20060616Comments.pdf

CECELIA A. GASSNER
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
BAR NO. 6977
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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 AN ORDER APPROVING A
CORPORATE REORGANIZATION TO
CREATE A HOLDING COMPANY, AVA FORMATION CORP.
CASE NO. AVU-O6-
A VU-O6-
COMMENTS OF THE
COMMISSION STAFF
The Staff of the Idaho Public Utilities Commission, by and through its Attorney of record
Cecelia A. Gassner, Deputy Attorney General, in response to the Notice of Application, Notice of
Workshop and Notice of Modified Procedure in Order No. 30026 issued on April 28, 2006, submits
the following comments.
BACKGROUND
On February 16, 2006, Avista Corporation dba Avista Utilities ("A vista" or "Company ) filed
an Application with the Commission seeking an order for authority to conduct a corporate
reorganization and form a holding company to be known as A V A Formation Corp. Avista believes
that a holding company structure would allow the Company to better respond to the changing business
environment of the electric and natural gas industry, while providing the opportunity to further insulate
its utility business from its non-utility business. The Company believes that this reorganization would
STAFF COMMENTS JUNE 16, 2006
provide additional protection for ratepayers by "ring-fencing" or further separating utility operations
from the Company s other non-regulated businesses. Additionally, the Company believes that a
holding company structure would provide better financing flexibility to the organization allowing it to
effectively compete in the industry.
This Commission has jurisdiction over this request pursuant to Idaho Code ~ 61-328. The
holding company, A V A Formation Corp. (the "Parent Corporation" or "A V A"), would be formed as
the parent company of the existing regulated company, A vista Corporation. The Parent Corporation
would also be the parent company of Avista Capital, Inc., which would continue to hold non-regulated
subsidiaries. 1 For the purposes of these comments, the entity that would be the regulated utility
provider after the proposed reorganization, if approved, shall be known herein as "A vista Utilities.
On April 28, 2006, the Commission issued its Order No. 30026, providing a Notice of
Application, Notice of Workshop, and a Notice of Modified Procedure. No petitions to intervene in
this proceeding were filed in this matter.
Pursuant to the Commission s Order No. 30026, representatives of the Parties conducted a
workshop on May 16, 2006, and engaged in informal settlement discussions with a view toward
resolving the Application in this case. Based upon the settlement discussions among the Parties as a
compromise of the positions in this case, and for other consideration as set forth below, the Parties
agree to various Commitments.
STAFF ANALYSIS
Staff reviewed the requirements necessary for the Commission to approve the reorganization
and, as Staff discovered potential issues, to evaluate whether those issues created by the reorganization
would have an adverse effect on customers or would pose a risk to the organization s overall credit
rating. Staff applied the standards of review set forth in Idaho Code ~ 61-328 and Idaho Code, Title
, Chapter 9. Idaho Code ~ 61-328 provides that "No electric public utility... shall merge, sell, lease
assign or transfer, directly or indirectly, in any manner whatsoever, any such property or interest
therein... except when authorized to do so by order of the public utilities commission." More
specifically, this statute requires that the Commission make three specific findings:
1 Avista Corporation, doing business as Avista Utilities, is currently the corporate parent. The
proposed structure would make A vista Utilities a separate company under the Parent Corporation and
A vista Corporation would no longer exist as an operating entity.
STAFF COMMENTS JUNE 16, 2006
a. That the transaction is consistent with the public interest;
b. That the cost of and rates for supplying service will not be increased by reason of such
transaction; and
c. That the applicant for such acquisition or transfer has the bona fide intent and financial
ability to operate and maintain said property in the public service.
Title 61 , Chapter 9 (Issuance of Securities by Public Utilities) of the Idaho Code specifies the
requirements Avista must follow to obtain authority to reorganize. Staff concerns discussed during the
review and informal discussions included: customer guarantees and service performance standards;
access to the books and records of A vista Utilities, the Parent Corporation and affiliates; the
composition of the Board of Directors of both entities; capital commitments; resource acquisition on a
level playing field; low income customer programs; and, especially ring-fencing.
