Order No 29130.pdf

Office of the Secretary
Service Date
October 15, 2002
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE SUBMISSION
OF THE STATUS REPORT OF AVISTA
CORPORATION AND APPLICATION
FOR A CONTINUATION OF A POWER
COST ADJUSTMENT (PCA)
SURCHARGE.
ORDER NO. 29130
CASE NO. AVU-02-
On July 18, 2001 , Avista Corporation dba Avista Utilities (Avista; Company) filed
an Application with the Idaho Public Utilities Commission (Commission) in Case No. A VU-
01-11 requesting authority-to implement an electric Schedule 66 Power Cost Adjustment (PCA)
surcharge. The surcharge would recover accrued PCA deferral balances resulting from a
combination of record-low hydroelectric generation and unprecedented high wholesale market
prices and volatility. The Company s Idaho PCA mechanism tracks 90% of the difference
between actual net power supply expense and the authorized level of net power supply expense
approved in the last general rate case. The Company s shareholders absorb the remaining 10%
of the difference in net power costs. Net power supply expense is the total of purchased power
expense plus fuel costs minus wholesale revenues. The balance in the Company s PCA deferral
account for the Idaho jurisdiction at June 30, 2001 was $30 million. The Company estimated
that absent rate recovery, the deferral balance would increase to $69 million by December 2001
$72 million by the end of 2002 and $88 million by the end of 2003. The Company requested a
27-month surcharge period through December 2003. The Commission in Order No. 28876
approved a 12-month surcharge of 19.4% ($23.6 million) and directed the Company to file a
Status Report 60 days prior to expiration of the authorized surcharge period, October 11 , 2002.
In its Order, the Commission stated
, "
if the Status Report and our review of the actual PCA
deferral balance (at the end of 12 months) support continuation of the surcharge, we anticipate
continuation of the surcharge for an additional period.
On August 9, 2002, Avista Corporation filed the Status Report required by
Commission Order No. 28876. It also filed an additional Application requesting a continuation
of the previously authorized PCA surcharge of 19.4%. As reflected in its filing, Avista states
that the current status of the unrecovered PCA deferral balance as of June 30, 2002, was
ORDER NO. 29130
$45 600 228 for its Idaho jurisdiction. Avista requests that the Commission continue the PCA
surcharge for an additional 12 months, through October 11 2003.
In this Order the Commission approves a 12-month continuation of the existing
19.4% Schedule 66 PCA surcharge, the surcharge to expire in one year, i., October 11 , 2003.
We make adjustments to the PCA deferral account balance, defer decision pending further
investigation on net fuel costs related to the Company s Coyote Springs facility, deny the
Company s requested change in the PCA deferral balance interest rate, and direct Staff to
investigate the Company s risk management policy and how it affects the Company s short-term
resource acquisition decisions. Finally, we direct the Company to file a Status Report 60 days
prior to expiration of the surcharge period.
STATUS REPORT - APPLICATION FOR EXTENSION
The details of the deferred cost balance as reflected in the Company s PCA account
are as follows:
Deferral balance as of June 30, 2001
Deferrals July 2001 through June 2002
Transfer 0 f under-rebate
Transfer of under-surcharge
PGE monetization accelerated amortization
Interest
SubTotal-Account 186.38 balance as of June 30, 2002
Revenues collected October 12, 2001-June 30, 2002
Unrecovered balance as of June 30, 2002
$30 007 057
48,442 371
(49 073)
342 069
(20 783 521)
764,590
723 493
(15,123,265)
$45 600 228
As reflected in the Company s previous PCA filing, hydroelectric generation through
June 2001 for Avista was the lowest in the 73 years of record. The Company reports that it
continued to experience those very low stream flow conditions through the remainder of 2001.
The record low hydroelectric conditions in 2001 , the Company states, required it to purchase
energy in the forward short-term wholesale market to replace the lost generation and cover its
energy deficiencies. These purchases, the Company contends , were made at unprecedented high
wholesale market prices and caused deferral balances to increase substantially. The
extraordinary power supply circumstances through mid-2001 , especially the record low stream
flows, the Company contends, continued to impact the Company s power cost deferral balances
for the remainder of the year and into 2002. In fact, the Company states that of the deferrals of
ORDER NO. 29130
$48.4 million recorded between July 2001 and June 2002, approximately $46 million occurred
during the last half of 200 1 with the remaining $2 million occurring in the first half of 2002.
To mitigate the increased power costs, A vista states that it has increased operation
its thermal resources and has aggressively pursued conservation and load curtailment programs.
