20040206Morris Direct.pdf

DAVIDJ. MEYER
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
A VISTA CORPORATION
O. BOX 3727
1411 EAST MISSION A VENUE
SPOKANE, WASHINGTON 99220-3727
TELEPHONE: [phone]
FACSIMILE: [phone]
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MA TIER OF THE APPUCA nON
OF A VISTA CORPORA nON FOR THE
AUTHORITY TO INCREASE ITS RATES
AND CHARGES FOR ELECTRIC AND
NATURAL GAS SERVICE TO ELECTRIC AND
NATURAL GAS CUSTOMERS IN THE STATE OF IDAHO
CASE NO. A VU-04-
CASE NO. A VU-04-
DIRECT TESTIMONY
SCOTT L. MORRIS
FOR A VISTA CORPORATION
(ELECTRIC AND NATURAL GAS)
I. INTRODUCTION
Please state your name, employer and business address.
My name is Scott L. Morris and I am employed as the President of Avista
Utilities and Senior Vice-President of Avista Corporation, at 1411 East Mission Avenue,
Spokane, Washington.
Would you briefly describe your educational background and professional
experience?
I am a graduate of Gonzaga University with a Bachelors degree and a Master
degree in organizational leadership. I have also attended the Kidder Peabody School of
Financial Management.
I joined the Company in 1981 and have served in a number of roles including customer
service manager. In 1991 , I was appointed general manager for Avista Utilities' Oregon and
California natural gas utility business. I was appointed President and General Manager of
A vista Utilities, an operating division of A vista Corporation, in August 2000. In February
2003, I was appointed Senior Vice-President of Avista Corporation.
In 1999, I was appointed by then-Governor John Kitzhaber as a board member of the
Oregon Economic and Community Development. Gommission. I served as a member of the
board of directors and as board president of Southern Oregon Regional Economic
Development Inc. I served as a director and board president of the Medford/Jackson County
Chamber of Commerce, and board member and board president of the Providence Community
Health Foundation.
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A vista Corporation
I am currently a member of the Providence Services of Eastern Washington board of
directors, a member of the Gonzaga University board of regents, a director of the Washington
Roundtable, and Chairman of the Spokane Regional Chamber of Commerce board of trustees.
In 2002, I was appointed by Governor Locke to the Chairmanship of the Washington Economic
Development Commission.
What is the scope of your testimony?
I am testifying as the policy witness for the Company. I provide an overview of
Avista Corporation and Avista Utilities. I describe Avista Utilities' overall utility operations
the Company s rate request in this filing, and the major factors driving the Company s need for
general rate relief. I will also explain the Company s customer support programs that are in
place to assist our customers. In addition, I will briefly discuss some of the current and future
challenges that are being addressed by the Company. Thereafter, I introduce each of the other
witnesses providing testimony on the Company s behalf.
Are you sponsoring an exhibit in this proceeding?
Yes. I am sponsoring Exhibit No.1, which was prepared under my direction.
II. OVERVIEW OF A VISTA
Please briefly describe A vista Utilities.
A vista Utilities provides electric and natural gas service within a 26 000
square mile area of northern Idaho and eastern Washington. The Company, headquartered in
Spokane, Washington, also provides natural gas distribution service in southwestern and
northeastern Oregon, and in the South Lake Tahoe area of California. Maps showing the
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Company s electric and natural gas Idaho service area and Avista s total natural gas and
electric service areas are provided in pages 1, 2, and 3 of Exhibit No.
As of December 31 , 2003, Avista Utilities had total assets of approximately $2.4
billion (on a system basis), with electric retail revenues of $490 million (system) and natural
gas retail revenues of $277 million (system). As of December 2003, the Utility had 1,450
full-time employees.
Please describe A vista Utilities ' Idaho electric and natural gas utility
operations.
Of the Company s 325,645 electric and 298,411 natural gas customers (at year
end 2003), 109,315 and 61 799, respectively, were Idaho customers. The Company serves
the Idaho counties of Benewah, Bonner, Boundary, Clearwater, Idaho, Kootenai, Latah,
Lewis, Nez Perce, and Shoshone. Lumber and wood products manufacturing is the dominant
industry in our Idaho service area. Approximately 32% of 2003 Idaho electric retail usage
was from residential customers, with 29% from commercial, 38% from industrial customers,
and 1 % from pumping customers. Approximately 72% of natural gas retail revenues were
from residential customers, and 18% from commercial and 10% from industrial and
transportation customers. The Company has seven transportation customers in Idaho.
Additional details of usage by customer class are shown on page 4 of Exhibit No.
Please describe A vista's current business focus for the utility and
subsidiary operations.