The final Stipulation and Commitments (Appendix A) agreed to by the parties in Idaho that
address the collective concerns ofthose parties. Generally, in addition to compliance with Idaho law
the components of the Commitments can be broken down into three categories of compliance:
1) Adherence to ring-fencing provisions;
2) Providing Staff access to books and records; and
3) Regulatory reporting requirements.
It is Staffs belief that Commitment Nos. 1 , 8 , 10, 11 , 15, 17, 18, 19 , and 31
address the first category, with agreed upon ring-fencing provisions ranging from maintaining separate
books and records for each entity to providing a non-consolidated opinion to the Commission
demonstrating that the ring-fencing around A vista Utilities is sufficient to prevent A vista Utilities from
being pulled into a Parent Corporation bankruptcy proceeding. As outlined in Commitment No. 31 , by
agreeing to this requirement, the Company would have to take immediate action, if results of a non-
consolidated opinion revealed that the organization s ring-fencing protocols have been breached or
circumvented, in order to remedy such breach or circumvention. This Commitment is necessary
because it provides Staff and the Commission with additional notice of faults in internal controls and
provides insight to measures taken to resolve those deficiencies. A non-consolidated opinion would be
documented in the Company s books and records along with audit reports and a risk management
analysis detailing causes and corrective measures the Company implemented in response to any
deficiencies.
Additionally, Commitment Nos. 2, 3, 5 , 13 , 23 , and 24 provide Staff access to a full range of
books and records, credit reports, Board of Directors minutes, internal audit and risk reports and
STAFF COMMENTS JUNE 16, 2006
confidential documents which would pertain to A vista Utilities and its affiliates including the Parent
Corporation. Comprehensive reporting requirements have also been agreed upon which would require
the Parent Corporation and A vista Utilities to report to Staff and request approval from the
Commission when certain events occur. These events include diverse activities such as procuring
loans, conducting spin offs, dissolution of business activities, dividend payment arrangements and
changes in the credit ratings of each entity.
In addition, comprehensive arrangements have been agreed to for complying with cost
allocation methodologies including rate-setting and cost-sharing. In Commitment No. 17, the "Equity
Building Mechanism " A vista Utilities agrees that it would increase the actual utility equity component
to 35% by December 31 , 2007 and to 38% by December 31 , 2008. To the extent Avista Utilities
incurs increased power supply or purchased gas costs that are not recovered in retail rates in a timely
manner, its ability to build equity would be impaired. Accordingly, the calculations to determine
whether the targets are met will be adjusted for any additional deferred power supply or purchased gas
costs recorded on A vista Utilities' books after January 1 , 2006, which have been approved for
recovery, over a period longer than that proposed by the Company. Failure to meet the first target will
result in an automatic reduction in base utility rates (spread uniformly across all classes) of 2%
effective April 1 , 2008. Failure to meet the second target would result in a reduction of 2%, effective
April 1 , 2009. If the Company fails to achieve the first target but meets the second one, the 2%
reduction on April 1 , 2008 would be reversed prospectively as of April 1 , 2009. If it meets the first
target but misses the second, the April I , 2009 reduction would remain in effect until its next general
rate case. If Avista Utilities misses both targets, the total reduction would equal 4%, which would
remain in effect until the next general rate case.
Another area of discussion between Staff and the Company concerned dividend payments. The
Company agreed, in Commitment No. 18, that Avista Utilities will not make any dividends to the
Parent Corporation that would reduce Avista Utilities' common equity capital below 25% of its Total
Adjusted Capital without the Commission s approval. This percentage will be adjusted, as necessary,
to account for any changes to Generally Accepted Accounting Principles (GAAP) after approval of this
transaction. For the purpose of calculating the numerator of the percentage, common equity will not
include any portion of Avista Utilities preferred stock issued and outstanding. Avista Utilities' Total
Adjusted Capital is defined as common equity, preferred equity, long-term debt, short-term debt and
capitalized lease obligations.
