study?

24 A It's a combination. We look at a lot of

25 the economic forecasts from the Economic Development

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1 Group there in Spokane as well as with Jobs Plus in

2 Coeur d'Alene and Valley Vision in the Lewiston area as

3 well as the regional economic forecast that the economics

4 department of the Spokesman Review does as well as the

5 State of Washington.

6 Q When you speak of economic growth, do you

7 translate that into increased population and new

8 businesses?

9 A Primarily, the population growth is what we

10 look at.

11 Q And do you think that growth within your

12 service territory in Idaho can continue to grow at that

13 rate without some degradation in, say, quality of life?

14 A Define "quality of life," I guess.

15 Q Air.

16 A Oh, air? Yes, I do. In this area, I think

17 so. The big issue probably in this area and particularly

18 down towards Rathdrum and on towards Spokane is the

19 aquifer issues as to what industries come in, where to do

20 that and, of course, we look at population growth. We

21 have to factor in the fact that even though our customers

22 have grown, they use less in energy with the energy

23 efficiencies for the new building and any changes and so

24 oftentimes population growth doesn't correlate with load

25 growth.

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1 Q No, and along those lines, I think you

2 offer an exhibit which shows that the annual

3 kilowatt-hour per customer in Idaho has decreased.

4 A Decreased in the residential class, that's

5 right.

6 Q And do you attribute that to any one

7 primary factor, your electric to natural gas conversion?

8 A Some of it's to the conversion but a small

9 piece of it. Most of it is just to the efficiency of

10 building, the efficiency of appliances, the efficiency of

11 construction. You know, generally you talk about, at

12 least from a gas standpoint, that it takes five old homes

13 to equal one new home from an efficiency standpoint and

14 that's the magnitude of the improvements in efficiencies

15 over the last 10 years.

16 Q And to the extent that you have electric to

17 natural gas conversions here, it's not really a loss,

18 you're capturing it on the other side?

19 A It depends on what the cost of providing

20 gas service is. From a pure BTU use in that residence,

21 it uses less BTUs, you might say, so if you think all

22 forms of energy are priced competitively, there is a

23 loss, you might say, but it's a benefit to the customer.

24 Q But less is better, isn't it, in that

25 instance?

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1 A Less is better in that instance, you're

2 right and that's one of the things that does improve

3 quality of life, you might say.

4 Q In looking at that exhibit, what stands out

5 is that although you had decreases in your kilowatt-hours

6 per customer in most of your classes or at least in your

7 residential and industrial, in the commercial class, you

8 had an increase of 8.03 and why did that occur? Why

9 aren't the efficiencies occurring within the commercial

10 industry or the commercial sector?

11 A The commercial efficiencies are increasing,

12 but what that shows is that the economic growth in this

13 area as well as back towards Spokane has been in the

14 small commercial area. People have actually grown their

15 businesses and they're using more energy. The whole

16 focus of Spokane's Economic Development, you know,

17 Coeur d'Alene's Jobs Plus has been attracting commercial

18 businesses and growing commercial businesses that are

19 here already and so that's been the economic -- I guess

20 that ties back into what you're talking about, the

21 quality of life. What everybody is trying to attract

22 here are commercial businesses that are benign from an

23 environmental standpoint, but they do use more energy

24 because of more manufacturing, more manufacturing lines

25 and they are making more stuff and building more stuff.

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1 Q I was looking at the Company's Web site and

2 you state that although the name has changed, the

3 customers can be assured that Avista has continued

4 commitment to the communities that you serve and I was

5 wondering whether you've had the occasion personally, I

6 guess, to review the customer comments that have been

7 filed in this case.

8 A Yes, I have.

9 Q And some of them have expressed concern

10 with respect to closing of local field offices, the

11 Company refusing to accept cash, cash payments, the fact

12 that your drop-off sites, you know, have been -- they

13 make a last minute posting to there and essentially your

14 disconnect crew is already out and so they wonder whether

15 in fact, I guess, you still have the same commitment to

16 the customer at the local level and I'm wondering if you

17 can respond to that.

18 A Well, I haven't heard the issue about

19 service disconnect crews because we haven't really had an

20 increase in a bunch of our customer service, particularly

21 in Sandpoint. This year has been with the pay stations.

22 We didn't close any field offices. I think the only

23 office that we really closed but really didn't close was

24 our office in Moscow. What we did there, that was taken

25 over by the Chamber of Commerce. Our man in Moscow is

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1 still there at that office.

2 All we stopped was close the pay stations.

3 We said we're going to stop taking cash payments at our

4 offices and we actually increased the number of places

5 and the number of hours that people could make payments.

6 Now, the interesting thing is we thought people would

7 start mailing in more payments to us, but what we found

8 is no. It's amazing that people like to pay their bills

9 in cash, they like to pay them in person and so we added,

10 I think we've got probably over 85, 90 pay stations

11 people can go to right now, but we did stop taking cash

12 at the Company offices.

13 One, it was time to allow people for taking

14 cash, keeping cash boxes, people making change. There

15 was a security issue of keeping that sort of cash around

16 offices and all the things we had to do on money trucks

17 and stuff like that and we didn't think it was

18 appropriate, plus it was only probably four or five

19 percent of the people that were coming into the Company

20 offices and trying to pay in cash, and I just think about

21 what other, you might say, utility or service business

22 that people line up and go pay their bills in cash, your

23 phone company or things like that, not very many or your

24 cable company, and so it was a tough decision,

25 particularly in Spokane and in Coeur d'Alene, because a

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1 lot of the retirees around here and elderly people,

2 that's a social visit for them when they come in and pay

3 their bills in cash, that's an hour visit and it ties up

4 a lot of our staff time and so we felt it was more

5 appropriate to balance out the fact that was only four to

6 five percent of the payers, we didn't want to keep all

7 that cash in the office.

8 You know, we actually had one ski-masked,

9 hooded person come in and storm into our Coeur d'Alene

10 office brandishing what appeared to be a weapon and that

11 began to make us wonder about the cash around the places,

12 too, so we decided it was a right decision to stop taking

13 cash at the offices, but we created more opportunities

14 for more people to pay, longer hours, more days and so it

15 was an enhancement in customer service, not a reduction,

16 but it was a reduction in the opportunity for the

17 customers to personally and socially visit, but we did

18 not really close offices. That was not the issue.

19 Q The great majority of the comments that

20 were filed were with respect -- were residential

21 customers expressing their frustration and concerns with

22 respect to the magnitude of the increase requested and

23 those customers are essentially people who have been

24 downsized or out of work, those that are on fixed social

25 security, people, single mothers already working a couple

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1 minimum wage jobs to make things pay.

2 They get the annual increases in the

3 healthcare industry, which makes your increase look

4 minuscule, but they're wondering why 15 percent in one

5 hunk and the Company has indicated, you know, you've

6 indicated what the cost of living and the COLA indexes

7 are and how much they've gone up in the last 12 years and

8 you're saying that's nearly 50 percent and this is 15

9 percent that we're asking for now and they're saying yes,

10 but all at one time it has its effect on my pocketbook

11 and why not phase in an increase of this magnitude and I

12 was wondering if maybe you have a response to that.

13 A I understand their issues, but I think it's

14 just a fair increase. One percent a year is basically

15 what we're talking about when COLA has gone up 50 percent

16 in the last 12 years.

17 Q Do you expect these people have been saving

18 this one percent per year?

19 A I don't know whether they have or not.

20 Q You've got -- what is the state of the

21 economy in northern Idaho in your mind?

22 A It's pretty flat.

23 Q Pretty flat. You've got agriculture, is

24 that healthy or is that in trouble?

25 A Agriculture right now is in the doldrums, a

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1 lot because of the recent climate and the dry weather and

2 the wheat prices and things like that.

3 Q And the mining industry?

4 A Mining industry is in the doldrums here

5 because of global competition on prices from Third World

6 countries.

7 Q And the timber industry?

8 A The timber industry is in the doldrums

9 right now, at the low end of the cycle. I just had a

10 long meeting week before last week with Pen Segal, the

11 new chairman of Potlatch, and he told me about where the

12 cycles were and how they thought they were at the bottom

13 of the cycle. They've got a great increase in the export

14 business going on, paper products and things like that,

15 so you may see the timber and paper industry going back

16 up because of some recovery in the Far East, but the

17 whole Northeast right now is -- I mean Northwest that's

18 in the inland empire is in the doldrums, but we don't

19 have the growth that the outside corridor does.

20 Q And do you know what the unemployment

21 figures are for northern Idaho?

22 A Not for northern Idaho. I guess

23 specifically I know in the Spokane area, the greater

24 Spokane area, which includes Coeur d'Alene, it's only

25 about four percent.

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1 Q Could there be pockets in northern Idaho

2 that are significantly higher than that?

3 A Oh, I'm sure there are if you look up

4 toward Bonners Ferry and places like that that there are

5 pockets that are significantly higher than that.

6 Q And do you have any idea what part of your

7 customer base is at or below the poverty line?

8 A I do not know.

9 Q Mr. Ward asked a question with respect to

10 the competition that the Company is experiencing, I

11 guess, at your fringes with, I guess, co-ops and whether

12 that competition was primarily in the commercial sector

13 and I think you indicated that you were experiencing

14 competition in both sectors, but I'm wondering how this

15 rate proposal of the Company will enhance your

16 competition in both of those sectors.

17 A I don't think it will change it in

18 reality. Where we have the most competitive pressure is

19 probably in the commercial sector, but we have some in

20 industrial. We're right now at risk of losing our second

21 largest customer on our system right now to a co-op that

22 has been supported by BPA in its power use real close to

23 here.

24 Q That customer would be who?

25 A It would be Inland Empire Paper Company and

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1 we're -- you know, we have the people in Bayview and

2 Sagle, we were talking about gas service, they have

3 competing proposals from people on residential service

4 right now and so that it probably won't change our

5 competitive status because people --

6 Q So it's not rates alone that's making you

7 uncompetitive?

8 A We're not uncompetitive, we're very

9 competitive. In fact, we find people preferentially will

10 come to us because of our reputation in service quality

11 as contrasted to some of the co-ops.

12 Q You state that the ability of co-ops or, I

13 guess, munis and the nonregulated entities to offer

14 customers more financially flexible service extension

15 arrangements is proving troublesome to you.

16 A Yes, it is.

17 Q And have you requested a change or

18 modification to your line extension tariffs?

19 A Not that I'm aware of, but we had a

20 discussion on that the other day. I think Tom Dukich can

21 address that in his testimony.

22 Q When you say "flexible service extension

23 arrangements," what problems are arising?

24 A Well, of course, the co-ops and the munis

25 don't have to get any approval or review from anybody to

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1 do anything at any rates at any time, so that's the

2 flexibility that they have that I don't have.

3 Q If the Company follows its approved

4 tariffs, you're not going to have to come to the

5 Commission for authority?

6 A No, that's correct and we have approval to

7 come in on special contracts periodically, like we did

8 with Potlatch when we did the special contract with

9 Potlatch.

10 Q With respect to Centralia, I guess, have

11 there been any applications before regulatory authorities

12 regarding that sale?

13 A Not that I'm aware of. I don't think any

14 filings have been made yet on anything that I'm aware of.

15 Q Regarding Avista Advantage and Avista

16 Energy and Avista Power and their participation in the

17 national energy trading and marketing, is there any

18 increased risk to the regulated entity by virtue of the

19 activities of those affiliates?

20 A No, there's not. There's no tie and

21 there's no leverage that's done off the regulated assets

22 at all of any of those nonregulated ventures. If

23 anything, they benefit from it. As an example, you know,

24 the Avista Utilities marketing people are able to sell

25 the Avista Advantage product as one of their marketing

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1 products to help business and commercial customers.

2 Q In response to a Staff production request,

3 No. 6, Staff asked, "What is Avista's position on

4 possible elimination of all speculative trading of energy

5 from the regulated company," and I think you've

6 identified Mr. Norwood as being the person to respond to

7 this, but his answer was, "Although the Company does not

8 have a definitive proposal at this time, the Company is

9 considering a proposal to consolidate the management of

10 its electric resources under Avista Energy," and when

11 might the Commission see such a proposal?

12 A Whether or not they'll ever see such a

13 proposal is a question in my mind. We've approached

14 first the gas benchmarking that we've discussed with the

15 commissions in Idaho and Washington and Oregon because

16 that's a simpler fact, but the regulatory issues dealing

17 with power marketing and power trading and all the FERC

18 issues on transmission and things may make that just

19 unworkable, so we may never propose that. We're still

20 trying to decide whether it makes sense or not, so I

21 don't have a time line as to when we'd come to the

22 Commission for that, if we ever would.

23 Q Is there reason to believe that trading in

24 energy is any less risky than trading in other

25 commodities or the stock market or banking?