The Company has worked hard to continue to operate what I believe to be a
very efficient utility. Over the past three years the Company has faced a number of serious
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A vista Corporation
challenges and has instituted several aggressive measures to manage its way through the
financial difficulties presented by the record-low hydro conditions, unprecedented high
wholesale market prices and power plant construction expenditures. Some of these measures
include the sale of 50% of the Coyote Springs 2 project, divestiture of A vista Communications
and a majority share of A vista Labs, and significant temporary reductions in capital and
operation and maintenance (O&M) budgets, intended to get the Company through this difficult
period. Mr. Malquist will discuss further the actions taken by the Company to improve cash
flow, reduce debt, and work toward regaining an investment grade credit rating.
Our strategy continues to focus A vista Corp. activities on our energy and energy-
related businesses, with our primary focus on the electric and natural gas utility business.
There are four distinct components to our business focus for the utility, which we have
referred to as the four legs of a stool, with each leg representing customers, employees, the
communities we serve, and our financial investors. For the stool to be level, each of these legs
must be in balance by having the proper focus. This means we must maintain a strong, low-
cost utility business by delivering efficient, reliable and high quality service to our customers
and the communities we serve. We are fortunate to have dedicated employees who, despite
the past three years of reduced budgets due to turbulence in the industry, have maintained high
morale and high customer satisfaction.
For our subsidiaries, specifically our non-regulated energy activities, we are managing
the size and the risk associated with this business, which we have done by scaling back
operations to the Western Electricity Coordinating Council (WECC) region, to make the best
use of our knowledge and experience in markets we know well.
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A vista Corporation
Please briefly describe A vista's subsidiary businesses.
Avista Corp.s subsidiaries, headquartered in Spokane, Washington, include the
energy marketing and resource management business, A vista Energy, and the information and
technology business, A vista Advantage, described below.In 2001 , A vista disposed of
substantially all of the assets of A vista Communications, and sold eighty-three percent of
Avista Labs in 2003. A diagram of Avista s corporate structure is provided on page 5 of
Exhibit No.
A vista Energy is our energy marketing and resource management business, operating
primarily within the WECc. Besides the Spokane headquarters, A vista Energy also has an
office in Vancouver, British Columbia, Canada.Avista Energy focuses on asset-backed
optimization of combustion turbines and hydroelectric assets owned by other entities, long-
tenD electric supply contracts, natural gas storage, and electric and natural gas transmission
and transportation arrangements.Avista Energy manages Avista Power s 49 percent
ownership of a 270 MW natural gas combined cycle combustion turbine plant in Rathdrum
Idaho, which commenced commercial operation in September 2001. Avista Power is inactive
at this time with no plans for additional generation projects.
A vista Advantage is a provider of internet-based facility intelligence, cost
management, billing and information services to multi-site retail customers throughout North
America. Avista Advantage s solutions are designed to provide multi-site companies with
critical and easy-to-access information that enables them to proactively manage and reduce
their facility-related expenses.
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A vista Corporation
III. RATE REQUESTS
Please provide an overview of Avista'electric rate request in this filing.
Through this filing the Company is requesting that the Commission grant a net
electric rate increase of $18.9 million or 11.0%. I refer to a net increase of 11.0%, because
the Company s overall request for electric operations includes a $35.2 million or 24.
increase in base retail rates. As Mr. Hirschkorn explains in his testimony, in order to mitigate
the overall price increase request in this case, the Company is proposing to reduce the current
Power Cost Adjustment (PCA) surcharge, and recover the remaining PCA balance over a two-
year period. Due to the proposed reduction in the PCA rate, the net overall change to
customers ' electric rates would be 11.0% instead of 24.1 %, as illustrated below.
Illustration 1
Rate Adjustments
30%
10%
11%
Increase over
current rates *20%
Existing PCA
2003 2004 2005 2006
*Including PCA surcharge
The Company s request is based on a proposed rate of return of 9.82% with a common
equity ratio of 44.3% and an 11.5% return on equity. The Company is proposing to spread the
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requested electric increase on a uniform cents per kilowatt hour basis, with an adjustment to
move customer class rates of return one-half way to unity. The illustration below shows the
proposed overall net increase to customer rates, which reflects the proposed reduction in the
PCA surcharge rate.
Illustration 2
Service Schedule
Residential Service Schedule 1
General Service Schedules 11 & 12
Large General Service Schedules 21 & 22
Extra Large General Service Schedule 25
Potlatch (Lewiston) Schedule 25
Pumping Service Schedules 31 & 32
Street & Area Lighting Schedules 41-
Overall Increase
Proposed
Net Increase
13.
10.
15.
12.
12.
11.0%
The Company is proposing to raise the residential basic charge to $5.00 from the
current $4.00 charge. Mr. Hirschkorn will provide additional details related to rate spread and
rate design issues.
