Order No 28648.pdf

Office of the Secretary
Service Date
February 28, 2001
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF THE APPLICATION
AVISTA CORPORATION DBA AVISTA
UTILITIES FOR A DEFERRED ACCOUNTING
ORDER.

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CASE NO. AVU-G-00-8
AVU-E-00-12

ORDER NO. 28648

On December 26, 2000, Avista Corporation dba Avista Utilities (Avista) filed its
Application for a deferred accounting order. Notice of Application and Notice of Modified
Procedure was issued on January 12, 2001. Order No. 28609. The Commission Staff was the only
party to submit comments which were filed on February 2, 2001.
BACKGROUND
Avista requests that the Commission issue an order authorizing the establishment of a
regulatory asset and/or regulatory liability associated with the implementation of Financial
Accounting Standards 133 and 138 (FAS 133/138), Accounting for Certain Derivative Instruments
and Certain Hedging Activities for its electric and natural gas portfolios. The Financial Accounting
Standards Board (FASB) issued FAS 133 in June 1998. It was later amended by FAS 138 in June
2000. All companies with a calendar year-end must adopt these rules no later than January 1, 2001.
This standard requires all derivatives and certain embedded derivatives to be reported on
the balance sheet at fair value, i.e. mark-to-market. Changes in the fair value of derivatives are to be
recorded through earnings. Avista contends that this standard will potentially expose its accounting
earnings to significant volatility not experienced previously. Avista contends that this volatility is
strictly related to timing differences between when a resource acquisition contract is entered and
when it is settled. Avista states that accounting associated with FAS 133/138 therefore will
generally not be part of its regulated pricing. It requests deferred accounting treatment be approved
so that any entries it makes for balance sheet recognition can be offset by regulatory assets or
liabilities and not recorded through the statement of income. Avista contends that this will allow it
to continue to make prudent and timely resource acquisition decisions unencumbered by concerns
about this new financial accounting standard.
Avista conducted an analysis of all instruments and contracts to determine which ones

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would be viewed as a derivative requiring mark-to-market accounting under FAS 133/138 and which
ones were exempt, i.e., scoped out. Staff has reviewed the criteria used in the analysis, the resulting
contract list and the amount of fluctuation that would have occurred in 2000. The net amount of
fluctuation under FAS 133/138, to be reported quarterly, would have created liabilities on the
balance sheet with a corresponding reduction to the 2000 earnings. These liabilities and earnings
impacts would ultimately be reversed if the contracts were actually fulfilled and the power delivered
or received, as is the case for normal utility operations.
The Derivatives Implementation Group (DIG) continues to further define and provide
guidelines of its interpretation on specific types of instruments and contracts for FAS 133/138
implementation. The following items were discussed at the December 2000 DIG meeting with
discussions to continue at the February 2001 DIG meeting (since a final decision was not made in
December):
1) “Normal Purchases and Sales Exception in the Electric Industry for
Capacity Contracts Including Contracts that May Have Some
Characteristics of Purchases and Written Options” and

2) “Normal Purchases and Sales Exception for Electricity Contracts Subject
to Bookouts.”

The DIG decisions will impact the financial impact under FAS 133/138 due to normal purchases and
sales to manage regulated customer loads and resources. The financial changes in reported income
without a corresponding change in cash flow could potentially impact stock and bond ratings and
ultimately the cost of capital. This risk currently should be minimal for Avista since it does not
currently have coverage ratio requirements in its bond covenants but that may change in the future.
Staff expressed concern in its comments that the quarterly financial income fluctuations
resulting from FAS 133/138 might drive Avista’s management decisions by focusing on new
accounting standards rather than prudent utility operations. Staff believes utility decisions should be
made with the goal to provide the utility service to customers at the lowest possible price. Staff also
believes an accounting order allowing Avista to establish regulatory assets and liabilities to defer the
impact of the accounting entries that will be required under FAS 133/138 will continue to allow this
goal to be the focus of the decision making process of utility management. Staff states the intent of
the proposal is to continue the treatment of long-term sales and purchase contracts as they have been
in the past with the expenses recognized at the embedded prices contained in the contract rather than

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restating the costs of these contracts on a quarterly basis at market prices. Staff believes this deferral
is reasonable and more consistent with the regulatory treatment currently authorized by this
Commission.
Transactions where a contract is settled for cash at a gain or loss in advance of normal
delivery of power would continue to be available for Commission review in the determination of
rates. Staff states that this proposal does not in any way relieve Avista of its obligation to
demonstrate the prudence of its resource acquisition decisions including review of the original
contract, Company actions, or lack of actions with respect to the contract or settlement of the
contract prior to completion.
COMMISSION FINDINGS
After review of the record the Commission will approve Avista Corporation’s
Application for a Deferred Accounting Order that will allow the establishment of regulatory assets
and regulatory liabilities associated with the implementation of Financial Accounting Standards 133
and 138 (FAS 133/138), Accounting for Certain Derivative Instruments and Certain Hedging
Activities for its electric and natural gas operations. Commission approval of this Application does
not relieve Avista of its obligation to demonstrate the prudence of its resource acquisition decisions
including review of the original contract, Company actions, or lack of actions with respect to the
contract or settlement of the contract prior to completion. Any deferred balances that do not net out,
will be reviewed in a future proceeding to determine the appropriate ratemaking treatment.
O R D E R
IT IS HEREBY ORDERED that Avista Corporation’s Application for a Deferred
Accounting Order in relation to the implementation of Financial Accounting Standards 133 & 138 is
granted.
THIS IS A FINAL ORDER. Any person interested in this Order or in interlocutory
Orders previously issued in this Case Nos. AVU-G-00-8 and AVU-E-00-12 may petition for
reconsideration within twenty-one (21) days of the service date of this Order with regard to any
matter decided in this Order or in interlocutory Orders previously issued in these cases. Within
seven (7) days after any person has petitioned for reconsideration, any other person may cross-
petition for reconsideration. See Idaho Code § 61-626.
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this

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day of February 2001.

DENNIS S. HANSEN, PRESIDENT

MARSHA H. SMITH, COMMISSIONER

PAUL KJELLANDER, COMMISSIONER

ATTEST:

Jean D. Jewell
Commission Secretary

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