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1 A If you talk to the pure professorial,

2 theoretical experts they'll say yes, that trading in

3 energy is more volatile. It has higher volatility ratios

4 and higher beta ratios than what people talk about on

5 volatility, so if you say risk is correlated with

6 volatility that the theoreticians would tell you trading

7 in the energy and energy commodities is more risky than

8 pork bellies, soy beans or anything else, including the

9 stock market.

10 MR. WOODBURY: Thank you.

11 Madam Chairman, I have no further questions

12 of Mr. Matthews. Thank you.

13 COMMISSIONER SMITH: Thank you,

14 Mr. Woodbury.

15 Are there questions of Mr. Matthews from

16 the Commission? Commissioner Hansen.

17

18 EXAMINATION

19

20 BY COMMISSIONER HANSEN:

21 Q Mr. Matthews, we've been hearing from the

22 regulated customers quite a bit lately and one of the

23 questions they seem to have is what you talk about and

24 address on page 10, lines 17 through 19, and that is the

25 Company's secondary business and I think on line 19 you

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1 state how important it is to the Company, and I guess the

2 question they ask is how the secondary business helps

3 them or helps the regulated customer. Could you just

4 briefly give me your thoughts on that?

5 A I guess the way it helps them, it helps

6 keep the Company going, you might say, from a total

7 corporation standpoint. Our regulated businesses with

8 their low depreciation rates really don't generate enough

9 cash flow to sustain the Company as a totally

10 stand-alone, viable entity, you might say, because we

11 don't have enough growth and if all I had was a regulated

12 utility in the lines of business that we're in,

13 stand-alone basis, it ought to sell to somebody and go

14 through whatever cost cutting or cost savings, whatever

15 would need to be done if we sold to somebody else, so

16 what the secondary businesses do is really provide the

17 growth engine that keeps the Company as a stand-alone

18 corporation and whether or not the customers view that as

19 a benefit or not I don't know.

20 Q One other question and it kind of relates

21 to this, I think. On page 18, you discuss how the

22 Company has diversified and is ready to take advantage of

23 future opportunities and, again, I think that some of

24 your customers think that this diversification and

25 aggressive approach to future opportunities is what is

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1 bringing about this proposed rate increase. I think they

2 kind of look at, well, if the Company was like the old

3 Company of old and so forth and wasn't looking into all

4 these new ventures and so forth, then we wouldn't be

5 looking at a rate increase and so I guess the question

6 I'd have here is could you maybe just briefly explain how

7 broadening the scope is good for the regulated utility

8 customer? It's probably a little similar to the first

9 question, but maybe just expand there a little bit.

10 A Well, I guess the first thing is maybe we

11 need to be clear to people that the reason we're asking

12 for a rate increase is that we're only earning a

13 7 percent return or we're less than 7 percent return on

14 our business in Idaho and if you look around at some of

15 our other regulated businesses, they're down in the range

16 of 5 percent returns, so we're asking for an increase

17 because we think we're entitled to a higher return and we

18 have not had rates to keep pace with our cost.

19 Now, this diversification really doesn't

20 have any impact at all on it. These are totally separate

21 businesses, separate funded, separate capitalization,

22 separate bank lines, everything, but they are providing

23 the growth engine for the Company in this area and across

24 the country. As an example, you know, the things we're

25 doing in Lewiston where we're starting up with Avista

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1 Communications where we will with the businesses that we

2 provide gas and power to, now we'll also be able to

3 provide them high speed telecommunications services and

4 dial tone services and Internet services in a way that

5 they have not been able to do it, so the way it helps

6 those customers, it helps them compete in the modern

7 world in the areas of other products, whether it's

8 telecom, fiber, Internet, energy, et cetera, and so in

9 essence, it has no impact on the regulated utility side

10 from the standpoint of helping its returns or hurting its

11 returns, but it may have the benefit of helping our

12 customers become more competitive as they try to,

13 particularly with the small industries, home-based

14 industries, be competitive in the modern world, you might

15 say, so it has a way to possibly help our customers with

16 this diversification, but it really has no impact on the

17 utility whatsoever.

18 COMMISSIONER HANSEN: Thank you.

19

20 EXAMINATION

21

22 BY COMMISSIONER SMITH:

23 Q I would just note that it probably wouldn't

24 help to tell your average residential customer that

25 you're only making 7 some percent because they're

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1 certainly not making that on their CD's or their savings

2 accounts.

3 A But in the stock market if they were making

4 7 percent they'd fire every broker they had.

5 Q My question is in response to an answer I

6 heard you give Mr. Woodbury and I thought it went

7 something like if we sell regulated generation and we

8 need regulated generation, then we'll purchase regulated

9 generation, which I thought the vision for the new

10 electric industry was that there would be distribution

11 companies that would competitively procure generation

12 from any supplier and not necessarily own or control or

13 purchase from their own supply, so are you envisioning a

14 different model?

15 A Well, you know, conventional wisdom, you

16 might say, across the country is you ought to split every

17 electric utility up in at least three parts and let the

18 three parts go away. I still think, particularly here in

19 the Northwest, there's a benefit to a

20 vertically-integrated utility, particularly with our

21 hydro generation assets and so that particularly for our

22 distribution customers, I don't necessarily want to adopt

23 the Montana Power philosophy and say my distribution

24 customers are just going to be at the whims of purchased

25 power cost. I'd like to have a little more control of

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1 that and so we're looking at whether or not we ought to

2 build some more regulated generation and have it part of

3 the vertically-integrated utility.

4 Q And do you believe that either the federal

5 regulators or Congress are going to allow that to

6 continue in the long term?

7 A I don't know. They have this model in

8 their mind that one size fits all and we have a lot of

9 problems with that model. Some states have a model, but

10 like even the Texas restructuring legislation that is

11 being passed around says you can still have

12 vertically-integrated utilities that keep their

13 generation, but they can't have more than 20 percent

14 market power on generation, so they're saying regulated

15 generation still makes sense but only to a certain

16 point.

17 Now, there are a lot of people that would

18 love to have the Northwest split up into the sectors and

19 let the hydro generation sell into 10-cent markets in

20 California, but I don't think that's the benefit for the

21 Northwest and so I still think that the federal

22 legislation will allow for special treatment for the

23 Northwest or the Northwest chapter if we get it written

24 correctly and that's what a lot we spend our time on

25 doing, because I think there's a benefit to the Northwest

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1 still of a vertically-integrated utility because of our

2 hydro system.

3 Q Even taking into consideration relicensing

4 costs?

5 A Even taking into consideration relicensing

6 costs. Now, the concern we've got, we have some

7 relicensing costs in this rate case and that's for our

8 large dams at Noxon and Cabinet Gorge, the concern I've

9 got is as we go into the future in 2003, -4 and -5 and

10 it's time to start looking at relicensing costs for our

11 smaller dams that if people try to look at the same sort

12 of deals the costs will become prohibitive and that's a

13 problem, because you can only have hydro dams continue to

14 look attractive if they're the large dams. The small

15 dams are going to be a problem.

16 COMMISSIONER SMITH: Mr. Meyer, do you have

17 any redirect?

18 MR. MEYER: I do not. Thank you.

19 COMMISSIONER SMITH: Thank you for your

20 help, Mr. Matthews.

21 THE WITNESS: Thank you.

22 (The witness left the stand.)

23 MR. MEYER: Are we ready to proceed?

24 COMMISSIONER SMITH: Yes.

25 MR. MEYER: The next witness, Tom Dukich,

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1 please.

2

3 THOMAS D. DUKICH,

4 produced as a witness at the instance of Avista

5 Corporation, having been first duly sworn, was examined

6 and testified as follows:

7

8 DIRECT EXAMINATION

9

10 BY MR. MEYER:

11 Q For the record, please state your name and

12 your employer.

13 A My name is Tom Dukich. I'm employed by

14 Avista Corp.

15 Q And have you prepared both direct and

16 rebuttal testimony?

17 A I have.

18 Q Do you have any corrections to make to

19 either?

20 A I do. They have to do mostly with the

21 revenue requirement. On page 2 of my direct --

22 Q Which line?

23 A Lines 10 and 11. On line 10, the words

24 beginning "the Company is requesting," change "is

25 requesting" to the word "requested," so it will read "the

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1 Company requested an increase in revenue requirement of,"

2 and change the -- that's not going to read right, is it?

3 Anyway, I want to change the revenue requirement to

4 13,456.

5 Q So you have a sentence to insert, don't

6 you --

7 A Yes.

8 Q -- line 11?

9 A Line 11 should say --

10 Q New sentence?

11 A -- new sentence, "On rebuttal, the Company

12 revised the revenue requirement downward to 13,456,000

13 for an overall percentage of 10.94."

14 Q Thank you. Do you have any other

15 corrections?

16 A No.

17 Q Thank you. Now --

18 A He said with relief.

19 Q -- if I were to ask you the questions that

20 appear in your direct and your rebuttal, with those

21 changes having been made, would your answers be the same?

22 A Yes.

23 Q Are you sponsoring Exhibit No. 4?

24 A Yes.

25 Q Is the information contained therein true

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1 and correct?

2 A Yes.

3 MR. MEYER: With that, I ask that

4 Mr. Dukich's direct and rebuttal be spread as if read and

5 move for the admission of Exhibit No. 4.

6 COMMISSIONER SMITH: If there's no

7 objection, Mr. Dukich's testimony will be spread upon the

8 record as if read in full and Exhibit 4 will be admitted

9 into the record.

10 MR. MEYER: Thank you.

11 (Avista Corporation Exhibit No. 4 was

12 admitted into evidence.)

13 (The following prefiled direct and

14 rebuttal testimony of Mr. Thomas Dukich is spread upon

15 the record.)

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1 I. INTRODUCTION

2 Q. Please state your name, business address

3 and present position with the Company?

4 A. My name is Thomas D. Dukich. My business

5 address is East 1411 Mission Avenue, Spokane, Washington.

6 I am the Manager of Rates and Tariff Administration. I

7 joined the Company in 1978 after having been previously

8 employed as an Associate Professor at Gonzaga University.

9 Q. Would you briefly describe your duties?

10 A. My responsibilities as Rates Manager

11 include the formulation and management of the Company's

12 plans and activities related to regulation for gas and

13 electric services in the states of Washington, Idaho,

14 Oregon, and California.

15 Q. Would you describe your educational

16 background?

17 A. I graduated from the University of

18 Minnesota in 1967 with a B.A. in Psychology and Business,

19 and from the University of Montana in 1972 with M.A. and

20 Ph.D. degrees in Experimental Psychology and Statistics

21 and Research Design. During my 19 years of employment at

22 Water Power, I have attended courses and seminars on

23 strategic planning, forecasting, finance, accounting,

24 rate design and pricing.

25 Q. What is the scope of your testimony and how

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1 is it organized?

2 A. I will present an overview of the Company's

3 electric operations and expand upon the reasons for the

4 Company's proposed rate increase. Also, I discuss why

5 the Company should receive an upward adjustment to its

6 return on equity to recognize and reward the Company for

7 its various initiatives which have inured to the benefit

8 of its customers. The Company has distinguished itself

9 from many of its utility peers in a variety

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1 of contexts, including customer relations, demand-side

2 management activities, and operating efficiencies, while

3 maintaining electric rates which are among the lowest in

4 the nation.

5 Q. Are you sponsoring any exhibits in this

6 proceeding?

7 A. Yes, I am sponsoring Exhibit No. 4, as

8 marked for identification. I will introduce and describe

9 the portions of this exhibit, as appropriate, later in my

10 testimony.

11 II. NEED FOR RATE RELIEF

12 Q. In general, what is the extent of rate

13 relief requested by the Company in its filing?

14 A. Based on pro formed test period results for

15 the twelve months ending December 31, 1997, the Company

16 requested an increase in revenue requirement of

17 $14,223,000 in its Idaho electric jurisdiction. On

18 rebuttal, the Company revised the revenue requirement

19 downward to 13,456,000 for an overall percentage of

20 10.94. This assumes a 9.446% rate of return with a

21 12.00% return on equity. Overall, the proposed increase

22 in revenue requirement will result in an 11.56% increase

23 in revenues. I will discuss later in my testimony the

24 manner in which the Company proposes to spread this rate

25 increase among schedules.

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1 Q. What, in general, are the elements which

2 comprise the requested rate relief?