However, the Company states that the costs associated with the hydroelectric conditions, the cost
of short-term power market purchases and increased thermal fuel costs have exceeded the
benefits these measures provided.
The Company contends that investor concern surrounding its cash flows, deferral
balances , and the ability to recover costs in a timely manner have had an impact on the
Company s finances that continues today. Avista s credit ratings are presently below investment
grade and the rating agencies characterize the Company s outlook as negative. A vista points out
that it is important for the Company to regain an investment grade rating as soon as possible so
that longer- term debt can be refinanced on more reasonable terms, benefiting customers with
lower debt-related costs. Credit ratings, the Company contends, will take time to restore and
continuation of the current surcharge is one of the keys for A vista to continue to improve its
financial condition.
A vista requests that the carrying charge or interest rate applied to the unamortized
PCA deferral balance be increased from the current customer deposit rate to a level that is more
reflective of the longer-term nature of the recovery period. Avista reports that the Company
embedded cost of debt as of June 30, 2002 , is 8.88%, incorporating both long- and short-term
debt. The Company proposes that the carrying charge be increased to a rate of 6%, as was
recently authorized for Idaho Power Company.
The rates set forth under the Company proposed PCA Schedule 66 reflect an annual
revenue surcharge amount of $23.6 million, or 19.4%, a continuation of existing Schedule 66
rates. In comporting with the existing surcharge recovery method, the surcharge amount will be
recovered on a uniform percentage basis to all general service schedules and will apply only to
the energy charge(s) within each schedule. The monetization and accelerated amortization of the
Portland General Electric (PGE) Sale Agreement previously approved by the Commission is a
309 280 per month offset to the PCA deferral balance that will continue to reduce the impact
of the Company s PCA surcharge to customers through the end of 2002. After that point, the
ORDER NO. 29130
ongoing PCA deferral entries will be adjusted to reflect the fact that the PGE credit has been
fully returned to customers.
MODIFIED PROCEDURE - PUBLIC WORKSHOP - COMMENTS
On August 28, 2002, the Commission issued a Notice of Application in Case No.
A VU-02-6. The Commission in its Notice determined that the public interest in this matter
may not require a hearing to consider the issues presented and that the issues raised by the
Company s filing may be processed under Modified Procedure, i., by written submission rather
than by hearing. Reference Commission Rules of Procedure, IDAPA 31.01.01.201-204. The
Commission established a September 18 2002 deadline for filing written comments or protests.
On September 6, 2002, the Commission issued a second Notice scheduling a
September 18, 2002 public workshop in Sandpoint, Idaho for Commission Staff to discuss issues
related to the Company s Application and for Staff and the Company to answer questions from
customers and interested parties. The Commission in its Notice extended the deadline for filing
written comments on the Company s Application to September 20 2002.
Written comments in this case were filed by Potlatch Corporation, Commission Staff
Stimson Lumber Company (Coeur d' Alene and Priest River), J D Lumber, Inc. (Priest River),
Regulus Stud Mills (St. Maries), the County of Shoshone, Tri-Pro Cedar Products (Old Town),
Senator Shawn Keough, and a number of the Company s electric customers. Idaho Legislators
who attended the public workshop were Senator Shawn Keough and Representatives John
Campbell and George Eskridge. The comments filed with the Commission can be summarized
as follows:
Commission Staff
Staff filed both original and supplemental comments. Staffs reVIew covered
expenses incurred for the period July 2001 through June 2002 and included a representative
sampling or cross section of transactions in the Purchased Power (FERC 555) and Power Sales
(FERC 447) accounts. Specifically reviewed was the price of a transaction when executed
compared to other relevant purchase/sales prices (Mid-Columbia index and futures) available at
the time. Based on its review, Staff concludes that the Company s purchases and sales
transactions appear reasonable and competitive with other alternatives based on information
available to the Company at the time oJ the transactions.
ORDER NO. 29130
Included in the previous PCA period, Staff notes, were the Buy-back programs
approved by the Commission. Buy-back expenditures of $2 169 263 were incurred during July
through December 2001 in this PCA period. At Avista s request, the programs were cancelled
when they became uneconomical. Staff verified that the amounts are correct and were recorded
appropriately.
The largest component of the above normal power supply costs deferred during the
July 2001 through June 2002 time period, Staff notes, were purchase/sales transactions. The
Company quantifies above normal purchase power costs of approximately $39 million with
offsetting market sales of approximately $8.4 million. These market transactions, Staff notes
net to approximately $30.6 million of the $48.4 million of the above normal power supply
deferrals booked in the year currently being reviewed. Staff reviewed the reasons for the
additional power supply costs provided by the Company, poor water conditions and high market
prices, and found them to be generally true.
