IPUC Staff Comments.pdf

JOHN HAMMOND
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 5470

Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5983

Attorney for the Commission Staff

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF THE APPLICATION
OF AVISTA CORPORATION DBA AVISTA
UTILITIES FOR A DEFERRED ACCOUNTING
ORDER.
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CASE NO. AVU-G-00-8/
AVU-E-00-12

COMMENTS OF THE
COMMISSION STAFF

COMES NOW the Staff of the Idaho Public Utilities Commission, by and through its
Attorney of record, John Hammond, Deputy Attorney General, and in response to the Notice of
Application, Notice of Modified Procedure, and Order No. 28609 issued on January 12, 2001,
submits the following comments.
On December 26, 2000, Avista Corporation dba Avista Utilities (Avista) filed its
Application for a deferred accounting order. Avista states that it is an investor-owned utility
engaged in the generation, transmission and distribution of electricity in Eastern Washington and
Northern Idaho. Avista also provides natural gas distribution service in Eastern Washington,
Northern Idaho, California and Oregon.
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
STAFF COMMENTS 1 FEBRUARY 2, 2001
Accounting Standards 133 & 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
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. For the regulated utility
operations during 2000 this fluctuation could have been greater than $150,000,000 in a single
reporting period. One individual contract could have had exposure of up to $70,000,000 in 2000.
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):
STAFF COMMENTS 2 FEBRUARY 2, 2001
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
doesn’t currently have coverage ratio requirements in its bond covenants but that may change in
the future.
Staff is concerned that the quarterly financial income fluctuations from FAS 133/138
on Avista might create a situation where new accounting standards rather than prudent utility
operations could drive management decisions. 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 defer as regulatory assets and liabilities, offsets to
the accounting entries that will be required under FAS 133/138, will not force this goal to be
excluded from the decision making process of utility management. 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 restating the
costs of these contracts on a quarterly basis at market prices. Staff believes this is 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. 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.
Staff recommends that the Commission issue an accounting order authorizing Avista to
establish regulatory assets and/or regulatory liabilities to defer the impact associated with the
implementation of Financial Accounting Standards 133 & 138 (FAS-133/138), Accounting for
STAFF COMMENTS 3 FEBRUARY 2, 2001
STAFF COMMENTS 4 FEBRUARY 2, 2001
Certain Derivative Instruments and Certain Hedging Activities for its electric and natural gas
portfolios. Staff believes deferral is reasonable and is more consistent with existing regulatory
policies.

Dated at Boise, Idaho, this day of February 2001.

________________________________
John Hammond
Deputy Attorney General

Technical Staff: Terri Carlock

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