3 A. To begin with, it should be recognized that

4 the Company has not changed its base electric rates in

5 the last twelve years; the last general rate case (Case

6 No. U-1008-256), became effective in September of 1986.

7 In the interim, the only rate adjustments pertain to the

8 Demand Side Management Tariff Rider (Tariff Rider),

9 implemented in March of 1995 (resulting in an increase of

10 1.5% to fund energy efficiency improvements), and a Power

11 Cost Adjustment(PCA) mechanism, implemented in October of

12 1989. Neither of these later two adjustment mechanisms

13 have had an impact on the normalized level of company

14 earnings

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1 for its Idaho jurisdiction, as explained more fully in

2 the testimony of Company Witness Falkner.

3 Because the Company has not requested general rate

4 relief for over twelve years, the pressure for rate

5 relief has increased, prompted by identifiable customer

6 growth, growth in rate base (notably distribution plant),

7 increasing power supply costs and the need to revise

8 depreciation rates. Other elements relate to costs

9 associated with relicensing of two of the Company's

10 primary hydro generating facilities and the recovery of

11 storm damage and litigation costs.

12 Q. Would you please elaborate on items such as

13 customer growth and growth in rate base?

14 A. Over the past twelve years, the number of

15 Idaho electric customers has increased from approximately

16 68,000 to over 99,000 -- representing a 46% increase.

17 General business revenues per customer, however, have not

18 kept pace, and have declined by almost 6% on a normalized

19 basis. This decline in revenue per customer is largely

20 due to declining energy usage per customer. With

21 customer growth we have witnessed an increase in

22 distribution plant per customer; distribution plant has

23 risen from $1,283 to $2,052 on a per customer basis from

24 1985 to the date of this filing -- representing a 60%

25 increase. Moreover, given the recent growth in number of

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1 customers, this has resulted in a higher percentage of

2 total distribution plant being comprised of newer, higher

3 cost plant. Mr. Falkner, a later witness, will provide

4 additional information on the relationship between the

5 increase in customers and distribution plant.

6 Notwithstanding these cost increases, as I will discuss

7 later in my testimony, in comparison to other utilities,

8 the Company is near the top of the industry with regard

9 to efficient utility operations.

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1 Q. Please explain what is shown in Exhibit 4.

2 A. Page 1 of this Exhibit shows the increase

3 in number of customers over time; page 2 shows growth in

4 rate base for the same period. Both of these elements

5 serve to drive the need for rate relief.

6 Q. You also identified power supply costs as

7 another primary element of this filing. Would you please

8 elaborate?

9 A. Yes, Mr. Norwood is sponsoring testimony

10 which explains the pro forma adjustments to the 1997 test

11 period power supply revenues and expenses. His

12 adjustments to power supply revenues and expenses shows a

13 net increase in 1997 of $46,764,000 on a system basis

14 ($15,516,000 for the Idaho jurisdiction). This aggregate

15 adjustment consists of a number of items: Adjusting for

16 normal hydro electric generation; reflecting the

17 termination or revision of various purchased power and

18 sales contracts; and adjusting for pro forma retail

19 loads. These elements are discussed in detail in the

20 supporting testimony of Mr. Norwood.

21 Q. What effect have these and other issues

22 had, overall, on the Company's rate of return?

23 A. The Company's test period pro forma rate of

24 return is only 6.940% under present rates, as compared

25 with the presently authorized rate of return of 10.95%.

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1 Accordingly, the Company does not, on a pro forma basis

2 for the test period, realize even the requested 9.446%

3 rate of return, resulting in a revenue requirement of

4 $14,223,000.

5 Q. Earlier, you outlined the elements of this

6 filing, including a proposed increase in revenue

7 requirement of $14,223,000, or an 11.56% overall

8 increase. Even though the

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1 proposed revenue percentage increase is 11.56%, won't

2 certain customer service schedules receive a greater

3 percentage increase?

4 A. Yes. Given the rate spread objective of

5 moving returns of all schedules, through time, closer to

6 "unity," the Company has proposed a 15.4% increase for

7 Residential Service Schedule 1. It is important to

8 realize, however, that even with a 15.4% increase for

9 Schedule 1, this schedule will still be only 71% of

10 "unity". At present, this schedule under existing rates

11 is only providing a 3.94% rate of return, as shown in

12 Company witness Knox's cost of service study.

13 Mr. Hirschkorn, a later witness, will address these rate

14 spread issues in more detail.

15 Q. You generally describe the impact on

16 Schedule 1. What is the impact on other tariff

17 schedules, given the proposed increase in revenue

18 requirement?

19 A. The following table, derived from

20 Mr. Hirschkorn's exhibits, summarizes the proposed rate

21 spread among customer schedules, and the resulting rate

22 of return by schedule:

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1

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7 (Schedule contained in hard copy of transcript.)

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1 As you can see, Residential Service Schedule 1 and Extra

2 Large General Service Schedule 25, at existing rates, are

3 providing returns well below the proposed 9.446% overall

4 rate of return, and a relatively higher overall

5 percentage increase has been applied to these schedules,

6 as testified to by Witness Hirschkorn. General Service

7 Schedule 11, Large General Service Schedule 21 and

8 Pumping Service Schedule 31, however, are examples of

9 schedules providing relative rates of return under

10 existing tariffs above the proposed overall rate of

11 return, and, accordingly, have been given a

12 proportionately smaller increase. Again, Mr. Hirschkorn

13 will address the specifics of this analysis.

14 Q. In terms of rate spread, what factors did

15 the Company consider when proposing to move the various

16 schedules closer to unity?

17 A. The starting point in the analysis is a

18 cost of service study. Company Witness Ms. Knox has

19 prepared such a study, which was used by the Company as a

20 guide in spreading the rate increase among the schedules,

21 with the objective being to move all such schedules

22 closer to unity so that customers contribute fairly to

23 the cost of service. In short, the Company has proposed

24 to move all of the schedules approximately one-third of

25 the way toward "unity" after application of the proposed

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1 revenue increase by schedule. Movement all at once to

2 unity would result in increases approximating 30% to

3 Schedules 1 and 25. In order to moderate the impact of

4 achieving unity in one step, the Company has exercised

5 its judgment in proposing to achieve unity over time.

6 Because of the disparity in rates of returns among the

7 various schedules, and given the overall level of the

8 proposed revenue increase in this filing, the Company has

9 concluded that this movement toward unity is reasonable

10 for purposes of this proceeding.

11 Q. Has the Company also proposed other rate

12 design changes?

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1 A. Yes. Again, Mr. Hirschkorn will describe

2 each of these changes in detail. I should note, however,

3 that the Company is proposing a new basic charge of $5.50

4 per month for Residential Schedule 1, and is otherwise

5 proposing the elimination of the present minimum charge

6 of $8.50 per month. The present minimum charge is only

7 billed to those customers who use approximately 200 kwhs

8 or less during a month (representing only about 8% of the

9 total bills issued). Accordingly, nearly all of the

10 fixed costs in providing service are recovered through

11 the energy charge. The institution of the monthly basic

12 charge of $5.50 per month, on the other hand, would allow

13 the Company to recover at least part of the average

14 embedded costs for serving customers, e.g., including the

15 service line, meter, meter reading, and billing. Please

16 note, however, that the proposed charge of $5.50 is much

17 less than the total customer allocated cost developed in

18 the cost of service study of $14.96 per customer, as

19 shown in Mr. Hirshkorn's exhibit.

20 Finally, with regard to the Residential Schedule,

21 the Company is proposing to reduce the number of energy

22 blocks from three to two, for the reasons explained in

23 Mr. Hirschkorn's testimony.

24 Q. Expressed on a percentage basis, are you

25 concerned that an overall increase in proposed revenue

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1 requirement of 11.56% will constitute "rate shock?"

2 A. Although the Company's proposal represents

3 a substantial increase ($8.88 per month for average

4 residential consumption), when placed in the context of

5 the above information, I don't believe that the increase

6 will constitute "rate shock" nor do I believe that the

7 proportionately higher increase of 15.4% for residential

8 classes is unreasonable under the circumstances. While

9 the percentage increase may seem large, electric service

10 will be provided at rates which will remain among the

11 lowest in the nation. As reported by the

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1 Edison Electric Institute (EEI) in its most recent survey

2 of utility rates, for the 12 months ending June 30, 1998,

3 the Company's Idaho average residential rate was fourth

4 lowest in the nation (out of 174 utilities surveyed);

5 even after the proposed increase, the average residential

6 rate will remain among the lowest thirteen out of 174

7 average utility rates in the nation.

8 Q. What has been the impact of inflation and

9 the price of consumer goods over the past twelve years?

10 A. Inflation is generally measured by several

11 measures, including the Consumer Price Index (CPI) and

12 Cost of Living Adjustments (COLA). The former is a

13 measure of the average change over time in the prices

14 paid by urban consumers for a fixed market basket of

15 consumer goods and services. The COLA is a calculation

16 required by the Social Security Act to determine annual

17 increases in certain government entitlement programs.

18 The Company's requested rate increase is 11.56%,

19 on average. The Company's last general rate increase in

20 Idaho took effect in September, 1986. Over this 12 year

21 period, the CPI has risen 51% and the COLA increases have

22 totaled 49%. By either measure, the Company's proposed

23 rate increase is significantly below the rate of

24 inflation.

25 The following table depicts these inflation rates

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1 which are also represented in a graph shown in Exhibit 4.

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1 Q. What efforts have been undertaken by the

2 Company to control its operating expenses associated with

3 labor?

4 A. The Company has attempted to avoid

5 significant increases in labor expense, notwithstanding

6 substantial customer load growth. In 1986, the Company

7 had 1,440 full-time equivalent positions (FTE); over

8 eleven years later, as of December 1997, that number grew

9 to only 1,467 FTEs (or 1.6%). Expressed differently, the

10 number of customers per employee was 222 in 1986, but

11 increased to 377 by the end of 1997; this further attests

12 to the Company's efficient mode of operation.

13 III. PROPOSED ADJUSTMENT TO RETURN ON EQUITY

14 Q. Turning now to the Company's proposal for

15 an upward adjustment to return on equity to reflect

16 management initiatives, what are you recommending?

17 A. The Company proposes that 25 basis points

18 (0.25%) be added to Dr. Avera's recommended 11.75% return

19 on equity, in order to recognize and reward the Company

20 for its innovative management and strategic initiatives.

21 For reasons I will discuss, the Company and its customers

22 have benefitted through the management initiatives

23 undertaken in recent years, which have positioned the

24 Company in the forefront of industry leaders.

25 An adjustment to the rate of return on equity is

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1 one of the ways the IPUC can recognize good management

2 and reward shareholders for the performance of their

3 management. Without such a reward, or penalties when

4 appropriate, there is not sufficient differentiation in

5 rate setting between a well-managed and a poorly-managed

6 utility.

7 Q. Does Dr. Avera's recommended 11.75 percent

8 return on equity explicitly take into account the quality

9 of the Company's management?

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1 A. No. In arriving at his recommendation,

2 Dr. Avera quite properly and correctly focuses on

3 investors' required rate of return for a proxy group of

4 utilities. This group was identified based on specific

5 criteria designed to account for differences in

6 investment risk, and no explicit adjustment was made to

7 account for the quality of the Company's management on a

8 stand-alone basis. As a result, Dr. Avera specifically

9 notes that no allowance for an increment of return

10 related to the Company's performance or efficient

11 management is included. The regulatory compact expects

12 management competency; however, the Company has well

13 exceeded the industry norm. In my testimony, I will

14 discuss a variety of management initiatives which

15 demonstrate that customers have benefitted from the

16 Company's leadership.

17 Moreover, an adjustment to return on equity is

18 particularly timely as utilities respond to competitive

19 issues. The stock prices of well-managed companies are

20 typically bid up by investors, thus lowering their cost

21 of equity, and well-managed firms generally have higher

22 bond ratings, thus reducing their cost of debt. In the

23 competitive sector, the resulting lower cost of capital

24 confers advantages to the firm in raising funds for

25 capital investment, pricing its products, gaining greater

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1 market share, and earning higher returns relative to its

2 competitors. Meanwhile, the use of an unadjusted return

3 on equity to set rates for a regulated company causes all

4 of the benefits attributable to good management to flow

5 to customers. In a competitive industry, only the

6 best-run companies will thrive and prosper, thereby

7 benefitting all stakeholders. As the electric utility

8 industry braces for continued change, an incremental rate

9 of return to recognize management quality is appropriate,

10 in order to acknowledge and support sound and progressive

11 management.

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1 Q. Are there benchmarking studies that support

2 your contention about the Company's quality of

3 management?

4 A. Yes. Even though the Company may not be

5 number one in the nation on each and every measure of

6 efficiency and management, several recently-published

7 studies have ranked the Company toward the very top of

8 the industry in management efficiency and innovation on a

9 variety of different measures. These were studies

10 performed by independent entities based on publicly

11 available statistics.