Staff notes that day-ahead market prices peaked in December 2000 and declined to
less than $100 per megawatt hour in June 2001 , the month before the current period being
audited began. It took several more months for the price to return to the $20 to $30 per
megawatt hour level that was normal before the price run up. During the first two months of the
current PCA period, Staff notes that A vista continued to purchase energy from the day-ahead
market at abnormally high prices. The Company also continued to incur abnormally high-energy
costs associated with forward energy purchases made prior to market price declines that began in
June 2001. The Company s current risk management policy, in place at the time the forward
energy purchases were made, establishes specific deadlines for addressing load/resource
imbalances. Proj ected imbalances 1) can be fairly large one year ahead of need, 2) must be
significantly reduced six months ahead of need and 3) must be completely eliminated one day
ahead of need. This risk management policy, Staff notes, required the Company to make
substantial energy purchases to serve needs for the second half of2001 at pre-June 2001 prices.
Staff reviewed the Company s Risk Management Policy, a sample of the Company
Position Reports" showing load/resource positions and "Deal Tickets" that identify purchase
and sales quantities, prices and dates. Staff believes that the 90/1 0 sharing of the above normal
power supply costs in this PCA filing provides the Company with an economic incentive to
make the best possible decision for customers. Staff concludes that the Company s market
ORDER NO. 29130
purchase and sales decisions were reasonably based on good utility practice and information
available at the time the decisions were made.
Interest
Staff notes that the Company is currently using the customer deposit rate to calculate
the interest on the deferral balance. Staff recommends that the Company continue to use the
customer deposit rate which is currently 4% and is adjusted annually on the first of January.
Staff notes that while Idaho Power and A vista have similar PCAs, Idaho Power
PCA deferral balance accumulates interest only when the power supply costs are being deferred.
Once those costs are subject to recovery, interest is no longer calculated on the remaining
deferral balance. Avista s PCA deferral balance continues to accrue interest while the deferred
power costs are being recovered in addition to receiving interest while the costs were being
deferred. Receiving interest on the deferral balance during the recovery period provides Avista
with additional compensation for costs incurred. This difference in PCA mechanisms, Staff
contends , provides A vista with sufficient carrying charge recovery, making a change from the
customer deposit rate unnecessary.
Small Generation Options
Staff notes that Avista pursued various generation projects that enabled it to avoid
additional high-cost purchases of energy from the short-term wholesale markets when the
projects represented the lowest cost resource options available at the time. These projects
included Boulder Park - $8,423 (six gas-fired reciprocating engines -25 MW), Devil's Gap -
593 656 (lease costs for 20 diesel generators), Kettle Falls Bi-Fuel- $384 856 (lease costs for
temporary generators), and Othello - $892 131 (23 MW combustion turbine - cancelled). In
addition to adding generation, the Company, Staff notes, was able to increase its operation of the
Northeast Combustion Turbines ($36 320). The Company also stopped the spill at its Monroe
Street generating station on the Spokane River thereby increasing its hydro generation. In so
doing, the Company incurred liability to Spokane for loss of revenue at the City s gondola ride
($4 666). With the exception of the included capital costs related to Kettle Falls ($56 598),
Devils Gap ($96 743), and the Othello project ($744 884), Staff believes the expenses incurred to
operate these projects should be included in the PCA and recommends approval of expense
recovery through the PCA subject to the 90/10 customer/company sharing provisions.
ORDER NO. 29130
!Vet J?uel Expense
Staff notes that the Company s filing also includes net fuel expense for the natural
gas combustion turbine fuel purchased, but sold rather than burned. The Company purchased
natural gas on the forward market for use in its leased and owned combustion turbine units. The
Company s decision to purchase natural gas was made at a time when the forward market price
for energy was much higher than the cost of gas fired generation. Based on information
available at the time , Staff concludes that the Company s forward gas purchase decisions were
reasonable. To the extent purchased gas was not used to generate electricity, it was sold by the
Company into the market. After the purchases were made, Staff notes that market energy prices
began to decline. It became more cost effective to purchase energy from the market than to
generate using previously purchased gas.
Staff does not dispute the Company s decision to purchase gas to meet future needs.
Nor does Staff dispute the Company s decision to sell unused gas and rely on purchases from the
energy market when declining prices made it more cost effective. However, Staff believes that
Avista must better explain elements of its risk evaluation methodology that drives the
Company s short-term resource acquisition decision-making. For example, Staff contends that
the Company needs to describe the criteria used to first establish its natural gas fuel portfolio and
then to determine the timing of its divestiture. Staff proposes further investigation by working
with the Company to identify and document the process used in this area of decision-making.