What is A vista'natural 2as rate request in this filing?
With regard to natural gas, the Company is requesting an increase of $4,754,000
or 9.2%. Avista s last general rate increase for natural gas service was approximately fourteen
years ago in 1990. As with the electric increase, the Company s request is based on a proposed
rate of return of 9.82% with a common equity ratio of 44.3% and an 11.5% return on equity.
The Company is proposing to spread the requested natural gas increase on a uniform cents per
therm basis, with an adjustment to move customer class rates of return one-half way to unity.
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A vista Corporation
As a result, the proposed rate spread for natural gas would result in an increase for each
customer class as shown in the illustration below.
Illustration 3
Service Schedule
General Service Schedule 101
Large General Service Schedule 111/112
High Annual Load Factor - Lg. General Service Schedule 121/122
Interruptible Sales Service Schedule 131/132
Transportation Service Schedule 146 (excluding gas costs)
Overall Increase
Proposed
Increase
10.
3.4%
18.
The Company is proposing to raise the residential basic charge to $5.00 from the
current $3.28. Mr. Hirschkorn will address these rate spread and rate design issues.
What are the primary factors causing the Company s request for an
electric rate increase in this filing?
The Company s last electric general rate case in Idaho was filed in 1998 with
rates effective in 1999. Since that time the Company has placed into operation new generating
projects, such as Coyote Springs 2 and Boulder Park. The Company is a 50% owner of the
new Coyote Springs 2, 280-megawatt combined cycle combustion turbine project in Oregon
which commenced commercial operation in July 2003. Boulder Park is a generating project
that includes six natural gas fired reciprocating engines with a total capability of 25 MW.
Other factors driving the need for electric rate relief include a reduction in wholesale
sales revenue, and increased fuel costs for thermal generation, primarily natural gas. Mr.
Falkner testifies to these costs and other factors impacting the revenue requirement. In
addition, during the "energy crisis" of 2000 and 2001 , it was necessary for Avista to fund high
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energy costs for both the electric and natural gas business at relatively high borrowing costs.
This resulted in an increase in interest expense, as will be explained in more detail by Mr.
Malquist. The primary factors driving the electric rate request are illustrated below.
Illustration 4
Primary Factors Driving $35.2 Million Electric Case
(Dollars in Millions)
Net Power Supply Operating Costs (1)
$13.
Increased Plant Investment (2)
$11.
Lost Margin due to lower sales
$2.
Other Net IncreasesIDecreases since 1997
$2.
(1) Reduced wholesale revenues (PGE Capacity Sale). and increased fuel costs (Coyote).
(2) Including new investment such as Coyote and Boulder.
What are the primary factors driving the Company s request for a natural
gas rate increase?
Although there are a number of increases and decreases in revenue, expense and
rate base items, for the natural gas business, there are a few major components that drive the
requested rate increase. One of these components is declining thenn usage by our customers
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on a weather adjusted basis. Residential average usage has decreased from 82 therms per
month in 1999 to 73 therms in 2002, a reduction of about 11 %. If residential customers had
averaged 82 therms per month in 2002, the Company s natural gas revenue requirement would
be approximately $1.3 million less.
A second component is an increase in general business expenses since general rates
were last increased in 1990. The number of natural gas customers served by Avista in Idaho
has increased from 23,400 in 1990 to 59 800 in 2002. The decline in natural gas usage by
customers combined with the growth in customers, and the general increase in expenses over
the past fourteen years, has caused the need for rate relief.
You have discussed the base or fixed costs of Avista's natural gas business.
There have been significant increases in natural gas commodity costs. Would you please
describe these changes?
Yes. The natural gas industry has experienced significant volatility and upward
price pressure on wholesale, or commodity, costs of gas. These costs are passed on to
customers through the periodic Purchased Gas Adjustments (PGAs). The following graph
shows the history of commodity cost changes. In addition, the bottom portion of the graph
shows the change in the Company s distribution and overhead costs (base rate costs) over time.
As shown in the illustration, the Company s management of its costs has resulted in these costs
remaining very flat over time, as measured on a per-therm basis.
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Avista Corporation
$0.
::E
w $0.
::E:
to-
iii $0.
~ $0.40 G"'~'
$0.
Illustration 5
Avista Utilities Residential Rates
Idaho Natural Gas
$1.
$0.
$0.
$0.
$0.
$0.
1~ 1~ 1~ 1m 1~ 1~ 1~ 1~ 1~ 1~ 1~ ~1
~ ~
Has the Company considered the possible economic impacts of the
Company s rate proposals in its service territory?
Yes. Through my involvement with area chambers and economic
development agencies, I am particularly mindful of the impact that rate increases have on our
customers, including the businesses within our service area and the important role the utility
plays in the communities we serve. In the long run, a financially healthy utility providing
safe and reliable service at competitive rates will foster satisfied customers and healthy
communities.