12 * 1997: Rated second out of 94 electric utilities on
efficiency
13 In a study conducted by Barakat & Chamberlin, Inc.
and reported by Public Utilities Fortnightly(June
14 15, 1997), the Company was ranked near the top of
utilities best positioned to meet the needs of
15 customers in a more competitive utility
marketplace. The Company was rated second in
16 competitive efficiency among 94 U.S. electric
utilities, achieving a rating of 99.9%. This
17 analysis considered such efficiency factors as
total electric sales, average system power rate,
18 total electric sales per employee, operating
expenses, and percentage of power purchased from
19 other sources.

20 * 1998: WWP recognized by McGraw-Hill for business
excellence and innovation
21 McGraw-Hill Electrical World Business Magazine
selected the Company as one of only five 1998
22 recipients of the James H. McGraw Award for
business excellence in recognition of important
23 contributions to the progress and future of the
energy industry. Specifically WWP was recognized
24 for "creatively and successfully pursuing market
opportunities by leveraging astute business
25 strategies and outstanding technical and

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1 engineering capabilities in risk management,
retail products and services and environmental
2 stewardship."

3 * 1998: One of only 19 utilities nationwide to merit
nationwide distinction
4 Based on figures for 1996, the Company tied for
fifth place among 140 utilities surveyed for most
5 efficient utility operations. Based on the survey
methodology, the top nineteen utilities were
6 singled out for merit. Survey results, as
reported by Public Utilities Fortnightly
7 (September 1, 1998), were based on detailed
information drawn from labor costs, operations and
8 maintenance expenses, pensions and benefits, fuel
and capital outlays. Even though the survey
9 included a period in which the Company took
substantial a write-off for the ice storm
10 restoration efforts which affected the Company's
standings in this survey, the Company finished
11 near the top of the industry.

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1 * 1998: Theodore Barry & Associates ranking of the
Company as Number 1 in Overall Customer Service
2 Performance. Theodore Barry & Associates (TB&A),
in an independent survey of electric utilities,
3 ranked the Company number one in overall customer
service performance. The Company edged out 33
4 other energy providers for the lowest annual
customer service expense, while receiving one of
5 the highest customer satisfaction ratings in the
survey group.
6

7 Q. Can you point to other accomplishments

8 demonstrating specific actions by the Company?

9 A. Yes. The Company has a long tradition of

10 innovation, beginning with its efforts to construct the

11 longest high voltage transmission line in the world in

12 1901 (100 miles, 60,000 volts) and continuing with the

13 Company's construction of two large hydroelectric

14 facilities (the Clark Fork and Noxon dams) in the late

15 1950's. These pioneering industry activities have

16 continued in the 1990's. Some more recent examples

17 follow:

18 * No General Rate Increase Since 1986. As I have
already discussed, the Company has not had a
19 general rate increase since 1986 and has had only
the 1.5% increase related to the DSM Rider.
20
* Portfolio Access Model: A Restructuring Response
21 for Low-Cost States
The Portfolio Access Model (or "PA Model") was
22 designed by the Company to provide a menu of
market-driven rate options, thereby allowing for
23 meaningful customer choice. The PA Model has
become the leading restructuring option in the
24 Northwest.

25 * Pilot Customer Choice Programs: DADS/MOPS/MOPSII
The Company's customer choice pilots (Direct
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1 Access and Delivery Service and More Options for
Power Service) were the first customer choice
2 pilot programs west of the Mississippi River.
These programs provided key information about
3 delivery of customer choice programs.

4 * DSM Tariff Rider
In 1995, WWP initiated the first non-bypassable
5 distribution charge for conservation. The Company
found a mechanism to continue demand-side
6 management during a period in which most utilities
were cutting conservation due to potential
7 restructuring concerns. The IRT Results Center,
an independent research firm characterized the
8 Tariff Rider as "one of North America's leading
strategies for funding energy efficiency and...is
9 the most sophisticated model of its kind and a
powerful harbinger of what may well become the
10 future predominant energy efficiency services
funding
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1 mechanism...". This model has since been
incorporated into state law in California and
2 Montana as well as other states.

3 * Innovative DSM Programs
The Company has pioneered DSM programs that
4 deliver energy savings with an emphasis on
participant contributions. The Company was an
5 early participant in the Northwest Energy
Efficiency Alliance and has pursued an active
6 low-income energy efficiency program in concert
with local community action agencies.
7
* Fuel-Switching Program
8 Between 1992 and 1994, WWP converted almost 5,000
Idaho customers from electric space and/or water
9 heat to natural gas space and/or water heat.
Direct application of natural gas as space heating
10 fuel is the most efficient source of heat which
benefits customers both economically and from a
11 comfort standpoint.

12 * Outage Management Procedures
The Company tripled its capacity in 1997 for
13 incoming calls related to outages and installed an
electronic tracking system to track outages. This
14 system, when coupled with a revamped response
approach, will provide quicker restoration of
15 service during localized or widespread system
outages.
16
* Call Center Networking
17 Chartwell's publication "Utility Best Practices"
(July 1998) recently singled out the Company's
18 Call Center operation as an exemplary
organization, with a featured cover story
19 describing the training and performance measures
that have been implemented.
20
* Fuel Cell
21 Washington Water Power is the first utility in the
Northwest to install a commercial fuel cell on its
22 system. With support from a Department of Energy
grant, the Company and a large downtown hotel have
23 partnered on a demonstration fuel cell to provide
electricity and hot water with no polluting
24 emissions. The Company has recently received a $2
million Federal grant from the Department of
25 Commerce's National Institute of Standard and

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1 Technology Advanced technology program to continue
development of fuel cell technology through one of
2 its subsidiaries, Avista Labs, Inc.

3 * Hydro-Relicensing
The Company initiated its relicensing process for
4 the Clark Fork and Noxon hydroelectric projects
several years early to allow sufficient time for
5 collaboration with stakeholders. The Company
anticipates filing a pre-relicensing settlement
6 agreement with the FERC at the time of
application. FERC has recognized the Company's
7 efforts as the model process for relicensing in
the country and has invited the Company to
8 participate with the FERC in a series of workshops
around the U.S.
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1 * Project Share
The Company's Project Share fundraising campaign,
2 which supports a community emergency heating
assistance program, ranked very high in prior
3 surveys of national fuel fund providers. The
National Fuel Funds Network, in previous years,
4 has ranked the Company's Project Share as high as
fourth in the Country, in terms of funds raised
5 per customer.

6 Other recent examples underscore the Company's

7 position as an industry leader in delivering customer

8 value. These include the introduction of new products

9 and services in which customers can receive and pay bills

10 on the web, as well as an early response to the Year 2000

11 computer issues.

12 Q. Are there other supporting items that you

13 would like to point to?

14 A. Yes. I think it is important to note that

15 while my testimony has focused on the Company's

16 management actions, in actuality, this culture permeates

17 the Company and is embodied by all employees.

18 An example is a recent competition of line crews.

19 Company lineman swept the top three places in the

20 Linemen's Rodeo held in Helena, Montana on July 18 of

21 this year. The Company's three teams were among 49

22 entries from utilities in ten states that participated in

23 the competition, the second largest of its kind in the

24 nation. A series of four timed events tested the

25 linemens' speed, agility, teamwork and safety

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1 expertise -- all necessary ingredients for properly and

2 safely constructing and maintaining power lines.

3 Q. Why is it in the public interest to provide

4 an incremental return on equity as requested in your

5 testimony?

6 A. There are good reasons why this request is

7 in the public interest. First, customers are

8 demonstrably better served by the actions described in my

9 testimony. All actions are in addition to what is

10 arguably considered a baseline for sound management in

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1 the utility industry. While the Company has not run

2 specific studies to quantify customer benefits, prima

3 facie, the DSM programs, tariff rider, and customer

4 service improvements all improve customer value. Other

5 examples I have provided, such as ground-breaking

6 hydroelectric re-licensing, work to customers' advantage

7 by avoiding costly and time consuming litigation.

8 Second, recognition of the Company's managerial actions

9 would affirm to financial analysts, such as bond rating

10 agencies, that traditional rate-base regulation is

11 supportive of sound management.

12 Q. Does this mean that unless such a

13 performance reward is forthcoming, the Company will

14 deviate from its high achievement goal?

15 A. No, not at all. In fact, in the rapidly

16 changing environment facing the electric utility

17 industry, the Company will not only have to maintain its

18 proven track record as a top performer, but strive to

19 improve its overall performance to maintain fair,

20 reasonable, and competitive prices for its customers and

21 provide the resources to continue to provide high quality

22 service while maintaining its financial integrity. While

23 I believe shareholders deserve to receive at least a

24 portion of the benefits from the Company's management

25 initiatives, the Company will maintain its commitment to

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Dukich, Di 15
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1 increasing the value of its service to customers.

2 Q. Is there precedent in this jurisdiction to

3 recognize and reward a well-managed utility, by means of

4 augmenting its approved return on equity?

5 A. Yes. In Order No. 25880 (Case No.

6 IPC-E-94-5), this Commission augmented Idaho Power

7 Company's return on equity, noting that the Company was

8 to be commended for a variety of actions and "... is

9 entitled to a higher rate of return on equity than might

10 otherwise be allowed." (Order at p. 24). The Commission

11 took express note of

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1 actions which the company had taken to improve customer

2 relations, as well as the Company's commitment to DSM

3 programs, and concluded that "... certain management

4 decisions made by IPCo demonstrate sound business

5 judgment and are worthy of recognition," and have allowed

6 the company to remain a "solid, low-cost energy

7 provider." (Id.) Staff, for its part, also support the

8 concept of a specific bonus to be added to return on

9 equity.

10 Q. Do you believe The Washington Water Power

11 Company has demonstrated the sort of sound business

12 judgment that is worthy of recognition by way of an

13 equity adder?

14 A. Yes, I do, as evidenced by my preceding

15 testimony. I have recounted a number of innovative

16 actions and programs undertaken by the Company in recent

17 years, many of which have received national recognition.

18 In addition to the several pilot programs which may serve

19 as a precursor to utility deregulation, the Company has

20 also aggressively promoted DSM programs (including

21 sponsoring an innovative DSM Tariff Rider touted as one

22 of "North America's leading strategies for funding energy

23 efficiency.") In addition, the Company was one of the

24 highest ranked utilities in the nation on the basis of

25 efficiency, business excellence and innovation. Other

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1 efforts in the area of hydro relicensing and fuel cell

2 development have also drawn national attention and have

3 positioned the Company as one of the industry leaders.

4 Finally, the Company continues to excel in its

5 day-to-day interaction with customers, by providing low

6 cost, efficient and reliable service. The Company's base

7 electric rates have not changed in over a decade and,

8 even after this increase, will be among the lowest in the

9 nation. Moreover, the number of customer complaints

10 concerning service remain among the lowest for any

11 regulated utility in this jurisdiction.

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1 Therefore, whether viewed as a reward for past

2 performance or as an incentive to continue improvements

3 that have been made, an upward adjustment to return on

4 equity is appropriate in this proceeding.

5 IV. SUMMARY

6 Q. Would you please summarize your direct

7 testimony?

8 A. Notwithstanding the Company's best efforts

9 at controlling costs, with the growth in the number of

10 customers on our system, we are experiencing increased

11 investment in plant, as well as in overall operating

12 expenses. As a result, our gross margins earned on each

13 customer are continuing to decline, along with our

14 overall return on investment. Deteriorating returns

15 necessitate the need for rate relief. As part of that

16 relief, we are requesting an upward adjustment of 25

17 basis points to the return on equity, in order to

18 acknowledge and reward the Company for its initiative in

19 meeting the challenges of an ever-changing industry.

20 Q. Does this conclude your direct testimony?

21 A. Yes, it does.

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1 INTRODUCTION AND SCOPE

2 Q Please state your name, business address

3 and present position with the Company?

4 A My name is Thomas D. Dukich. My business

5 address is East 1411 Mission Avenue, Spokane, Washington.

6 I am the Manager of Rates and Tariff Administration for

7 Avista. I joined the Company in 1978 after having been

8 previously employed as an Associate Professor at Gonzaga

9 University.

10 Q Have you previously provided direct

11 testimony in this Case?

12 A Yes.

13 Q What is the scope and content of your

14 rebuttal testimony?

15 A I will summarize in a single place the

16 content and conclusions of the Company's rebuttal

17 testimony. I will also comment directly on the testimony

18 of Potlatch witness Mr. Peseau and on Staff witnesses

19 Mr. Anderson, Ms. Carlock, Ms. Maxwell and Mr. Sterling.

20 SUMMARY OF TESTIMONY

21 Q Would you please provide a summary of the

22 scope and conclusions of the Company's rebuttal

23 witnesses?