In addition, Staff continues to have questions regarding the circumstances
surrounding acquisitions and then dispensation of natural gas to fuel the Coyote Springs
combined cycle combustion turbine. The Company maintains that at the time natural gas was
purchased, it was anticipated that Coyote Springs II would be operational and more economical
to operate than making market energy purchases. As it turns out, Coyote Springs was neither
operational nor economical given the price of gas previously purchased. The effect was an
abnormally high percentage of hedged gas to serve available resources at prices found to be
uneconomical when compared to energy purchased from the market.Consequently, Staff
proposes that the Commission withhold judgment on net gas costs of $578 748 incurred in June
2002 to serve Coyote Springs until a more complete evaluation is conducted regarding
anticipated online dates, reasons for the operational delay and timing of the sale of gas acquired
ORDER NO. 29130
for use at the plant. Staff believes that the additional evaluation can be conducted by Staff and
included for review in the next PCA.
Gas Swaps and l?inancial Accounting Standards (l? AS) 133
Staff recommends the removal of the line item labeled gas swaps and FAS 133.
Avista includes two equal and opposite entries in the deferral balance, one in December 2001
and one in January 2002. Staff contends that the entries are a tracking mechanism for derivative
accounting with F AS 133 and are not appropriate PCA items. There is no change in the deferral
balance as a result of these entries or Staffs adjustment.
Rate Decision-Extension of Deferral Period
Staff notes that at the public workshop three commercial customers involved in the
timber industry voiced concerns about the PCA rate impact on their costs. One customer (J D
Lumber, Inc.) suggested that spreading PCA costs over two to three years would be more
beneficial. Staff recognizes this as a rate design option but does not recommend this option to
the Commission for the following reasons: Quantified PCA deferrals will require two years to
recover under the Staff and Company proposals in this case. Delaying recovery of these
deferrals further into the future brings the possibility of additional years of poor water
conditions, which could increase the deferral balance. The carry-over balance would accrue
additional interest charges, which would increase PCA rates for those customers. It is also a
concern that these customers only represent three customers in one or more classes. It is not
known whether or not other customers in the same customer class or classes would want PCA
costs spread over additional time periods.
Staff Calculation of the Deferral Balance
The Company reports a total unrecovered deferral balance at June 20, 2002 of
$45 600 228. Staff adjustments total $1,499 932 and result in a total unrecovered deferral
balance at June 30, 2002 of $44 100 296. Staff supports the Company s proposal to leave
current rates in place for another year and proposes to re-examine PCA deferrals next year. Staff
recommends that the Company be required to file a PCA status report 60 days prior to the
expiration of the PCA rate.
ORDER NO. 29130
Consumer Issues
Staff in its comments summarizes the written comments received from customers
comments presented in the September 18 workshop in Sandpoint and details the different types
of programs available to customers for energy assistance and payment.
Staff Recommends:
1. That the current surcharge of 19.4% be continued for another 12 months
and the Company be required to file a PCA status report 60 days prior to
the expiration of the PCA rate next year.
2. That the Company s request to change the interest rate be denied and the
existing rate be continued. The interest rate mechanism as originally
applied in the PCA modification case - using the customer deposit rate
continues to be the appropriate rate in determining the carrying charge.
3. That the variable costs for the small generation options be included in the
deferral balance for recovery. The costs included in the deferral balance
that represent capital costs, i.e. for the Kettle Falls small generation
option, should be excluded from deferral balance and subsequent
recovery.
4. That the net fuel expense for natural gas combustion turbine fuel sold
rather than burned be included in the deferral balance for recovery, with
the exception of the net expenses that were specifically related to fuel
expenses for the Coyote Springs plant. Staff recommends these expenses
along with similar expenses incurred after June 2002 be subject to a more
detailed evaluation to be completed by Staff and reflected in the next
PCA review.
Staff also proposes a complete review of Avista s risk management and
mitigation policies on an ongoing basis. A review of these types of
transactions, it contends, is timely given the changes in electric and gas
markets along with changes in the electric industry. It is also , it states
consistent with reviews conducted with other utilities.
5. That the line item titled Gas Swaps, FAS 133 included by the Company in
the deferral calculation be removed.
6. That the deferral balance be modified to include Staffs adjustments and
the corresponding adjustments to the carrying charges.