I believe our track record in the past decade demonstrates our commitment to
providing excellent service to our customers at the lowest possible cost. This would be the
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second electric general or base rate increase in the last ten years and the first natural gas base
rate increase over the same period. The total increase in electric and natural gas base rates
over the last ten years has been 7.58% for electric and 0% for natural gas, as compared to the
increase in the Consumer Price Index of 27.34% over the same period. This comparison is
shown below.
! 15%
25%
20%
Illustration 6
Avista Utilities
Change in Electric and Natural Gas Idaho Base Rates
vs. CPllndex (1993 - 2003)
30%
10%
':i'
':'
If'
Year
Further, we have attempted to mitigate the impact on customers ' electric rates with
the proposal to reduce the PCA surcharge to produce a net average change in current
customer bills of 11.0% rather than an overall increase of 24.1 %.
Please describe how A vista Utilities has managed its operating costs.
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A vista Corporation
The Company has historically run its operations with attention to minimizing
expense while providing quality service and a high level of customer satisfaction. The
financial challenges of the past three years have caused the Company to especially scrutinize
costs from top to bottom. Through this process, however, the Company has exercised
discretion to avoid cuts that could have had long-term negative consequences in its utility
operations.
The success of the Company s cost control efforts for both electric and natural gas
operations can be seen in an analysis of the change in total operation and maintenance
(O&M) and administrative and general (A&G) costs in recent years, which is shown in the
illustrations below.
ELECTRIC
Illustration 7
Total Idaho Electric O&M and A&G Cost Per Customer
% Change from 1997 to 2002 vs Consumer Price Index
15.
12.
10.
Total O&M & A&G Exp Consumer Price Index
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A vista Corporation
NA TU RAL GAS
Illustration 8
Total Idaho Natural Gas O&M and A&G Cost Per Customer
% Change from 1998 to 2002 vs Consumer Price Index
15.
10.
10.
Total O&M & A&G Exp Consumer Price Index
As the charts illustrate, the Company has managed its Idaho electric and natural gas
O&M and A&G costs per customer well below the change in the Consumer Price Index. Mr.
Falkner provides additional testimony related to these changes in costs.
IV. CUSTOMER SUPPORT PROGRAMS
Please outline the programs the Company has in place to mitigate the
impacts on customers of the proposed rate increase.
A vista Utilities offers a number of programs to assist customers who have
difficulty in paying their energy bills. Some of these programs are operated in cooperation
with local Idaho community action agencies who are experienced in targeting the assistance
where it is needed most. These programs include energy efficiency programs, Project Share
for emergency assistance to customers, a CARES programs, level pay plans, and payment
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arrangements. These programs are briefly described below. Mr. Kopczynski, a later witness
provides additional details related to these programs in his testimony.
Energy efficiency programs.A vista Utilities offers energy efficiency services
to electric and natural gas residential, commercial, and industrial customers.
Proiect Share.Project Share is a voluntary option allowing customers to
contribute funds that are then distributed through community action agencies
to customers in need. A vista itself contributed $60,000 to the program in the
past year.
Payment averaging.Comfort Level Billing is the Company s option for
customers to pay the same bill amount each month of the year.
Payment arrangements.The Company s Contact Center Representatives work
with customers to set up payment arrangements to pay energy bills.
CARES program.Special needs customers have access to specially trained
(CARES) representatives.
Customer service automation.Customers are able to access A vista
Interactive Voice Response system (IVR) for automated transactions such as
to enter their own payment arrangements, listen to outage messages and
conduct other business such as obtaining account balances and requesting a
duplicate bill.
v. ADVANCED METER READING
Please explain the Company s plans related to advanced meter reading
(AMR) in its Idaho service territory?
For the past ten years, the Company has been closely following the
development of AMR technology and its potential application at A vista. Until recently, the
cost of AMR technology has been much greater than the benefits that could be achieved on
the Company s system. We believe a combination of decreases in capital and installation
costs of AMR together with expected continuing increases in meter reading expenses now
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A vista Corporation
supports the installation of this technology. Over a four-year period beginning in 2005, the
Company plans to upgrade Idaho electric and natural gas meters for automatic reading
capability. This will allow the Company to manage meter reading labor costs, provide
improvements on meter data accuracy, lower customer service costs, and virtually eliminate
estimated meter readings. Mr. Holmes provides an expanded description of the Company
plans for AMR and associated costs and benefits.
What technology, or type of AMR devices, is the Company proposing to
install?