24 A Yes. In addition to myself, the following

25 witnesses are presenting rebuttal testimony on behalf of

128

CASE NO. WWP-E-98-11 Dukich, Di-Reb 1
Avista

1 the Company:

2 William Avera: Mr. Avera, principal in Financial

3 Concepts and Applications, Inc., has been retained to

4 testify to the fair rate of return for Avista. His

5 rebuttal testimony

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CASE NO. WWP-E-98-11 Dukich, Di-Reb 1A
Avista

1 responds to the testimony of Staff witness Ms. Carlock

2 and Potlatch Witness Mr. Peseau. After incorporating the

3 proposed 25 basis point adder for management efficiency,

4 Mr. Avera recommends a fair rate of return on equity for

5 Avista of 12.0% with a range of 11.25% to 12.25%.

6 Company's Position On Rebuttal:

7 * Revisions to Ms. Carlock's analysis demonstrate

8 that at an absolute minimum a 11.50% ROE would be

9 applicable to Avista.

10 * Mr. Avera demonstrates that properly using

11 Mr. Peseau's methodology results in a fair rate of

12 return on equity for Avista of between 11.90% and

13 12.15%.

14 * Mr. Avera disagrees with Staff that Avista's

15 competitive and regulatory risks are lower than

16 most other electric companies. In fact, Avista

17 has greater financial risks implicit in its

18 capital structure given its lower equity

19 component.

20 * Mr. Avera re-affirms his recommended point

21 estimate of 12.00% ROE, after the application of

22 25 basis points for management efficiency.

23 Kelly Norwood: Mr. Norwood responds to the power

24 supply component of Mr. Peseau's testimony by pointing

25 out numerous inaccuracies in Mr. Peseau's analysis and

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CASE NO. WWP-E-98-11 Dukich, Di-Reb 2
Avista

1 testimony. He demonstrates that Mr. Peseau's

2 recommendation to use a 30-year water record should be

3 rejected in favor of the use of a 60-year water record

4 for the normalization of power supply costs. He also

5 responds to Mr. Peseau's testimony regarding the handling

6 of secondary transactions for rate-making purposes.

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CASE NO. WWP-E-98-11 Dukich, Di-Reb 2A
Avista

1 Company's Position On Rebuttal:

2 * Potlatch testimony regarding the use of 30 years

3 of water record should be rejected in favor of the

4 previously Commission approved methodology which

5 would include the use of 60 years of water data.

6 * Potlatch proposal to allocate millions of dollars

7 of A & G and corporate overhead costs to

8 commercial secondary transactions is grossly

9 overstated and should be rejected. There are

10 additional benefits to customers from marketing

11 activities that far outweigh reasonably allocated

12 costs. If an adjustment at all is made related to

13 the above noted costs, the maximum should be

14 $157,200.

15 Don Falkner: As a Senior Rate Accountant with the

16 Company, he addresses various proposed revenue

17 requirement adjustments presented by Staff Witnesses

18 Ms. Stockton, Mr. Lansing, Mr. Lobb and Mr. Anderson

19 relating to depreciation expense, hydro relicensing

20 costs, injuries and damages, DSM interest, and

21 miscellaneous general expenses. Mr. Falkner also

22 responds to proposed adjustments to depreciation, hydro

23 relicensing costs, and injuries and damages submitted by

24 Potlatch Witness Mr. Peseau.

25 Company's Position On Rebuttal:

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CASE NO. WWP-E-98-11 Dukich, Di-Reb 3
Avista

1 * The depreciation expense adjustment proposed by

2 Staff should be accepted. The assertion by

3 Potlatch witness Mr. Peseau that market value

4 analysis should impact depreciation decisions is

5 discredited and should be rejected.

6 * Staff's income tax adjustments and associated

7 changes in the conversion factor should be

8 accepted.

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CASE NO. WWP-E-98-11 Dukich, Di-Reb 3A
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1 * Injuries and Damages should include costs of

2 extraordinary storm damage as proposed by the

3 Company, but should be corrected for the original

4 allocation error.

5 * A revised hydro relicensing adjustment, as

6 proposed by the Company in response to Staff's

7 concerns, should be accepted in conjunction with

8 the newly proposed balancing account mechanism.

9 * The tree trimming expense adjustment proposed by

10 Staff should be accepted.

11 * Miscellaneous General Expenses should not be

12 reduced as proposed by Staff.

13 * Interest adjustment for DSM expenditures, as

14 proposed by Staff, should be reduced to $71,422

15 due to offsetting overheads. Future balances

16 should accrue interest at the same rate as

17 customer deposits. This adjustment does not

18 influence the revenue requirement in this

19 proceeding, but should be reflected in the

20 Company's accounting records.

21 * The Commission should grant a revised revenue

22 increase of $13,456,000 or 10.94%.

23 Larry LaBolle: As Relicensing Manager of the Company's

24 hydroelectric projects, Mr. LaBolle responds to the

25 testimony of Staff witness Mr. Lobb and Potlatch witness

134

CASE NO. WWP-E-98-11 Dukich, Di-Reb 4
Avista

1 Mr. Peseau by providing support and documentation for

2 specific expense items and outlining the rationale behind

3 the Company's innovative approach to hydro relicensing.

4 Company's Position On Rebuttal:

5 * The revised Hydro Relicensing O & M cost level of

6 $617,800 should be approved and accepted for

7 revenue requirement calculations.

8 * The collaborative and innovative concept of the

9 Living License requires expenditures in advance of

10 formal FERC approval. These expenditures have

11 provided significant benefits

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CASE NO. WWP-E-98-11 Dukich, Di-Reb 4A
Avista

1 to customers and will provide benefits far into the

2 future. The Commission should accept the Company's

3 inclusion of these expenditures in the current case and

4 reject Mr. Peseau's arguments.

5 Tara Knox: As a Rate Analyst with the Company,

6 Ms. Knox provides rebuttal testimony in response to cost

7 of service assertions contained in the testimony of

8 Potlatch Witness Mr. Peseau.

9 Company's Position On Rebuttal:

10 * Staff has reviewed and accepted the Company's cost

11 of service methodology in this proceeding. The

12 Commission should also accept the methodology.

13 * The Commission should reject Potlatch's proposed

14 changes to the cost of service methodology, such

15 as the use of a minimum distribution system for

16 classification of costs and the use of single peak

17 allocators, in favor of a methodology more in line

18 with prior Commission orders.

19 * The Company's only two changes to the previous

20 Commission approved methodology actually provide a

21 net benefit to Extra Large General Service

22 customers such as Potlatch.

23 Brian Hirschkorn: As a Senior Rate Accountant with

24 the Company, Mr. Hirschkorn responds to selected portions

25 of the testimony of Staff Witnesses Mr. Sterling and

136

CASE NO. WWP-E-98-11 Dukich, Di-Reb 5
Avista

1 Ms. Maxwell. Specifically, he addresses Mr. Sterling's

2 proposed adjustment regarding Contributions In Aid of

3 Construction for line extensions. Further, Mr.

4 Hirschkorn responds to Ms. Maxwell's proposal regarding

5 the appropriate level of the residential basic charge.

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CASE NO. WWP-E-98-11 Dukich, Di-Reb 5A
Avista

1 Company's Position On Rebuttal:

2 * The Commission should reject Staff's adjustment to

3 distribution rate base because the calculation is

4 based on numerous speculative assumptions and

5 because the proposed remedy is unduly punitive

6 when considering the magnitude of the impact on

7 customers. In the alternative, the Company

8 proposes to initiate a collaborative process with

9 Staff for reviewing costs and other features of

10 the line extension tariff.

11 * The Commission should accept the original Company

12 proposal to increase Residential basic charge to

13 $5.50 per month as best reflecting the true cost

14 to serve customers. Staff fails to include the

15 service line in their calculations contrary to a

16 more reasonable approach to assessing costs. If

17 all such costs were appropriately reflected, a

18 basic charge of $13.04 would be justified.

19 * The Company's proposed basic charge will more

20 fairly recover a minimal level of fixed costs for

21 all customers, especially those who have electric

22 service but use natural gas for space heating.

23 Thomas Dukich: I will comment on several specific

24 issues not covered by other Avista witnesses,

25 particularly several assertions by Potlatch witness

138

CASE NO. WWP-E-98-11 Dukich, Di-Reb 6
Avista

1 Mr. Peseau. I will also briefly comment on the testimony

2 of Staff witnesses Ms. Terri Carlock, Ms. Maxwell,

3 Mr. Anderson, and Mr. Sterling.

4 Company's Position On Rebuttal:

5 * The Commission should reject the notion advanced

6 by Mr. Peseau that depreciation rates for Idaho

7 have any relation to the recent sale of utility

8 assets.

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1 * The Company's proposed increase for Potlatch is

2 reasonable in the context of Potlatch's total load

3 and service under a special energy contract.

4 * The terms of the Company's recently approved

5 Tariff Rider Schedule 91 should remain unchanged.

6 * The Company has promptly responded to the

7 administrative oversights noted by Staff witnesses

8 Ms. Carlock and Ms. Maxwell.

9 * The Company's complaint record is the lowest of

10 Idaho's regulated electric companies.

11 POTLATCH SPECIAL CONTRACT

12 Q On page 2 of his testimony, Mr. Peseau

13 mentions the special contract that Potlatch has with

14 Avista that serves the mill in Lewiston, Idaho. Would

15 you briefly describe this contract?

16 A Yes. The contract allows Potlatch to

17 purchase its total Lewiston energy requirements at market

18 rates. At the same time, Avista must purchase from

19 Potlatch approximately 55 average MWs at a fixed rate,

20 which escalates annually, but has been above market price

21 since the contract began in 1992. Potlatch then receives

22 a net bill from Avista.

23 Based upon billing information and the periodic

24 load information in the Potlatch special contract, 91% of

25 the total KWHs that Potlatch purchases from Avista for

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1 all accounts fall under the terms of this special

2 contract. As Mr. Peseau correctly notes, none of the

3 increases proposed in this case would apply to this

4 special contract; only the remaining 9% of the KWHs on

5 Schedule 25 would be subject to the increase. In fact,

6 from 1992 to 1998, the unit cost of energy for 91% of

7 Potlatch's electric energy consumption from Avista has

8 actually

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1 decreased by 41% after netting the purchase and sales

2 rates as required by the special contract. To the

3 future, the Company estimates that Potlatch's total net

4 bill from Avista will only increase 1.4%, even after the

5 proposed increase for Schedule 25. In sum, if we

6 consider all of Potlatch's load, Potlatch's unit cost

7 will have actually decreased significantly over 15 years

8 even with the proposed increase for the Schedule 25 load.

9 Q What conclusion would you draw from this

10 result?

11 A Potlatch has received special rate

12 treatment not afforded other commercial and industrial

13 customers. If one considers the 12 years of rate

14 stability prior to the Company's current proposal and the

15 ten-year special contract for the Lewiston plant,

16 Potlatch has experienced a net rate decrease over 15

17 years for its total electric load. I conclude that

18 Potlatch has been well served by Avista and will continue

19 to receive special rate treatment to the future under the

20 terms of the special contract.

21 Q On pages 4 through 16 of his testimony,

22 Mr. Peseau discusses changes that have taken place in the

23 wholesale power market. Has Potlatch both directly and

24 indirectly benefited from these changes?

25 A Yes. All customers have benefited from the

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1 increased competition in power markets which has brought

2 increased price transparency and liquidity to the

3 wholesale marketplace. To the extent that competition

4 has resulted in lower costs, these benefits have been

5 reflected in the Company's Power Cost Adjustment

6 Mechanism.

7 In addition, Potlatch has been an even more direct

8 recipient of these benefits because, as I just discussed,

9 their special contract for over 90% of their load allows

10 them to receive

11

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1 market prices which are not directly available to any

2 other Idaho customers of Avista Utilities.

3 DEPRECIATION

4 Q Mr. Peseau, starting on page 16 of his

5 testimony, discusses the Company's proposal to change

6 depreciation rates. Do you have any comments regarding

7 Mr. Peseau assertions?

8 A Mr. Peseau's proposal regarding

9 depreciation should be rejected in its entirety.

10 Mr. Falkner comments in detail on the technical portion

11 of Mr. Peseau's testimony so I will not repeat that here.

12 I would like to note however that Mr. Peseau bases his

13 arguments on an article (Exhibit No. DP 205) that

14 addresses stranded cost as a result of deregulation and

15 divestiture. In fact, the authors of this article state

16 that, "We want to stress the importance of balancing the

17 books before going forward into deregulation." (Page 39

18 of Exhibit No. DP 205, quote marks deleted.) Avista has

19 not proposed any divestiture in this case and has spoken

20 publicly against forced divestiture. This Commission and

21 the Idaho legislature, to my knowledge, have not come

22 forth to promote electric deregulation and divestiture of

23 utility generating assets.