ORDER NO. 29130
Potlatch Corporation
Potlatch contends that Modified Procedure is not appropriate because the Application
raises a number of very significant issues that are well beyond the scope of a traditional PCA
pass-through case. Potlatch recommends that the Commission conduct an evidentiary hearing.
Potlatch contends that the real reason for Avista s enormous power cost deferrals
during the period from July 2001 through June 2002 was its decision to lock-in forward prices
shortly before the market's rapid price decline. Potlatch also notes that Avista s losses from
hedging comprise mOre than 25% of the Company s PCA request. This expense was for natural
gas purchases intended for use in generating electricity, but not actually used for generation but
resold into the open market. Potlatch states that this natural gas was resold by Avista at an
enormous loss equal to more than 40% of the original purchase price. On its face, Potlatch
contends that this huge purchasing mistake cries out for a prudency investigation.
Potlatch argues that Avista s attempt to recover nearly $750 000 in net turbine costs
for the cancelled Othello project is objectionable because the turbine is not "used and useful" in
the service of Idaho ratepayers. In addition, Potlatch notes that A vista proposes to recover "lease
payments, maintenance agreement payments, and incremental, non-labor, installation costs for
Devil's Gap and Kettle Falls Bi-Fuel." Such costs, Potlatch contends, cannot be deferred for
PCA recovery, whether or not prudently incurred. Citing Idaho Power Case No. IPC-02-
Such plant costs must be recovered, if at all, Potlatch contends , in a general rate case.
Potlatch questions whether Avista is allocating the cost of serving Potlatch
inappropriately. Avista s Application, it states, contains an unusual direct assignment to the
Idaho jurisdiction of the cost of serving Potlatch. If A vista directly assigned a pro rata share of
the system cost of service to Potlatch to the Idaho jurisdiction, then Potlatch concedes that the
assignment appears to be proper. If, on the other hand, A vista assigned anything other than a pro
rata share of system costs, then Potlatch contends that the assignment is improper and potentially
detrimental to Idaho ratepayers. Without further proceedings, Potlatch states that it cannot
determine whether this assignment is proper or not.
Potlatch requests that the Commission either (1) deny Avista request for
continuation of the PCA surcharge or (2) limit refundable recovery to the PCA amounts that
would have been incurred had A vista made its electric and natural gas purchases at actual
ORDER NO. 29130
contemporaneous wholesale market prices, as measured by prices at Mid-C and at Sumas
Washington.
Other Customer Comments
With the exception of two customers who support the Company s filing, the
comments filed by the Company s other customers express opposition to a continuance of the
PCA surcharge. The temporary surcharge is a hardship and they would like to see it removed. It
was suggested that Commission efforts to address and better the financial wellness of the utility
must be weighed against the effect of those efforts in what is already a stagnant and depressed
economy.For many timber related businesses in northern Idaho, the cost of power is a
significant expense. The added cost and effect of surcharges, they state, can be staggering.
great many comments reflect that the Company has been unsuccessful in
communicating the separateness of its regulated utility operations from its unregulated subsidiary
operations. Both customers and some legislators alike believe that there is a direct tie to the
actions of Avista s subsidiaries and the increase in electric costs that the utility seeks to pass on
to its customers. The Commission is urged to take no action until the Federal Energy Regulatory
Commission (FERC) completes its investigation of the 2000-2001 run-up in northwest and
western market energy prices.
A vista and not its customers, some contend, must be held responsible and
accountable for the bad decisions of its management. The Company, one customer comments
should stay committed to being a utility company and stay away from other money deals, which
may be harmful. The Company, it was suggested, needs to put time and effort into cutting its
costs, and should by example require the CEO and other top executives to take a reduction in
their bonuses, stock options and other benefits.
Company Reply
Avista contends that Potlatch's request for evidentiary hearings should be rejected.
Avista states that the issues raised by Potlatch in their comments are premised on inappropriately
applying "hindsight" to power purchase, gas purchase and small generation project decisions
made by Avista to serve its customers. The appropriate standard, Avista contends , is whether the
Company made a reasonable decision based on the information available to the Company at the
time the decision was made. A vista contends that it is not appropriate to compare purchase
prices to historical indexes and prices.
ORDER NO. 29130
Avista also disagrees with Potlatch's comments with regard to capital costs for
completed and cancelled small generation projects. Capital costs associated with the recently
completed Company-owned Boulder Park generating project, Avista contends, are not included
in the PCA. The Kettle Falls Bi-Fuel units, the Company states, are leased units which
addressed resource needs that cost less than then prevailing market prices and, the Company
contends, are appropriately included in the PCA.