As will be explained by Mr. Holmes, the Company plans to utilize
combination of AMR technologies in its Idaho service territory. We intend to install radio-
based technology in areas with higher meter densities and Power Line Carrier (PLC) based
technology in areas with lower densities.We will continue to use telephone-based
technologies for selected industrial accounts. A vista estimates the costs to install this system
in Idaho to be approximately $16 300,000, with approximately equal expenditures over a
four year period beginning in January 2005.
Is the Company proposing an adjustment to rates in this filing for AMR
equipment and installation?
No.The Company is not proposing an increase in rates in this filing
associated with the proposed AMR program. Mr. Falkner will explain the Company
accounting proposal associated with this program.
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A vista Corporation
VI. OTHER CURRENT AND FUTURE ISSUES
What are some of the major issues facing the Company in the next three to
five years?
In the next three to five years A vista will face a number of major issues that
will affect the future costs to provide service to our customers. Among the issues are:
Transmission Upgrades
As Mr. Kopczynski explains in his testimony, to reinforce the electric transmission grid
eastern Washington and northern Idaho, Avista Utilities, in collaboration with the
Bonneville Power Administration, is building and upgrading transmission infrastructure that
will improve the delivery of electricity to meet existing and future power needs in Avista
service territory.The projects will relieve current transmission congestion in the area and
improve system reliability. It will also provide additional transmission capacity to meet future
growth needs in the region. These major transmission upgrades began in 2003 and will be
completed in 2006. The projects represent over $100 million in new infrastructure investment.
Approximately $26.3 million of these projects will be completed in the near-term and Idaho
jurisdictional capital costs of $9 million have been included in this case. The costs associated
with the remainder of the projects will be the subject of a future rate proceeding.
Spokane River Relicensing
Avista s license for the Spokane River hydroelectric projects expires in 2007. These
projects include Post Falls, Upper Falls, Monroe Street, Nine Mile and Long Lake, with a total
generating capacity of 156 MW and average annual energy production of approximately 105
aMw. Since 2001 , we have been working with numerous stakeholders to understand and
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resolve issues related to the Spokane River Project. The first full season of field studies were
completed in 2003 , and we are currently reviewing those results. Stakeholders are also
beginning to work on proposals for protection, mitigation, and enhancement measures. Our
goal is similar to what was accomplished on the Clark Fork Project: a comprehensive
settlement agreement defining the terms and conditions of a new license based on a consensus
of local, state and federal agencies, tribes and local citizens. We plan to have a draft license
application ready at the end of 2004, and to file with FERC by July 2005. Mr. Storro provides
additional discussion related to these efforts. The Company is not proposing a change in rates
in this case related to this relicensing process.
Cabinet Gorge Dissolved Gas
As Mr. Storro explains in his testimony, when the Clark Fork relicensing process was
completed, an issue related to the high levels of dissolved gas occurring during spill periods at
Cabinet Gorge Dam remained unresolved. A plan to mitigate the high total gas levels has
been developed with stakeholders including the Idaho Department of Environmental Quality.
The plan calls for the phased modifications of two existing diversion tunnels with engineering
studies to commence in 2004. The first tunnel would be constructed by 2010 at an estimated
cost of $37 million, and the second tunnel, if needed, within 10 years of the first tunnel at an
estimated cost of $23 million. The second tunnel would be constructed only after an analysis
of the performance of the first tunnel and an evaluation of the environmental benefits.
Although preliminary work has begun on the project, the Company has not requested an
increase in rates in this filing.
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A vista Corporation
Regional Transmission Organization
The Company has expended a significant amount of time and effort in recent years
related to the development of a regional transmission organization (RTO). Avista continues to
work with parties throughout the region to pursue the development of a regional transmission
organization solution for the Pacific Northwest. The Company has not included costs
associated with RTO formation in this filing.
Volatility of Energy Markets
The Company and its customers continue to face the challenges associated with the
volatility of electric and natural gas wholesale market prices. Volatile wholesale prices affect
the costs to the Company s retail natural gas customers, the cost to produce power from the
Company s natural gas-fired generating projects, and the Company s financing requirements in
covering these electric and natural gas purchase costs.The variability of Avista
hydroelectric generation, in particular, exposes the Company and its customers to the volatile
wholesale electric and natural gas prices, when the Company must purchase replacement
power from the market or run gas-fired generation to cover low streamflow conditions. The
Company continues to focus on resource management and resource procurement strategies that
will reduce exposure to volatile wholesale market prices and provide a level of price stability
for customers.
Thus, putting aside the very difficult challenges of the past few years, A vista has a
number of major issues to address in the near future that will require significant investment of
capital and other increased costs.
Are there any recent developments that you would like to address?
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A vista Corporation
Yes. On January 15,2004, operating indicators at the Coyote Springs 2 project
noted a potential internal arcing problem in the plant generator step-up transfonner (the main
transformer connecting the plant to the grid). Numerous tests were conducted and found that
internal arcing had in fact occurred, however the internal inspection found no visible cause.