24 Absent planned deregulation and divestiture, the

25 logic of Mr. Peseau's argument fails. It fails because

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1 he bases his argument on the "fact that virtually all

2 sales of utility assets in preparation for open markets

3 are being made at significant multiples of the regulated

4 book value of these assets." (Peseau, page 17, lines

5 12-15, emphasis added.) This case, of course, is not

6 about selling utility assets in preparation for

7 deregulation. Quite the contrary.

8 Secondly, selling at well above book value is the

9 result of not being regulated by

10

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13 /

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15 /

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1 traditional rate of return and rate base regulation.

2 After all, that's the whole point of deregulation. Rate

3 base in the state of Idaho and Washington is calculated

4 on the basis of original cost, not market cost or

5 replacement cost. Mr. Peseau does an apples to oranges

6 comparison. He wants depreciation to be influenced by

7 market value while regulated rates are being set using

8 original cost. Again, his logic totally fails.

9 Thirdly, Mr. Peseau's testimony on page 17,

10 beginning on line 4 contains the following false

11 statement: "The Company simply wants to raise rates to

12 recover its original plant investment sooner to increase

13 today's shareholders' profit." If depreciation expense

14 is increased and revenues are correspondingly increased

15 to recover the increase in expense, then the net impact

16 on earnings or shareholders' profit is zero. In

17 addition, the only shareholder profit that the Company is

18 allowed to earn is a return on its net depreciated plant

19 in service. Increasing depreciation rates will result in

20 lower net depreciated plant and lower, not higher,

21 shareholders' profit contrary to Mr. Peseau assertions.

22 Again, both the logic and the facts of Mr. Peseau's

23 argument fails.

24 DSM ISSUES

25 Q Beginning on page 4 of his testimony Staff

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1 witness Mr. Anderson discusses customer acceptance of DSM

2 funding and on page 9 of his revised testimony, he

3 proposes an adjustment of the Energy Efficiency Tariff

4 Rider rate in an effort to reduce the balance in the DSM

5 account to zero by 2001. Would you please comment on

6 Mr. Anderson's observations and do you agree with his

7 proposal to reduce the funding rate?

8 A Just six months ago the Commission

9 approved, after modified procedure, the

10

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1 Company's request to indefinitely extend the DSM tariff

2 rider at the current 1.5% funding level. (Order No. 27794

3 dated November 8, 1998.) Staff filed comments in that

4 case and recommended approval of Schedule 91 with only

5 one proposed change to the cost-effectiveness language,

6 not the funding level. It is also worth noting that DSM

7 programs and proposed funding levels were and continue to

8 be the result of a formal, extensive region wide

9 collaborative process called the External Energy

10 Efficiency Board. See page 12 of Mr. Anderson's revised

11 testimony. Idaho Commission Staff are members of the

12 Board.

13 The prudence of DSM expenditure is not being

14 challenged in this case. Quite the contrary. Mr.

15 Anderson on page 15 of his revised testimony recommends

16 that the Commission find that the Company's conservation

17 and energy efficiency efforts and expenditures have been

18 reasonable and prudent.

19 Finally, Company witness Mr. Falkner explains why

20 it is necessary and prudent to maintain a positive

21 balance in the DSM conservation account. Mr. Falkner

22 also questions Mr. Anderson's assumptions and methods

23 regarding interest calculations. However, Mr. Falkner

24 acknowledges that a level of interest should be paid

25 after the netting of certain corporate overheads.

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1 In sum, many of the issues raised by Mr. Anderson

2 have just recently been fully addressed by this

3 Commission. It would hamper effective DSM program

4 implementation and be contrary to a recent Commission

5 order to reduce the Schedule 91 rate and the level of DSM

6 funding as suggested by Mr. Anderson. Errors caused by

7 administrative oversights and correctly pointed out by

8 Mr. Anderson will be corrected. Any further action is

9 not needed at

10

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1 this time.

2 Q On pages 40 and 41 Mr. Peseau discusses the

3 allocation of conservation costs and disagrees with the

4 Company's proposal. Do you agree with Mr. Peseau?

5 A No. Mr. Peseau's logic is based only upon

6 the most simplistic analysis, i.e., allocation should be

7 based on the direct cash spent. There are other benefits

8 that should be used to allocate DSM program costs.

9 DSM programs are based on the rationale that if

10 costly new generating plants are avoided, all customers

11 and customer classes benefit through generally lower

12 rates regardless of direct cash payments. Secondly,

13 programs are designed so that all customer classes can

14 participate and achieve some level of either cash

15 payments or direct bill reductions. This more general

16 and complex rationale has been affirmed by this

17 Commission on several occasions, most recently in the

18 approval of the indefinite extension of the DSM Tariff

19 Rider funding mechanism in Order No. 27794 dated November

20 8, 1998. Mr. Peseau has simply raised an argument that

21 has been extensively discussed numerous times in the

22 past. It was rejected by both the Idaho Commission and

23 the Washington Commission on those occasions and should

24 be rejected again. It should also be noted that Staff on

25 these occasions supported the DSM funding mechanism at

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1 the level proposed by the Company and that the level and

2 details of DSM programs were the result of an extensive

3 region wide collaborative process.

4 COST OF SERVICE

5 Q Do you have any comments with regard to

6 Mr. Peseau's extensive discussion of cost of service

7 issues?

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1 A Ms. Knox addresses in detail the technical

2 issues raised by Mr. Peseau. In matters of rate design

3 and rate spread, a general overall sense of fairness and

4 equity should be the end result. Taking into account all

5 of the possible technical arguments relating to cost of

6 service and relative rates of return as well as the fact

7 that Potlatch will have a zero increase for 91% of its

8 electric use, the Company's proposal for a greater than

9 average increase for only the remaining 9% of Potlatch's

10 total load is reasonable.

11 CUSTOMER NOTICE AND CUSTOMER RELATIONS

12 Q Ms. Maxwell's testimony addressed general

13 issues of customer relations and customer notice rules.

14 Do you have any comments on her testimony?

15 A Yes. Ms. Maxwell noted that the Company

16 has already addressed and corrected the notice problems

17 she identified as a result of her audit. With regard to

18 customer service and relations, I would like to note that

19 Ms. Maxwell's Exhibit No. 121 shows that customer

20 complaints for Avista are clearly the lowest of Idaho's

21 regulated electric utilities for each and every one of

22 the last four years shown.

23 REVENUE REQUIREMENT COMPARISON

24 Q Has the Company prepared a comparison of

25 the revenue requirement adjustments resulting from the

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1 changes discussed and proposed in its rebuttal testimony?

2 A Yes. Mr. Falkner is sponsoring Rebuttal

3 Exhibit No. 24, Schedule DMF-1 which provides such a

4 comparison.

5 Q Does that conclude your rebuttal testimony?

6 A Yes.

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1 (The following proceedings were had in

2 open hearing.)

3 COMMISSIONER SMITH: Mr. Ward, do you have

4 questions for Mr. Dukich?

5 MR. WARD: Yes.

6

7 CROSS-EXAMINATION

8

9 BY MR. WARD:

10 Q Mr. Dukich, by way of a predicate, would

11 you agree with me that in general retroactive ratemaking

12 is barred?

13 A I'm not a lawyer, so I can't answer that

14 for sure, but I think that's kind of an assumption that

15 people make. There are exceptions that have been

16 allowed, I think, but in general.

17 Q Well, let me put it this way: In general,

18 we do not in the regulatory world compensate either

19 ratepayers or shareholders for gains or losses that

20 occurred prior to the test year and the adjustment of

21 rates; isn't that correct?

22 A In general.

23 Q Now, I want to ask you some questions very

24 briefly about your proposed 25 basis points adjustment to

25 equity. If you don't mind, I'll call that the 25 basis

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1 point kicker.

2 A Okay.

3 Q As I understand the theory behind those

4 sorts of adjustments, it is that a company has

5 demonstrated such efficient management and/or innovation

6 in the past that we can assume similar efficiency and

7 innovation in the future that should be rewarded; would

8 that be a reasonable statement?

9 A I think that's only part of the story. I

10 think that another way to put it would be that the things

11 that have been done in the past are leading to current

12 benefits, so that exceptional management or outstanding

13 management that may have been done in the past has now

14 produced current benefits that match with the current

15 customers, so, for instance, if you did an exceptionally

16 good job on DSM or in environmental management that

17 customers today and to the future will continue to

18 benefit from those past actions, so in that sense,

19 commissions should and have in the past with Idaho Power,

20 for instance, should reward or recognize companies for

21 doing such because it reflects current value.

22 Q But wouldn't you agree with me that as to

23 those benefits that are sunk a reward at least in terms

24 of motivation is unnecessary; that is, those decisions

25 are made; correct?

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1 A I don't mean to get clever, but, no, not

2 totally. I think that a reward, presumably if it's a

3 reward, increases the likelihood of that behavior

4 occurring in the future and if it's a behavior that has

5 to do with cost efficiencies, creativity and benefits to

6 customers, it would be well for the Commission to

7 recognize that so it will continue in the future.

8 Q All right, leaving aside our quibble about

9 the degree to which we're looking forward and not past --

10 A Quibble? I thought I successfully rebutted

11 your assumption.

12 Q Leaving aside our disagreement about

13 that --

14 A Okay.

15 Q -- with regard to the future, what track

16 record do we have from this management that suggests that

17 it should be rewarded in the future?

18 A I think Mr. Matthews in his testimony

19 talked about the importance of the core utility to the

20 Company and, as a matter of fact, that still is the

21 majority of the business and he has talked about one of

22 the reasons he came to the Company is because of the

23 skills and knowledge of the existing personnel, so in

24 that sense, I don't think there's been any change in what

25 would happen in the future and the programs that have

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1 been put in place, whether they're hydro relicensing,

2 project share, I have a list in my direct testimony,

3 certain environmental stewardship awards, the call

4 center, for instance, just winning call center of the

5 year award, those kinds of things began and continue to

6 happen under current management, so I think you don't

7 have to count on that happening, it already is happening.

8 Q Nevertheless, would you agree with me that

9 for most of the initiatives that you cite in your

10 testimony the top two managing officers at the time in

11 the Company are no longer with the Company?

12 A Let me look at them. Can I look at them

13 specifically to see if I can agree with that?

14 Q Take your time.

15 A Could you help me figure out my own

16 testimony, what page is that on? Page 11. Actually,

17 probably about half are continuing under current

18 management and I would say that current management has

19 something to do with project share, hydro relicensing,

20 fuel cell, call center networking, outage management

21 procedures, innovative DSM is continuing, Mr. Matthews

22 spoke to that, DSM tariff rider is continuing, customer

23 choice programs are continuing under the current

24 management, portfolio access is continuing, so I'd say

25 that well over half are still continuing and I'm not

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1 saying that they didn't -- that the prior management

2 didn't have an influence, but they're continuing under

3 current management as well.

4 Q But isn't it also true that most of those

5 programs, if not all, were initiated by prior management?

6 A Most, yes.

7 MR. MEYER: Excuse me, by "management," are

8 we referring just to the top two individuals you

9 referenced earlier or were you encompassing --

10 THE WITNESS: Do you include me in that

11 category by the way?

12 MR. WARD: Yes, of course.

13 THE WITNESS: Then the answer is no, they

14 weren't. The people who initiated them are still here if

15 you include me.

16 Q BY MR. WARD: Would you agree some of the

17 people who initiated them?

18 A Most are, actually, I would say the vast

19 majority are. In fact, it could well be the case that

20 the people who left may not have had the primary

21 development in these programs, not that they weren't

22 important in terms of the corporation, but the people are

23 still here at the Company.

24 Q Mr. Dukich, if you would turn to your

25 rebuttal testimony now.

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1 A Are you going to refer back to my direct at

2 all?

3 Q No, you can discard it.

4 A Okay, I'm there.

5 Q And I'd like you to go to page 8. Lines 7

6 and 8, you make a statement there and this is not of

7 great moment, but you say that Potlatch has received

8 special rate treatment not afforded to other commercial

9 and industrial customers. Do you see that statement?

10 A Yes.

11 Q In fact, Potlatch is still your only Idaho

12 special contract customer, is it not?

13 A I believe that's true, yes.

14 Q And is Potlatch unique in terms of both its

15 size and the fact that it is both a buyer and seller of

16 energy to Avista?

17 A Yes. Absent the DADS experiment on direct

18 access, that would be true.

19 Q And you were with the predecessor Company

20 Washington Water Power when the Potlatch contract was

21 signed, were you not?

22 A I was.

23 Q Didn't the Company and Potlatch both

24 jointly apply to the Commission for approval of that

25 contract and allege that it was in the public interest?

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1 A They did.