STAFF COMMENTS JUNE 16, 2006
Staff, in reviewing the Company s Application and discussing the agreed-upon Commitments
took into account customer comments that expressed concerns regarding loan arrangements and inter-
company financing. Commitment No. 29 addresses these concerns by requiring Avista Utilities to
demonstrate that the procurement of any loan from the Parent Corporation does not interfere with any
of the ring-fencing mechanisms that secure the utility.
Keeping in mind the standards of Idaho Code ~ 61-328, Staff discussed commitments with the
Company to secure and demonstrate that those standards have been met. In particular, the
reorganization plan is designed in a manner that fully protects the interests of its customers because the
plan further insulates customers from the risks associated with what would be the Parent Corporation
unregulated operations. Three specific examples of customer protection and assurance that costs will
not increase due to the transaction include: 1) Commitment No. 12, which states that the cost of
formation of the Parent Corporation would not be included in future A vista Utilities ratemaking
proposals; 2) Commitment No. 22, under which Staff will evaluate the "all-in-cost" of issuances for
inclusion in rates and the cost of any debt issuance recognized for ratemaking will not be higher than it
otherwise would have been without the corporate reorganization; and 3) Commitment No. 29, which
states that "cross-subsidization" between A vista Utilities and other affiliates must be entirely
transparent so that in any subsequent rate proceedings A vista Utilities would be required to
demonstrate that any debt obligation interest, terms and conditions are comparable or less than what
could have been obtained in the market.
The reorganization should reduce the utility s risk and improve credit ratings. Staff does not
anticipate rating downgrades based on recent credit rating reviews. However, in the event of a credit
rating downgrade due to the reorganization, Staff will calculate the impact on customers and propose
an adjustment be made to Avista Utilities' revenue requirement in the appropriate rate proceedings.
The provisions set out in the Commitments (Appendix A) assure that the public interest is
protected with ring-fencing provisions and that these barriers are not over come by any affiliate where
the credit rating of one is used to offset the diminished rating of the other. The operations and
structure of A vista Utilities and the Parent Corporation would continue to meet the requirement of
having the bona fide intent and financial ability to operate and maintain said property in the public
servIce.
STAFF COMMENTS JUNE 16, 2006
STAFF RECOMMENDATION
The Staff recommends approval of the proposed reorganization given that the Company and its
affiliates have agreed to implement these specific commitments, conditions and reporting mechanisms.
Staff recommends that the Commission accept and approve the Stipulation and adopt the
Commitments in Appendix A. Staff believes that these Commitments adequately protect Idaho
ratepayers and serve the public interest.
Respectfully submitted this
/ ~ A. day of June 2006.
CL~Cecelia A. . sner
Deputy Attorney General
--..
Technical Staff: Tom McKeown
Terri Carlock
i:umisc:comments/avueO6.- avugO6.1cgtm
STAFF COMMENTS JUNE 16, 2006
CERTIFICATE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS 16TH DAY OF JUNE 2006
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN CASE
NO. A VU-06-lIA VU-06-, BY E-MAILING A COpy THEREOF AND BY
MAILING A COpy THEREOF, POSTAGE PREPAID , TO THE FOLLOWING:
DAVID J. MEYER
SR VP AND GENERAL COUNSEL
A VISTA CORPORATION
PO BOX 3727
SPOKANE W A 99220-3727
E-mail dmeyer~avistacorp.com
KELLY NORWOOD
VICE PRESIDENT - STATE & FED. REG.
A VISTA UTILITIES
PO BOX 3727
SPOKANE W A 99220-3727
E-mail Kelly.norwood~avistacorp.com
Jo~
SECRETARY
CERTIFICATE OF SERVICE