The manufacturer (Alstom) has determined that the only way to find the cause is to return the
transformer to its repair facility. The manufacturer s initial estimates are that the transformer
could be repaired and returned to the Coyote Springs site by June 30, 2004. Without the
transformer, Coyote Springs 2 will be out of service during this period. All costs related to
repair of the equipment are covered by the manufacturer s warranty. The Company has
requested that its investment in Coyote Springs 2 be included in rate base in this filing.
stated earlier, the Company expects the transformer repairs to be completed and the plant back
on line by June 30, 2004. In the interim, the Company does not expect the outage to result in a
material impact on its operating costs, because there is currently little difference in the market
price of power and the incremental cost to run the project during this period.
Are there other noteworthy accomplishments that you would like to
address?
Yes. There are several items of which I am particularly proud. The Company
contact center has been recognized nationally for its quality and efficiency. The Coeur d' Alene
and Lewiston call centers are networked with call centers in Spokane, Washington and
Medford, Oregon.In 2003, this allowed Customer Service Representatives to provide
assistance to over ten customers per hour and 17 500 calls per year per representati ve.
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Avista s employees continue to collaborate on innovative ideas. The Conservation
Fund Year in Review, 2002 stated: "For the fourth straight year, Avista Corporation has
received an Outstanding Stewards of America s Rivers award from the National Hydropower
Association. The group honored the energy company for its preservation work in the Clark
Fork River basin.
The Kettle Falls Generating Station, the first wood waste-fired plant in the United
States built by a utility solely for the generation of electricity, is marking its 20th anniversary.
This plant has won several awards such as the Washington State s Environmental Excellence
Award for reducing emissions from burning waste in open wigwam burners and Power
Magazine Energy Conservation A ward.
The Company continues to further transmission reliability for the benefit of our
customers and the region as a whole. In addition to what are known as the West of Hatwai
projects that will be described by Mr. Kopczynski, the Company has pioneered the use of a
Star Network," or radial design to reduce transmission losses as well as to increase reliability
to our customers and reduce the number of customers affected by transmission outages.
However, I am most pleased with the response of Avista Utilities' employees in the past
three years as the Company faced its most serious financial challenge in its 114 year history.
Employees have maintained quality customer service and reliability while challenged to do
more with less. While we have maintained tight controls on capital and O&M budgets, our
customer service surveys indicate that customer satisfaction has remained high. Our most
recent overall customer satisfaction survey results show a satisfied customer rating of 89.1 %
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our Idaho and Washington operating divisions. These results can be achieved only with very
committed and competent employees.
VII. OTHER COMPANY WITNESSES
Would you please provide a brief summary of the testimony of the other
witnesses representing A vista in this proceeding?
Yes. The following witnesses are presenting direct testimony on behalf of
A vista.
Mr. Malyn Malquist, Senior Vice President and Chief Financial Officer will describe,
among other things, the overall financial condition of the Company, its current credit ratings,
the Company s plan for a return to investment grade credit ratings, the proposed capital
structure, and the return on equity requested by the Company. Mr. Malquist explains that:
The Company s credit rating is below investment grade for unsecured debt
having been severely impacted by the Western energy crisis of 2000 and 2001;
A vista is aggressively rebuilding its financial health including retiring higher
cost debt and conserving cash through strategic initiatives;
The Company has proposed an overall rate of return of 9.82%, including a
44.3% equity ratio and an 11.5% return on equity;
Although the analyses of Dr. A vera and Dr. Wilson support a return on common
equity in excess of 11.5%, A vista has limited it request to 11.5% in an effort to
balance the competing objectives of A vista regaining its financial health within
a reasonable period of time, and the impacts that increased rates have on our
customers;
This general rate request for electricity and natural gas in the State of Idaho is
important component in the continuing improvement of A vista s financial
condition, providing the opportunity to regain an investment grade credit rating.
Dr. William E. A vera.as a principal in Financial Concepts and Applications (FINCAP),
Inc., has been retained to present testimony with respect to the Company s cost of capital and
capital structure. He concludes that:
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A vista Corporation
Analyses related to the cost of common equity for a benchmark group of electric
utilities in the western U.S. yields an ROE in the range of 10.4% to 11.9%;
The investment risks associated uniquely with A vista, however, are significantly
greater than those of the utilities in the benchmark group and investors require a
higher rate of return to compensate for that risk;
Based on capital market analyses and the economic requirements for electric
utility operations, an 11.5% ROE falls below the current required rate of return
for Avista, in light of investors' economic requirements and the Company
specific risks;
The challenges imposed by the evolving structural changes in the industry imply
that utilities will be required to incorporate relatively greater amounts of equity
in their capital structures. The total equity ratio of 44.3% proposed by A vista in
this case would barely meet the targets that Standard & Poors expects for an
investment grade rated utility.