The Devil's Gap small generation option, the Company states, was for the lease of
diesel generators. The lease was cancelled due to the subsequent decline in market prices. The
Company disagrees with Staffs proposal to remove site preparation and setup costs associated
with the lease units under the premise that such costs are capital costs. These costs, the
Company states, were necessary in siting the lease units. The Company submits that the costs
were necessary, prudently incurred, and should remain in the PCA deferral.
The Othello small generation project, the Company states, was originally planned to
be owned by the Company, but the project was cancelled and the costs included in the PCA
represents the write-down of the value of the unit. Othello project write-down costs, the
Company contends, are not capital costs from the standpoint of being a completed plant that is
currently in service. The Company contends that the Staff mischaracterizes the Othello project
as lease costs. The Company believes that regardless of how the write-down is characterized, the
costs were reasonably incurred by the Company to reduce the overall power costs based on
conditions at the time and should be included in the PCA.
Should the Commission decide that it is appropriate to remove the Othello write-
down costs from the PCA deferral balance the Company requests that the Commission permit the
Company to record the costs in Account 182.30 Other Regulatory Assets to be held for review
until its next general rate case. Absent Commission authority for deferral as a regulatory asset
the Company notes that it could be put in a position of expensing the Othello write-down as a
current period cost.
A vista maintains that Potlatch's contention that the direct assignment to Idaho of the
cost in serving Potlatch may be inappropriate is without merit. With the exception of the
previous Potlatch contract on December 31 , 2001 , A vista states that Potlatch received service
under the Idaho Extra Large Service - Schedule 25 rate schedule. The direct assignment of 25
~MW of Potlatch load to Idaho the Company contends is necessary, as the
ORDER NO. 29130
production/transmission allocation does not reflect the new servIce under Schedule 25.
Reference Application, Norwood Testimony pp. 19-21. Mr. Norwood's testimony, the Company
states, shows the Idaho PCA benefit of the Potlatch contract change to be $1 365 540. The cost
of $30 per megawatt hour was used for the direct assignment cost for the 25 average megawatts.
The $30 per megawatt hour price, the Company contends, is close to the average system cost of
power. Therefore, contrary to Potlatch's allegations, Avista contends that the $30 price per
megawatt hour is a fair representation of average system cost and that there is substantial benefit
to Idaho customers.
COMMISSION FINDINGS
The Commission has reviewed and considered the filings of record, PCA Status
Report and comments in the Company s Application to extend the existing PCA surcharge for an
additional 12 months, including the comments of Senator Keough, the Commissioners of
Shoshone County, Potlatch Corporation and Commission Staff. We have also reviewed our prior
Order No. 28876 wherein we authorized the present PCA surcharge, required the Company to
file a Status Report prior to its scheduled expiration, and anticipated a filing by the Company
requesting a continuation of the surcharge. A continuation was anticipated because the 19.4%
surcharge requested by Avista and approved by the Commission would generate only $23.
million, less than the accrued balance in the PCA deferral account ($30 million) at the time the
surcharge was implemented. Although the Company requested a 27 -month surcharge period, we
approved only 12 months. We implemented a surcharge based on actual deferral balances. The
power situation in the Northwest continued to be unsettled. The prospect of future volatility
dictated that we closely monitor the Company s purchase power and power sales decisions. The
Company s filing in this case provides us with the opportunity to revisit the Company s PCA
deferral account, its hydro position and its related power purchase/sale transactions.
This filing by the Company is a continuation of last year s PCA filing, a filing that
was precipitated by a combination of record low hydroelectric generation and unprecedented
prices for short-term wholesale electricity and natural gas. It was an energy crisis of historic
proportion. Regulators and utilities are still struggling with its impacts. The 27-month recovery
period requested for accrued and estimated power cost deferrals spread the recovery of those
costs over time to allow a lower surcharge level than would otherwise be required. The
Company s initial estimate of future deferrals has proven to be fairly accurate. We established a
ORDER NO. 29130
12-month recovery period, required a Status Report and pledged to revisit the matter in a year.
We note that the Company last year anticipated offsetting some of the accrued power purchase
costs with market sales of its own surplus generation. The market rate and level of offset that
Avista hoped to receive was dampened by the cap on market rates imposed by FERC and current
market rates.
