20150728AVU to Staff 5.doc

AVISTA CORPORATION
RESPONSE TO REQUEST FOR INFORMATION

JURISDICTION: IDAHO DATE PREPARED: 07/27/2015
CASE NO.: AVU-E-15-05/AVU-G-15-01 WITNESS: Morris/Thies/Andrews
REQUESTER: IPUC RESPONDER: Liz Andrews
TYPE: Production Request DEPARTMENT: State & Federal Regulation
REQUEST NO.: Staff - 005 TELEPHONE: [phone]

REQUEST:

Please list all cost-cutting measures undertaken by the Company during 2012-2015, explain those measures in detail, and quantify the results of those measures.

RESPONSE:

In a direct response to the continuing increase in non-fuel O&M/A&G year over year, senior management of the Company took steps to reduce this trend in increasing expenditures. Examples of cost management efficiencies and steps taken to reduce the growth in expenses is discussed below and include resource-related decisions, the Voluntary Severance Incentive Plan (VSIP) to reduce employee complement and changes to pension and post-retirement medical programs. These changes illustrate Avista’s efforts to control our costs, improve efficiency, and focus on long-term sustainable savings to continuously improve our service to customers and manage costs into the future.

The impact of these cost management efficiencies and steps taken to reduce the growth in expenses affecting the rate years can be seen in the following chart, provided in Mr. Morris’ direct testimony at page 19, Illustration No. 5:

This chart shows the reduction in expenses in 2013, as represented by the green Non-Fuel O&M/A&G line and continuing at a lower level through 2018.

As noted in Mr. Morris’ direct testimony starting at page 20, line 12, the reduction in operating expenses in 2013 (green line) related primarily to Avista’s Voluntary Severance Incentive Plan (VSIP) executed in the fourth quarter of 2012, reducing employee complement at the Company. Avista’s response to Staff_DR_029 shows the annual savings of the 55 eliminated positions totaled over $5 million.

In addition, as noted in Mr. Morris’ direct testimony starting at page 21, in 2013 senior management made changes to Avista’s pension and post-retirement medical plans, effective January 1, 2014, which has reduced future O&M/A&G costs. Changes to the Company’s retirement income (pension) and post-retirement medical plans offered to non-union employees, is as follows:
For non-union employees, Avista no longer offers a pension plan for new hires beginning January 1, 2014. Avista will make a contribution to a 401(K) fund established for the employee, but no longer offers a defined benefit pension plan that provides an annual annuity upon retirement. This reduces future utility operating costs associated with employee benefits. Changes to plans offered to the bargaining unit employees will be subject to future negotiations.
Also beginning January 1, 2014, Avista no longer provides funding for post-retirement medical for non-union new hires. In addition, for both existing and new hire non-union employees, when the retiree reaches age 65, Avista will no longer provide an Avista-sponsored medical plan. Through these changes Avista is transitioning out of funding medical coverage for retirees.
In 2015 and 2016, savings related to the Company’s changes in its pension and post retirement medical plans on a system basis are estimated to be approximately $2.6 million and $3 million, respectively, with increasing annual savings expected going forward.

These savings are reflected in the Company’s Pro Forma Studies, as the reduced level of labor from the VSIP is already reflected in the Company’s twelve-months ended December 2014 results of operations for Idaho, and the 2016 level of pension and post retirement medical expenses have been reflected in the Pro Forma Employee Benefit adjustments (see Andrews Adjustments 3.03 & 3.05 (electric) and 3.01 & 3.03 (natural gas)).

Additional measures worthy of note, are the continuing hiring restriction, the efforts of “Customer Touch Point Teams,” capital spending targeted to manage O&M, and refinancing of long-term debt, which are among some of the other actions taken by Avista to mitigate the impact of increased costs to our customers now and in the future:

Hiring Restrictions: The Company continues to operate under a hiring restriction which requires approval by the Chairman/President/CEO, President of the Utility, the CFO, and the Sr. VP for Human Resources for all replacement or new hire positions.

Customer Touch Point Teams: In the fall of 2011, a team from across the Company identified every contact point or “touch point” a customer has with Avista. The objective of the initiative is to improve our customers’ overall experience when doing business with us, as well as improve responsiveness in a respectful and least cost manner. This team identified a “touch point map” of 172 different customer interactions or touch points. To date, the touch point teams have made improvements to 57 distinct touch points. In 2014 Avista touch point teams focused on Electric and Gas Emergency Operation Planning (involving customer touch points), Paperless Billing, Damage Assessment During Storms, and Storm Estimated Restoration Time. In 2013, other examples included touch point team projects that focused on customer awareness of natural gas safety, the distributed generation application process, and accuracy of electric outage estimated restoration times.