Dr. William Wilson, a Senior Economist at Ernst and Young, will explain his
methodology for assessing industry risk and operating company risk, and the resulting return on
equity for Avista based on this methodology. Dr. Wilson will:
Demonstrate a marked increase in volatility of operating earnings as a
percentage of rate base among regulated electric utility operating companies
during the 1998-2002 period, when compared to prior periods. Higher volatility
implies higher risk. Allowed rates of return in the utility industry have not been
adjusted to reflect this higher risk;
Present a methodology to recognize the risk profile of electric utility operating
companies that incorporates data from 116 regulated electric utilities;
Identify and analyze twelve key variables to assess the risk of an individual
utility relative to other utilities in the industry;
Conclude that the analysis, including consideration of the specific operating
risks of A vista, supports an ROE for A vista at the higher end of an ROE
bandwidth from 11.08% to 13.32%.
Mr. Richard Storro, Director of Power Supply, will present an overview of resource
planning and power operations, will address the Commission s PCA Order regarding Risk
Policy, and will describe the Company s hydro-relicensing activities related to the Clark Fork
and Spokane Rivers. He explains:
Morris, Di
A vista Corporation
14 .
A vista is in a surplus or balanced energy position through 2007 on an average
annual basis. The Company has an average energy deficit of 22 aMW in 2008
and increases to 333 aMW in 2014;
The Company intends to continue the preferred resource strategy laid out in its
recent 2003 Integrated Resource Plan, which is a combination of market
purchases, energy efficiency, renewable resources, combined cycle combustion
turbines, and coal-fired generation;
A vista is upgrading its Cabinet Gorge Project Unit #2, and is applying the very
successful approach it used in the relicensing of its Clark Fork projects to its
Spokane River facilities relicensing process;
Mr. Storro also addresses the Company s Energy Risk Policy as it relates to its
procurement strategies.
Mr. Robert Lafferty,Manager, Wholesale Marketing & Contracts, among other things
will address the Company s selection of the Coyote Springs 2 (CS2) generating project, the
management of CS2 construction issues and the reasonableness of certain gas supply contracts
deferred to this case by the Commission from the Company s 2003 PCA case. Mr. Lafferty
demonstrates that:
With regard to the CS2 Project:
The Company s selection of CS2 as a resource from its 2000 all-resource
Request For Proposal process was reasonable. The Company reasonably and
fairly evaluated 32 proposals from 23 bidders, which resulted in the selection of
CS2 as the supply-side resource;
It was reasonable to sell 50% of the CS2 project to Mirant, given the financial
challenges facing the Company;
The Company, along with its CS2 partner Mirant, took reasonable steps to bring
the CS2 project to commercial completion as quickly as practical when taking
into account the impacts of the EnronlNEPCO bankruptcies and the generator
step-up transformer delays. The costs associated with the CS2 project are
reasonable and should be approved for recovery.
With regard to issues deferred from the 2003 PCA:
The Company s decisions to purchase index-based firm delivered natural gas for
CS2, with delivery flexibility to provide fuel supply to other natural gas-fired
generation projects, were reasonable;
The Company s decision to fix the price of a portion of its index-based natural
gas, by entering into four medium-term hedge transactions, was based on its
Morris, Di
A vista Corporation
need for resources to serve net system load, which resulted in a lower cost to
generate power compared to purchasing electric power in the market;
The Company periodically enters into medium-term power transactions, such as
the hedged transactions. The decision to enter into the transactions was
reasonable, based on the information available at the time.
Mr. William Johnson,Senior Power Supply Analyst, will describe the adjustments to
the 2002 test period power supply revenues and expenses. Mr. Johnson describes:
The Company s adjustments to the 2002 test period power supply revenues and
expenses. These adjustments are designed to reflect the nonnalized level of
revenues and expenses, and to include known and measurable changes to the
revenue and expense items;
The increase in net power supply expenses since the Company s last general rate
case of approximately $11 million (Idaho share). The two primary changes
include the reduction in wholesale sales revenue (pGE capacity sale) of $6
million, and an increase in net fuel expense for thermal generation (primarily
CS2) of $4.5 million;
The Company s updated base costs to be used in future Power Cost Adjustment
calculations.
Mr. Clint Kalich, Manager of Power Supply Planning and Analysis, will describe the
Company s Aurora model inputs, assumptions, and results related to the economic dispatch of
Avista s resources to serve load requirements. He explains that:
The AURORA system dispatch model more accurately reflects the true system
dispatch of Avista s resources on an hourly basis, than the prior model that used
monthly data;
The model dispatches Avista s generation resources and contracts on an hourly
basis in a manner that maximizes benefits to customers;
The output results from the model, including thennal generation and short-term
wholesale sales and purchases, were provided to Mr. Johnson to incorporate into
the power supply proforma adjustments.