2 Q And the Commission found it just and

3 reasonable, did it not?

4 A Yes.

5 Q On page 9 of your testimony, you say

6 that -- here you're criticizing Dr. Peseau's proposed

7 adjustments to your requested increase in depreciation

8 and you say on line 16, "Absent planned deregulation and

9 divestiture, the logic of Mr. Peseau's argument fails,"

10 and up above that, at lines 12 and 13, you say, "Avista

11 has not proposed any divestiture in this case and has

12 spoken publicly against forced divestiture," but in fact

13 you were here this morning when I asked Mr. Matthews

14 about the Centralia matter, were you not?

15 A Right.

16 Q And so it's true, is it not, that the

17 Company is selling utility assets?

18 A And has in the past. For instance, Meyers

19 Falls was sold, but that statement has more to do with

20 the overall approach that Commissioner Smith was talking

21 about when utilities separate themselves into different

22 lines of business, like the generating assets,

23 transmission, et cetera. There will always be a

24 certain -- I shouldn't say always. There's very likely

25 to be a certain kind of churning of assets where they're

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1 bought and sold, but that certainly doesn't imply

2 divestiture of generating assets in terms of what the

3 common buzz is in the utility industry. It's not a

4 positioning like there has been in other jurisdictions to

5 identify stranded costs and I think that's what

6 Mr. Peseau's arguments go towards.

7 Q Well, let me put it this way: Does the

8 Company take depreciation on Centralia just like every

9 other plant in its system?

10 A They do.

11 Q Thank you. Please turn to page 10.

12 Beginning at line 6, you take issue with Dr. Peseau's

13 testimony suggesting that the motive for the depreciation

14 increases or the effect of the depreciation increases is

15 to increase shareholders' profits. Do you see that quote

16 in your --

17 A I think I said he claims that the Company

18 wants to change depreciation rates simply to increase

19 today's shareholders' profits. That's a quote from his

20 testimony.

21 Q In the first place, would you agree with me

22 that an increase in depreciation rates, all other things

23 being equal, increases cash flow?

24 A You might want to talk to Mr. Falkner about

25 that who is the Company's accounting witness, but I think

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1 what my point was, as I understand it as I've been

2 tutored by the Company accountants, when we book

3 increased depreciation and the revenues come in, an

4 expense is booked, so that offsets the revenues on a

5 one-to-one basis, so there's really no impact on Company

6 profits, so the statement is not accurate. He didn't

7 talk about cash flow, he said profits. I mean, that's

8 what the quote says, so I would in quotes quibble with

9 you about the accuracy of your representation.

10 Q Well, Mr. Dukich, I'm going to get to the

11 question of profits. Does an increase in depreciation

12 increase cash flow?

13 A I'll have you ask Mr. Falkner that

14 question.

15 MR. WARD: Well, then I'll move to strike

16 his prior response. If he's not competent to answer that

17 question, he's not competent to offer what he offered

18 voluntarily and I will take it up with Mr. Falkner.

19 COMMISSIONER SMITH: Do you have any

20 response to this motion, Mr. Meyer?

21 MR. MEYER: I sure do. Mr. Dukich in

22 response to a yet previous question indicated that while

23 it may affect expense, it affects both expense and

24 revenues and while it may have an impact on cash flow,

25 there's also an offsetting expense adjustment resulting

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1 in no additional profit. That's the point of his

2 testimony. Mr. Falkner can add to that or explain

3 further, so that's the extent of Mr. Dukich's testimony.

4 If Mr. Ward wants to pursue it further, we have an

5 accounting witness and there you have it.

6 COMMISSIONER SMITH: Mr. Ward.

7 MR. WARD: Well, the point, Madam Chair, is

8 the question of whether it increases profits is a far

9 more subtle question than whether it increases cash flow,

10 but if you don't know whether it increases cash flow,

11 which the witness apparently does not, you're clearly not

12 competent to answer the question about whether it

13 increases profits, which is a far more complicated

14 question.

15 MR. MEYER: I believe the witness did opine

16 on the cash flow question.

17 COMMISSIONER SMITH: Well, the Chair is

18 going to deny the motion, but I think we're well aware

19 that Mr. Dukich is not the Company's accounting witness,

20 that person has yet to come and so we'll accord his

21 testimony the weight to which it's due.

22 THE WITNESS: Is this the time for my

23 Rodney Dangerfield imitation?

24 Q BY MR. WARD: One last item, Mr. Dukich.

25 On page 13, at the top of the page in lines 1 through 6,

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1 you say in essence two things: One, because of the

2 special contract, Potlatch will have a zero increase for

3 91 percent of its electric use, do you see that statement

4 on lines 4 and 5?

5 A Right.

6 Q Are you aware that in the Company's

7 exhibits pro forma adjustments show a considerable, an

8 800 and some thousand dollar, increase from the Potlatch

9 contract? I can refer you to the exhibit if you'd like.

10 MR. MEYER: Would you do so?

11 THE WITNESS: Yeah, my comment here was

12 regarding the net bill to Potlatch, so that on a net bill

13 basis, all things equal, Potlatch is selling to the

14 Company energy at a high rate and then going out and

15 buying it at a market price that is much lower and

16 realizing a gain on that difference, so if you take that

17 approach and if that continues in the future, which we

18 think it will, Potlatch will actually make money and not

19 lose money for the future for 91 percent of its load.

20 MR. WARD: Counsel, if you could furnish

21 Mr. Dukich a copy of Exhibit No. 11. That's

22 Mr. Falkner's exhibit.

23 MR. MEYER: Do you have an extra copy?

24 MR. WARD: Yes.

25 (Mr. Ward approached the witness.)

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1 MR. WARD: That's not the full exhibit that

2 I've given you, Mr. Dukich, but it's certainly the page I

3 want to ask you about.

4 MR. MEYER: Which page is it?

5 MR. WARD: I'm looking at -- unfortunately,

6 it's so blurry I can't tell the number. Exhibit 11, I

7 believe it's 7 of 8.

8 Q BY MR. WARD: Now, my point is

9 relatively -- the question is a relatively simple one,

10 Mr. Dukich. If you look at column PF2 of that exhibit

11 and go down to line 29, do you see the top of the heading

12 of that exhibit is Pro Forma Potlatch or that column;

13 correct?

14 A Right.

15 Q And line 29 is the net operating income and

16 I trust you understand that that's the impact on net

17 operating income of each of these pro forma adjustments?

18 A Right.

19 MR. MEYER: If you know.

20 THE WITNESS: Yeah, I don't know what the

21 pro forma adjustments are. There could be an offset to

22 that that goes the other direction, so I really don't

23 know. I mean, that's what the column says, but I really

24 don't feel comfortable testifying to this. This is

25 Mr. Falkner's exhibit.

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1 Q BY MR. WARD: Very well. Would it also be

2 true, then, if you don't know the answer to that that you

3 don't know the answer to whether or not Potlatch will pay

4 greater or lesser amounts in the '99-2000 year than it is

5 today?

6 A No, that is not true. In fact, Mr. Ward,

7 we prepared an exhibit and decided not to use the exhibit

8 in my testimony in recognition that Potlatch may want its

9 usage levels and energy rates kept confidential and we've

10 historically done that for industrial customers, but we

11 do have those calculations ready in exhibit format if

12 you'd care to go over them.

13 Q All right. Mr. Dukich, let me ask you

14 about the rest of that statement that has to do with the

15 Company's proposal regarding the remaining 9 percent of

16 Potlatch's total load and I take it you're referring

17 there to its extra large general service load?

18 A Yeah, three Schedule 25 accounts. I think

19 they're in Pierce, Lewiston and Saint Maries.

20 Q Now, are you suggesting to the Commission

21 there --

22 A Post Falls, I think. Anyway, go ahead.

23 Q Are you suggesting to the Commission that

24 it should take into account the special -- the superior

25 size of the special contract in setting rates for a

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1 Schedule 25 customer?

2 A I guess what I'm saying is that if you look

3 at a customer's comments which are legitimate about their

4 relative competitive position in today's competitive

5 environment, international markets, et cetera, you have

6 to take into account what that corporation receives from

7 its serving utility and so I think that, yes, the

8 Commission should take that into account. I think that

9 the rate spread and rate requests that are filed are

10 justified on a stand-alone basis, but in terms of the

11 total impact on Potlatch, total impact on the economy, on

12 jobs, et cetera, I think it is important to take into

13 account the full range of impacts, including, like I

14 said, the fact that on over 90 percent of Potlatch's

15 load, the corporation's load that it gets from Avista,

16 they actually have had a 41 percent rate decrease, so if

17 you net that against the increase on 9 percent, they end

18 up being served well by Avista, so I guess the answer is

19 yes.

20 Q Are you suggesting, Mr. Dukich, that a

21 customer rate that would otherwise be found just and

22 reasonable by the Commission should be adjusted upward

23 because in another location, in another service account

24 and under another contract that customer has what you

25 believe to be a good deal?

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1 A Not at all. In fact, I don't suggest that

2 Potlatch's rate be adjusted upward. I suggest that the

3 rate as we filed, like I said, on a stand-alone basis for

4 all Schedule 25 customers is reasonable and any claims by

5 Potlatch that there might be some effect on competition

6 or jobs or whatever are not -- what we need to take into

7 account is that for 90 percent of the other energy it

8 gets from Avista it has had a rate decrease, so I'm not

9 claiming that one should offset the other, just that you

10 have to keep in mind the total impact on Potlatch

11 Corporation.

12 Q Mr. Dukich, have you even read Potlatch's

13 testimony?

14 A Mr. Peseau's testimony?

15 Q Yes.

16 A Is that a rhetorical question?

17 Q No, that's a question I want an answer to.

18 A Yes, I have, yes.

19 Q Where in that testimony is there any

20 discussion whatsoever of competition and the effects on

21 competition of the rate increases to Potlatch?

22 MR. MEYER: Express or implied?

23 MR. WARD: Express or implied.

24 Q BY MR. WARD: That testimony is all

25 technical in nature, isn't it?

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1 A I don't think so. I think at the beginning

2 Mr. Peseau spends a considerable amount of time talking

3 about deregulation and the fact that Potlatch should

4 benefit from it and that the special contract is not a

5 part of this. He admits that they have one. I think the

6 preamble to his testimony, which is probably some six or

7 eight pages long, is a very free-flowing, general

8 discussion about the state of the utility business and

9 whether or not Potlatch is benefiting from that, and that

10 includes PURPA contracts, that includes this contract and

11 the fact that Potlatch buys low and sells high,

12 basically, and makes money on their contract rather than

13 the reverse, so I think that's all part of the milieu,

14 you might say, of the environment today which is the

15 first 10 pages of Mr. Peseau's testimony.

16 MR. WARD: Well, I'll leave it to the

17 Commission to read Dr. Peseau's testimony and see if

18 that's true or not. Thank you. That's all I have.

19 COMMISSIONER SMITH: Thank you, Mr. Ward.

20 Mr. Shurtliff, do you have questions?

21 MR. SHURTLIFF: I do.

22

23

24

25

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1 CROSS-EXAMINATION

2

3 BY MR. SHURTLIFF:

4 Q Going back to your direct testimony,

5 Mr. Dukich, at page 7 --

6 A It will take me a while to get there, can

7 you give me a second?

8 Q Sure. You refer on lines 16 and 17 to

9 "rate shock." What is rate shock?

10 A I think historically people have talked

11 about what happens when a customer bill goes up

12 significantly and the customer reaction to that is, like,

13 oh, my word, the rates are going up X percent.

14 Q Beyond the literal reaction of oh, my lord,

15 my bill is going up, rate shock can have real impacts on

16 particular customers, can it not, it can drive business

17 decisions?

18 A Well, you asked me what the word meant and

19 I think typically in a way it is a visceral response as

20 to whether or not all sorts of things can happen as a

21 result of that, the question being can those increases be

22 passed on, what's the absolute dollar amount. For

23 instance, we've always had an issue in our Company

24 because a 10 percent rate increase for us is a relatively

25 small number, it might be $8.00 a month, a 10 percent

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1 rate increase in New Hampshire where the rates are 10

2 cents might be a lot more, so rate shock as a percentage

3 might have a certain visceral reaction, but in reality,

4 whether or not the $5.00 a month produces a significant

5 financial hardship is a different issue.

6 Q Did you undertake any examination as to

7 whether the three entities that I represent would suffer,

8 oh, my goodness, my rates are going up rate shock?

9 A I think the Company, I think as

10 Mr. Matthews said, has kept that in mind and that's one

11 of the reasons that we committed to such a long period of

12 time not to have a rate increase. I think that 12 years

13 with zero as well as other kinds of programs that have

14 benefited your clients, I think Mr. Matthews reviewed

15 some of those, DSM projects to the tune of about 4

16 million kilowatt-hours a year, which according to our

17 calculations on an annualized basis produce a benefit to

18 I think Sunshine and Silver Valley of about $130,000 a

19 year in their reduced bills, so that all comes together.