Many of the concerns and issues raised by Avista s customers fall outside the limited
scope of a PCA filing, which is limited to power cost transactions and expenses, variable costs
related to the Company s generation capability, and related efforts necessary to serve and benefit
its native load. In assessing the reasonableness of the Company s deferred costs we consider
whether the Company s decisions based on the information available at the time were reasonable
when made and whether the Company s attempts to control its costs were prudent. It would not
be appropriate to use the review standard suggested by Potlatch and assess the Company
decisions from the perspective of perfect hindsight. The Company hedged against future price
volatility with forward energy and gas purchases. Although circumstances ultimately created
unfortunate results, we find the utility s practice to be otherwise responsible and reasonable.
Some of the issues raised by customers in comments are beyond our statutory
jurisdiction, which is defined by Idaho Code, Title 61. Our jurisdiction over the activities ofthe
regulated utility affiliates is limited. Some of the issues raised by customers fall within the
jurisdiction of the Federal Energy Regulatory Commission (FERC), an agency which itself is
conducting an investigation of utilities and traders regarding the wholesale market pricing and
energy situation which developed in 2000-2001.
Potlatch in its comments requested an evidentiary hearing. We find no need for such
a hearing. We continue to find Modified Procedure to be appropriate. The level of the
Company s PCA deferral balance ($45 million) and the annual surcharge rate requested ($23.
million) permit us to make adjustments and conduct further inquiry without suspending or
reducing the surcharge. In this Order, we exclude the recovery of capital costs identified by
Potlatch as inappropriate for a PCA mechanism. We also defer a decision regarding fuel costs
for Coyote Springs pending further inquiry and direct Staff to investigate the Company s Risk
Management Plan.
Although some adjustments to the PCA deferral balance are appropriate, based on
Staffs audit results , the Commission finds it is reasonable to authorize a one-year continuation
ORDER NO. 29130
of the existing 19.4% ($26.6 million) surcharge. The bulk of the deferred PCA amounts continue
to be purchase/sales transactions related to poor water conditions and high market prices. Also
included are amounts associated with Commission authorized buy-back programs and net fuel
costs for the Company s natural gas combustion turbines, gas that was purchased, but because of
more competitive least-cost options not used and sold at a loss. We find that no adjustment is
required related to the Company s cost of service to Potlatch and its transition from special
contract customer to tariff customer. We acknowledge an adjusted unrecovered balance at June
2002 of$44 100 296. See Attachment A to this Order.
As a regulatory body, this Commission has a dual obligation, to the utility and to its
customers. We cannot deny recovery of reasonably incurred expenses. The rates we approve
must be just and reasonable. We cannot establish rates for the Company that are confiscatory.
The Commission has the power to investigate the reasonableness of the Company s request. As
we noted in the Company s prior PCA filing, not all factors contributing to the increase in the
PCA deferral balance are beyond the control of the Company. Avista controls the timing of its
purchases, controls the extent to which it hedges against price changes, and controls the extent to
which the Company is in a net deficit resource position.
We find that the PCA mechanism is for recovery of variable costs and is not an
appropriate vehicle for recovery of capital costs. Accordingly, we direct the Company to remove
the capital costs associated with Kettle Falls Bi-Fuel ($56 598), Devil's Gap ($96 743), and
Othello ($744 884) from the PCA deferral accounts together with corresponding adjustments to
the carrying charges. See Attachment A to this Order.
Staff and Potlatch both suggest the appropriateness of further inquiry regarding fuel
purchased for the Coyote Springs plant. We agree. We remove $578 748 in net fuel expense
pending further review together with an adjustment for related carrying charges. See
Attachment A to this Order. We find it reasonable that the inquiry and Staff s investigation be
conducted during the next surcharge year and reported during the next PCA review. We find
that it is also appropriate during this next year for Staff to investigate and assess the
reasonableness of the Company s risk management policy and how it affects the Company
short term resource acquisition decision making and to submit its findings and conclusions
during the next PCA review.
ORDER NO. 29130
Avista has requested authorization of a 6% interest rate on deferral balances.
Although we granted that rate to Idaho Power, the PCA methodologies for the two companies
and their treatment of carrying charges are different. The PCA deferral balance for A vista
accrues interest during the recovery period; Idaho Power s does not.We therefore find it
reasonable to deny Avista s request. The Company is to continue using the annually adjusted
customer deposit rate, currently 4%, a rate that we continue to find reasonable.
Regarding the Company s inclusion of a line item labeled Gas Swaps and F AS 133
in its PCA accounts, the Commission finds that inclusion of a tracking mechanism for derivative
accounting in the PCA accounts is inappropriate. The Company is directed to remove those line
entries.
As we did last year, we find it reasonable to continue a close monitoring of the
Company s PCA decisions and thus require the Company to file a PCA Status Report 60 days
prior to the expiration of the PCA surcharge. As before, if the Status Report and our review of
the actual PCA deferral balance supports continuation of the surcharge, we anticipate
continuation of the surcharge for an additional term.