Mr. Don Kopczvnski, General Manager of Energy Delivery, will describe Avista
energy delivery operations, the Company s vegetation management program, and the major
transmission upgrades currently in progress. Mr. Kopczynski describes:
Morris, Di
A vista Corporation
Avista s customer service programs such as energy efficiency, Project Share,
and payment plans. Some of these programs will serve to mitigate the impact
on customers of the proposed rate increase;
The effort, in collaboration with the Bonneville Power Administration, to build
and upgrade transmission infrastructure that will improve the delivery of
electricity to meet existing and future power needs in Avista s service territory;
The projects represent over $100 million in new infrastructure investment that
will be completed by 2006;
Avista s comprehensive and professionally-staffed vegetation management
program that reduces customer outages, improves safety, and enhances system
reliability.
Mr. David Holmes, Manager of Distribution Engineering, will present the Company
plan to implement an advanced meter reading (AMR) program. Mr. Holmes explains:
The Company plans to install meter upgrades to Idaho electric and natural gas
meters over a four-year period beginning in 2005 at a cost of approximately
$16.3 million;
The benefits include savings in meter readings, customer billing, maintenance
expense, and future customer service enhancements;
The Company does not seek an increase in rates at this time for AMR costs.
Mr. Don Falkner, Manager of Revenue Requirements, will discuss the Company
overall revenue requirement proposals.In addition, his testimony and exhibits in this
proceeding will generally cover accounting and financial data in support of the Company s need
for the proposed increase in rates. He sponsors:
Electric and natural gas revenue requirement calculations;
Electric and natural gas results of operations;
Profonned operating results including expense and rate base adjustments;
System and jurisdictional allocations;
Advanced Meter Reading accounting proposal.
Ms. Tara Knox,Rate Analyst, sponsors the cost of service studies for electric and
natural gas service and the weather normalization adjustments to retail usage. Ms. Knox studies
indicate:
Morris, Di
A vista Corporation
Electric service residential and extra large service schedules are earning
substantially less than the overall rate of return under present rates;
Gas general service schedule 101 (primarily residential customers) is earning
slightly less than the overall return, all other schedules are earning more than the
overall return, but less than the requested return;
Mr. Hirschkorn incorporates these findings in his rate spread recommendation.
Mr. Brian Hirschkorn, Manager of Retail Pricing, discusses the spread of the proposed
annual revenue changes among the Company s general service schedules and addresses the
Company s revenue normalization adjustment. He explains that:
The proposed annual net electric revenue increase is $18,871 000, or 11.0%.
The net increase consists of a proposed general increase of $35,222,000 as well
as the proposed reduction in the present Power Cost Adjustment (PCA)
surcharge of $16,351,000;
The proposed increase for a residential customer using an average of 941
kwhs per month is $7.85 per month, or a 13.9% increase in their electric bill.
The present bill for 941 kwhs is $56.52 compared to the proposed level of
$64.37;
As part of that increase, the Company is proposing that the basic customer
charge be increased from $4.00 to $5.00 per month;
The Company is proposing to add an energy usage rate block to each of its
electric general service schedules (Schedules 11, 21 and 25), whereby the
larger customers served under those schedules would pay a lower
incremental energy rate for usage beyond a certain level;
Since the Company s last general rate case, usage per customer appears to
have declined significantly for all customer classes. From 1997 (last general
case test year) to 2002, residential use per customer has declined from 1 037
kwhs per month to 941 kwhs, or about 9%. Use per customer has declined
about 8% for commercial and industrial customers during that time, and
about 14% for the Company s largest fourteen customers served under
Schedule 25;
The Company is proposing changes to the present Schedule 25 rate structure
that will result in Potlatch paying an average rate per kwh that is lower than
the average rate(s) paid by other Schedule 25 customers;
The proposed natural gas annual revenue increase is $4 754,000, or 9.2%;
The increase for a residential customer using an average of 73 therms of gas
per month would be $5.75 per month, or 9.6%, which includes a proposed
increase in the monthly basic customer charge from $3.28 to $5.00;
0 A bill for 73 therms per month would increase from the present level of
$60.01 to a proposed level of $65.76;
Morris, Di
A vista Corporation
The Company requests that the Commission issue a finding that electric energy
efficiency expenditures from January 1999 through December 31 , 2003 and
natural gas energy efficiency expenditures from March 13, 1995 through
December 31 2003 were prudently incurred.
Does this conclude your pre-filed direct testimony?
Yes.
Morris, Di
A vista Corporation