20 The Company's motivation, of course, is to keep those

21 businesses as healthy as they can within the parameters

22 of our financial situation. We have no desire to hurt

23 the businesses that use our product.

24 Q Well, should those three entities express

25 what you characterize as rate shock with the proposed

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1 increase that you seek as to them?

2 A Would you say that again?

3 Q I'll withdraw the question. At page 3 of

4 your direct testimony, you talk about the reasons for,

5 part of the reasons for, the requested general rate

6 relief coming now. Do you have that in front of you?

7 A Page 4 you said?

8 Q Three.

9 A Could you refer me to a line number? That

10 would help me.

11 Q Well, I think generally it's starting at

12 line 11. You're talking about the increase in customers,

13 so forth.

14 A Right.

15 Q Well, have the mines contributed any in

16 that regard to that growth?

17 A I believe so, but that might be best

18 directed at Mr. Hirschkorn. He has, I think, much of the

19 data on the use per customer and the loads by rate

20 schedule.

21 Q At page 10 of your testimony, you talked

22 with Mr. Ward, and I won't repeat that, about what he

23 called the 25 point, 25 basis point, kicker?

24 A Yes.

25 Q Would it be as accurate if I were to

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1 suggest it as a 25 basis point good job bonus?

2 A Sure.

3 Q And in that regard, that's not an empiric

4 calculation, is it, the 25 basis points?

5 A Empiric, you mean like did we go through

6 and add up the benefits? I would guess that if I went

7 through and did that, I would recommend a much higher

8 kicker than that. I think that the benefits of all the

9 programs we listed, I think the hydro relicensing in and

10 of itself, just that is probably worth well in excess of

11 that for customer benefits.

12 Q And indeed, you would go up from the 25

13 basis points?

14 A Yes. I think that there's been more

15 benefit than that to customers.

16 Q Somebody else could take a look at the

17 Company and say I don't think they did such a good job,

18 they don't get any, that would be a judgment, isn't it?

19 A I wouldn't think so.

20 Q You don't think anybody could come to that

21 judgment?

22 A Well, I'm not saying I don't think anybody

23 could, but I think one of the reasons we listed the

24 awards we did, and we didn't list many of them, is

25 because they're independent national awards, they're not

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1 local junior achievement, nothing wrong with junior

2 achievement, but I mean they are significant national

3 awards awarded by, I guess, a variety of different

4 organizations and consultant groups, so that was the

5 point in presenting them because we think that

6 independently people would come to the conclusion it's a

7 pretty well-managed Company.

8 Q So as I understand the predicate for this

9 award is that based on historic management of the

10 Company, they did an outstanding job and so in the future

11 those efforts that were an outstanding job will be

12 replicated, accrued to the benefit of the ratepayer and

13 so we ought to fatten the rate of return by 25 basis

14 points to account for the replication of those good

15 efforts in the past?

16 A I think it's a combination. Like I told

17 Mr. Ward, the benefits are currently accruing to

18 customers and they will continue to accrue. I think

19 hydro relicensing is a good example, DSM or whatever, so

20 I think that they reflect current benefits as well as

21 this Commission has said, I think in orders in the past,

22 that they consider it part of their, I guess, management

23 of regulatory companies to provide incentives for

24 companies to do a good job, so it's consistent with prior

25 Commission policy to do so.

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1 Q Is that incentive for companies to do a

2 good job less or more than the benefit to the ratepayer?

3 A I think it's less. Like I told you, I

4 think that the benefit is far in excess of that if you

5 added up all these programs.

6 Q And when I go through all these exhibits

7 and all this testimony, I don't see any numbers. I just

8 see somebody's judgment that because we got this award or

9 that award that we're entitled to the 25 basis points.

10 A The parties to the case have asked us to

11 supply the documentation that underlies these, my summary

12 of these awards and many of those do have numbers in them

13 and will show you, for instance, the efficiency awards

14 will show the Company was up among the most efficient

15 companies in the United States, talk about how the

16 Company's inputs are used with regard to labor, capital,

17 expenses, purchased power, et cetera in comparison to

18 other utilities in the United States and actually come up

19 with hard dollar numbers to make those comparisons, they

20 use FERC Form 1's, analysts' reports, et cetera, so you

21 can get dollar amounts out of there.

22 For instance, one of the reports said that

23 a high-rated company may make 20 percent more efficient

24 use of its assets than a lower-rated company, so you

25 could simply take 20 percent of our rates and say that

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1 compared to some of the lower-rated companies that was an

2 efficiency gain.

3 Q So if you're right that the Company will

4 continue to expand management and techniques of the like

5 kind of that in the future, your judgement is the

6 ratepayers will benefit even more than the 25 basis

7 points that you're asking be awarded?

8 A They currently are and will continue to,

9 yeah.

10 Q But if you're wrong and the future

11 management doesn't replicate the good job efforts of past

12 management, then the ratepayers could pay in that

13 circumstance a 25 basis point adder for no purpose?

14 A I would expect by the time that would

15 happen the Company would be before this Commission again

16 and that could be adjusted out.

17 Q What would cause them to be before this

18 Commission?

19 A If the management got that bad, like you

20 said, maybe we'd have to come back in.

21 Q If the Company didn't win some of these

22 awards that you've listed in your testimony, we're going

23 to be back in?

24 A Like I said before, I don't want to get

25 argumentative, but I think that the awards are not --

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1 they're not awards for their own sake. They're awards

2 because they represent an achieved efficiency, cost

3 savings, excellent customer service, all of which benefit

4 customers, environmental awards, stewardship awards,

5 which keep our environmental costs down versus what the

6 alternatives might be, so they all I have, I think,

7 concrete benefits to customers.

8 Q And so these that you've listed in your

9 testimony are just illustrative of the kinds of good

10 management decisions that --

11 A They are the major ones. There are other

12 ones as well, like I said, the call center award. I

13 think we achieved the Washington State environmental

14 commission award in '85, 1990, 1991, 1992, which

15 according to our environmental people is a fairly

16 prestigious award and has to do with environmental

17 stewardship in Washington which benefits Idaho because

18 the plants and operations for the Company as a whole are

19 allocated to the jurisdictions.

20 Q So if you don't win it in the year 2000,

21 2001, 2002, we'll expect to see you back?

22 A I didn't say that. What I said is if your

23 premise was correct and we began to fail in terms of our

24 good management, that might relate to a quicker rate case

25 than otherwise would happen.

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1 Q Your rebuttal testimony, Mr. Dukich, do you

2 have that?

3 A Are you going to refer back to my direct?

4 Q No. I won't suggest, as Mr. Ward did, that

5 it can be discarded.

6 A Did he move to discard the whole thing? I

7 guess I missed that and Mr. Meyer didn't even object.

8 Q At page 7, you talk about the special

9 contract for Potlatch and then you again refer to that

10 special contract at page 13 of your testimony and you

11 discussed that at some length with Mr. Ward and I won't

12 go back over that again, but you're familiar with your

13 conversation you just had with Mr. Ward about that

14 special contract?

15 A Yes.

16 Q I read your testimony, Mr. Dukich, as

17 suggesting that, and correct me if I'm wrong and if I've

18 kind of paraphrased it, that really what's Potlatch's

19 gripe here, they've got 91 percent of their power on a

20 good deal and we're only going to raise above average of

21 the increase the other 9 percent, so they really don't

22 have a complaint; is that what you were saying?

23 A No, I was saying that -- I think I gave my

24 answer to Mr. Ward where I said that if you want to look

25 at the impact on Potlatch Corporation in total from

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1 service from Avista, jobs, economic development,

2 Potlatch's relative competitiveness in markets, whether

3 they be local or international, that you look at the

4 whole picture, and that in fact, like I said, in the

5 preamble to Mr. Peseau's testimony where he talks about

6 the changes in the utility business, I think that

7 reflects that, so it's a big picture and like I said, I

8 think that the rate increase to Schedule 25 customers

9 according to our cost of service testimony and movements

10 toward unity and look at the relative rates of return

11 which are way, way below unity right now for Schedule 25

12 customers that the movement is entirely justified

13 stand-alone, but I think it's also worth looking at a

14 bigger picture.

15 Q In that regard, you look at that bigger

16 picture with Potlatch in part by looking at their special

17 contract?

18 A Yes.

19 Q And Hecla, Bunker, Silver Valley Resources,

20 they don't have that special contract, do they?

21 A Sunshine has in the past, yes, they have

22 had a special contract.

23 Q Do they now?

24 A No, the special contract was put into

25 effect to increase the likelihood that the antimony plant

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1 would restart and they were given a substantial discount

2 on their incremental load to restart that plant and I

3 think it ran for about two-and-a-half years and didn't

4 provide, I don't think, all of the required impetus that

5 was needed to keep that going.

6 Q In those circumstances that you've just

7 described, jobs, competitiveness, those total

8 circumstances as you described it, those that you ascribe

9 to Potlatch because it has the special contract do not

10 apply to the mining companies, do they?

11 A Well, let me try to explain that. I did

12 talk about the special contract for Sunshine. I talked

13 about the DSM that Silver Valley and Sunshine received to

14 the tune of about $130,000 a year, so I do think you have

15 to look at the total picture. I think just like an

16 individual would look at a supplier of, let's say I did

17 business with Bob's Lawn and Tree Care and he may have

18 charged me one rate for lawn mowing and that may go up,

19 but if Bob also does a pretty good job on tree trimming

20 or pruning or washing my windows, I take the whole

21 service package into account and I think that that's no

22 different from what we look at in terms of the utility

23 business. We look at the total package of how the

24 utility serves customers, but still Bob needs to justify

25 his rate increase for lawn care on a stand-alone and I

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1 think we've done that.

2 Q In regard to -- and then I'll be done, but

3 I thought you were talking -- the jobs you were talking

4 about being impacted with Potlatch because of the

5 combination of the proposed rate increase and their

6 special contract, those are jobs of employees of

7 Potlatch, are they not, that you were talking about

8 having an impact on jobs?

9 A Well, and I think whatever multiplier there

10 might be in the local economy.

11 Q And so my point, Mr. Dukich, is that in

12 that regard, the impact on the mining companies is not

13 the same impact it is on Potlatch, is it?

14 A I don't know that, again, because, like I

15 said, we've had 12 years of zero increase, we've had DSM

16 programs given your clients' customers and we've had

17 special contracts for Sunshine. The net effect of that

18 may in fact have been to preserve jobs that otherwise

19 wouldn't have been there and that would continue to be

20 because of the service from the Company and I've been led

21 to believe that at different times that the -- well, the

22 other thing is participation in the DADS experiment where

23 I think the mines, Mr. Hirschkorn could answer this more

24 specifically, purchased a substantial portion of their

25 loads in the open market and got some pretty good

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1 benefits for open market rates, so that would be another

2 side benefit I haven't talked about yet, so I can't say

3 for sure that it's any different for the mines. I think

4 we've offered different kinds of programs that also go

5 beyond just the rates.

6 Q And so because they've had a pretty good

7 deal for the last 12 years, you haven't been in for a

8 rate increase, they should be happy to see this one?

9 A No. In fact, they've had not only a good

10 deal in terms of no rate increase, but they've earned

11 substantially below whatever the rate of return according

12 to our cost of service is and I think even Mr. Peseau's

13 cost of service, they're well below unity, so they've

14 been paying below what cost of service would indicate as

15 well as not having any rate increases.

16 Q Which cost of service, the cost of service

17 you propose in this case or the cost of service that was

18 proposed in the case of --

19 A Both, actually. I don't think we moved

20 them all the way to unity yet. Historically, I think

21 it's about 60 percent, but I don't have it right in front

22 of me. You might want to check with Mr. Hirschkorn.

23 It's about 60 percent of what fully allocated earnings

24 would be for Schedule 25 customers and I think we're

25 moving them to about 70 something.

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1 Q And it wasn't that the cost of service

2 study and its allocations in the last rate case were

3 skewed, I take it?

4 A No, it had nothing to do with the benefits

5 I was talking about. It was just purely stand-alone,

6 that's what we would have done. We moved everybody about

7 a third of the way towards unity.

8 Q Well, did you do it in 1986? I think that

9 was the last rate case.

10 A I don't recall what movement there was in

11 '86.

12 MR. SHURTLIFF: I have no further

13 questions.

14 COMMISSIONER SMITH: Thank you,

15 Mr. Shurtliff.

16 We've reached the wonderful hour of noon

17 and we will break for lunch until 1:15.

18 (Noon recess.)

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25

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