In authorizing a continuation of the surcharge, we recognize that the Company
residential, small business and industrial customers will not have the rate relief that they desire.
For some customers this will result in economic hardship. We are not insensitive to their
situation. Staff in its comments has detailed different types of programs available to eligible
Avista customers for energy assistance and payment, i., (I) the LIHEAP energy assistance
program, (2) Project Share, (3) County welfare benefits, (4) the CARES program which assists
elderly and disabled customers, (5) Avista s comfort level billing program, and (6) a winter
moratorium on disconnects.Those comments are available on the Commission s website
www.puc.state.id., under this case number. Direct inquiry can also be made of the Company
at call center numbers identified in monthly billing statements.
CONCLUSIONS OF LAW
The Idaho Public Utilities Commission has jurisdiction over Avista Corporation dba
Avista Utilities and the issues raised in Case No. A VU-02-6 pursuant to the authority granted
the Commission in Idaho Code, Title 61 and pursuant to the Commission s Rules of Procedure
IDAPA 31.01.01.000 et seq.
ORDER NO. 29130
ORDER
In consideration of the foregoing and as more particularly described above, IT IS
HEREBY ORDERED and the Commission does hereby authorize a continued 12-month PCA
surcharge of 19.4% ($23.6 million) for an effective date of October 12 , 2002. Avista is directed
to file a PCA Status Report 60 days prior to expiration of the authorized surcharge period.
IT IS FURTHER ORDERED that the Avista requested change in the interest rate on
the PCA deferral b~lance is denied.
IT IS FURTHER ORDERED that capital costs (and related carrymg charges)
included by the Company in the variable costs for small generator options be excluded from any
PCA recovery. See Attachment A to this Order.
IT IS FURTHER ORDERED and the Commission defers decision regarding the net
fuel expense (and related carrying charges) related to the Company s Coyote Springs facility
pending further inquiry and report to the Commission in the Company s next PCA review.
IT IS FURTHER ORDERED and Staff is directed to investigate and assess the
reasonableness of Avista s risk management policy and how it affects the Company s short-term
resource acquisition decisions and to submit its findings and conclusions in the Company s next
PCA review.
IT IS FURTHER ORDERED that the line item titled Gas Swaps, F AS 133 included
in the Company s PCA accounts and deferral calculation be removed.
THIS IS A FINAL ORDER. Any person interested in this Order may petition for
reconsideration within twenty-one (21) days of the service date of this Order. Within seven (7)
days after any person has petitioned for reconsideration, any other person may cross-petition for
reconsideration. See Idaho Code ~ 61-626.
ORDER NO. 29130
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this II
day of October 2002.
--MARSHA H. SMITH, COMMI
ATTEST:
9oWJ J r;:3t0VLG1AJ.5:
Barb Barrows
Assistant Commission Secretary
bls/0:A VUEO206 sw
ORDER NO. 29130
Idaho Public Utilities Commission
Staff Attachment A
Avista Idaho PCA Deferred Cost Balances
Case No. A VU-O2-
1 Deferral balance at June 31 , 2001
2 Deferrals July 2001 through June 2002
3 Transfer of under-rebate
4 Transfer of under-surcharge
5 PGE monetization accelerated amortization
6 Interest
7 Subtotal - Account 186.38 balance at June 30, 2002
8 Revenues collected October 12 , 2001 - June 30, 2002
9 Unrecovered balance at June 30 , 2002
(Avista Application; Page 4 , Lines 8 through 16)
$ 30 007 057
$ 48,442 371
$ (49 073)
$ 342 069
$ (20,783 521)
$ 2,764 590
$ 60 723 493
$ (15 123 265)
$ 45 600 228
Staff Adjustments to Deferrals July 2001 through June 2002
10 Remove the Kettle Falls Bi-Fuel Capital Costs
11 Remove the Devil's Gap Capital Costs
12 Remove the Othello Capital Costs
13 Subtotal - Capital Costs
15 Defer the review of the Net Fuel Expense for June 2002 for fuel purchased specifically for Coyote Springs
17 Adjustment to Interest balance as a result of Staff Adjustments
18 (July 2002 will reflect the interest adjustment for the June 2002 Staff Adjustments)
20 Total Staff Adjustments
22 Staff Unrecovered Balance at June 30, 2002
598
743
744 884
898 225
578 748
959
499 932
$ 44 100 296
ATTACHMENT A
CASE NO. AVU,02-
ORDER NO. 29130