Capital Spending: In recent years the Company has increased its level of capital spending. As discussed by Company witness Mr. Thies, starting at page 13, line 18 of his direct testimony, there are three primary drivers affecting Avista’s level of capital investment: 1) the business need to fund a greater portion of the departmental requests for new capital investments that in the past have not been funded; 2) the need to capture investment opportunities and benefits identified by our asset management capabilities, and 3) a continued focus on controlling the increase in operation and maintenance (O&M) spending through prudent capital investment.

Our aging and changing infrastructure provides several challenges we need to manage to keep costs under control into the future. Asset management programs and projects include wood pole management, Aldyl-A pipe replacement, transmission line rebuilds, and substation equipment replacements and rebuilds. These asset management capital investments are replacing old and failing assets using a planned and systematic approach to reduce outages, control costs to benefit customers over the life of these assets, and reduce risks associated with failed equipment.

In addition, the following also impact our decision on the level of capital spend impacting the Company and our customers: 1) Interest rates remain near all-time lows, so funding these capital projects now will result in a lower long-term cost to customers, rather than waiting until interest rates and inflation rise. 2) Avista currently does not have a need for new capacity and energy resources, which would otherwise put upward pressure on retail rates; and 3) electric and natural gas commodity costs continue to be relatively stable as compared to past years, and are expected to remain relatively stable for the near future. Therefore, funding the additional needed capital investment projects now will result in lower overall bill impacts to customers rather than waiting until a time when retail rates are being driven higher by increasing commodity costs, construction of new capacity and energy resources, and/or higher inflation and interest rates.

Refinance of Long Term Debt: As discussed by Mr. Thies, starting at page 24, there has been a general decline in interest rates for several years while Avista has issued new debt, causing the Company’s overall cost of debt to decrease. Avista has been prudently managing its interest rate risk in anticipation of periodic debt issuances, which has involved fixed rate long-term debt with varying maturities, and executing forward starting interest rate swaps to mitigate interest rate risk on a portion of the future maturing debt and its overall forecasted debt issuances.

From 2011 through 2014 Avista issued $315 million in long-term debt. The weighted average rate of these issuances is 3.30 percent. These issuances have varying maturities ranging from 3 years to 35 years, and a weighted average maturity of 23.6 years. The Company’s most recent issuance (in 2014) was $60 million of first mortgage bonds with a thirty-year maturity at a rate of 4.11 percent. This new debt, which matures in 2044, is the lowest priced debt with a term beyond twenty years that the Company has issued since the 1950s. The effective cost of this debt is even lower at 3.65%, which includes the cost of issuance and the impact of interest rate hedges. The $5.4 million positive value of the interest rate hedges (hedges were settled when the coupon rate was set) improved the effective yield on this debt by 0.52%. In 2013 the Company issued $90 million of three-year debt (maturing in 2016) at a very favorable rate of 0.84%. The effective cost of this debt is a negative 0.04%, which includes the cost of issuance and the impact of interest rate hedges. We received $2.9 million for settled interest rate hedges, which improved the effective yield on this debt by 1.07%.

The Company has continued to issue debt with varying maturities to balance the cost of debt and the weighted average maturity. This practice has provided Avista with the ability to take advantage of historically low rates on both the short end and long end of the yield curve. Avista plans to continue issuing long-term debt with various maturities for the foreseeable future in order to fund our capital expenditure program (noted above) and long-term debt maturities.

To mitigate interest rate risk related to future long-term debt issuances, Avista hedges the rates for a portion of forecasted debt issuances over several years leading up to the date we anticipate each issuance. The Company also manages interest rate risk exposure by limiting the extent of outstanding debt that is subject to variable interest rates rather than fixed rates. In addition, Avista issues fixed rate long-term debt with varying maturities to manage the amount of debt that is required to be refinanced in any period (looking ahead to its future maturity), and to obtain rates across a broader spectrum of prevailing terms which tend to be priced at different interest rates. (Mr. Thies discusses the Company’s interest rate hedging program further in his testimony.)

Although not all examples of cost-control, efficiencies or cost saving measures are specifically quantified and provided here, as can be seen from the chart on page 1, changes the Company has made over the last few years, as well as plans for the future, illustrate Avista’s efforts to control our costs, improve efficiency, and focus on long-term sustainable savings to continuously improve our service to customers and manage costs into the future.

Avista also included in its direct filed case an adjustment for known 2015-2016 O&M expense savings (or offsets) associated with planned capital projects. See Andrews’ Adjustments 3.11 (electric) and 3.09 (natural gas).

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