20121011Morris DI.pdf

DAVID J. MEYER
VICE PRESIDENT AND CHIEF COUNSEL FOR
REGULATORY & GOVERNMENTAL AFFAIRS
AVISTA CORPORATION
P.O. BOX 3727
1411 EAST MISSION AVENUE
SPOKANE, WASHINGTON 99220-3727
TELEPHONE: [phone]
FACSIMILE: [phone]
[e-mail]

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF THE APPLICATION ) CASE NO. AVU-E-12-08
OF AVISTA CORPORATION FOR THE ) CASE NO. AVU-G-12-07
AUTHORITY TO INCREASE ITS RATES )
AND CHARGES FOR ELECTRIC AND )
NATURAL GAS SERVICE TO ELECTRIC ) DIRECT TESTIMONY
AND NATURAL GAS CUSTOMERS IN THE ) OF
STATE OF IDAHO ) SCOTT L. MORRIS
)

FOR AVISTA CORPORATION

(ELECTRIC AND NATURAL GAS)

Morris, Di 1
Avista Corporation
I. INTRODUCTION 1
Q. Please state your name, employer and business 2
address. 3
A. My name is Scott L. Morris and I am employed as 4
the Chairman of the Board, President and Chief Executive 5
Officer of Avista Corporation (Company or Avista), at 1411 6
East Mission Avenue, Spokane, Washington. 7
Q. Would you please briefly describe your 8
educational background and professional experience? 9
A. Yes. I am a graduate of Gonzaga University with 10
a Bachelors degree and a Masters degree in organizational 11
leadership. I have also attended the Kidder Peabody 12
School of Financial Management. 13
I joined the Company in 1981 and have served in a 14
number of roles including customer service manager. In 15
1991, I was appointed general manager for Avista 16
Utilities’ Oregon and California natural gas utility 17
business. I was appointed President and General Manager 18
of Avista Utilities, an operating division of Avista 19
Corporation, in August 2000. In February 2003, I was 20
appointed Senior Vice-President of Avista Corporation, and 21
in May 2006, I was appointed as President and Chief 22
Operating Officer. Effective January 1, 2008, I assumed 23
Morris, Di 2
Avista Corporation
the position of Chairman of the Board, President, and 1
Chief Executive Officer. 2
I am a member of the Western Energy Institute board 3
of directors, a member of the Gonzaga University board of 4
trustees, a member of Edison Electric Institute board of 5
directors, a member of the American Gas Association, a 6
member of ReliOn board of directors, and board director of 7
the Washington Roundtable. On January 1, 2011, I was 8
appointed to the Federal Reserve Bank of San Francisco, 9
Seattle Branch board of directors and in January 2012 I 10
was appointed as Chairman of the Board to Innovate 11
Washington by Governor Christine Gregoire. I also serve 12
on the board of trustees of Greater Spokane Incorporated. 13
Q. What is the scope of your testimony in this 14
proceeding? 15
A. I will first explain why Avista is requesting a 16
rate increase through this filing, and summarize the 17
Company’s electric and natural gas rate requests. A large 18
part of our need for a rate increase is driven by the 19
costs associated with continuing to expand and replace the 20
facilities we use every day to serve our customers. When 21
we remove the old equipment and replace it with new, it 22
results in higher overall costs to serve customers. This 23
Morris, Di 3
Avista Corporation
was the primary reason for the proposed increase in our 1
last rate increase request, and it is expected to continue 2
to cause a need for increased rates in the future. 3
I will also discuss some of the measures we have 4
taken to cut costs, as well as initiatives to increase 5
operating efficiencies in an effort to mitigate future 6
cost increases to customers. I will briefly explain the 7
Company's customer-support programs in place to assist our 8
customers, as well as our communications initiatives to 9
help customers better understand the changes in costs that 10
are causing our rates to increase. Finally, I will 11
introduce each of the other witnesses providing testimony 12
on the Company’s behalf. 13
A table of contents for my testimony is as follows: 14
Description Page 15
I. Introduction 1 16
II. Why Is Avista Requesting A Rate Increase 4 17
III. Summary of Rate Requests 19 18
IV. Cost Management and Efficiencies 24 19
V. Communications with Customers 26 20
VI. Customer Satisfaction 32 21
VII. Customer Support Programs 33 22
VIII. Other Company Witnesses 35 23
Q. Are you sponsoring any exhibits in this 24
proceeding? 25
Morris, Di 4
Avista Corporation
A. Yes. I am sponsoring Exhibit No. 1, Schedule 1
Nos. 1 and 2. Schedule No. 1 includes an overview of 2
Avista and its utility and subsidiary operations, as well 3
as a diagram of Avista’s corporate structure. Schedule 4
No. 2 includes a map showing Avista’s electric and natural 5
gas service areas. 6
Q. What are the rate increases requested by Avista 7
in this filing? 8
A. Avista is requesting an overall electric billed 9
rate increase of 4.6% or $11.4 million, and a natural gas 10
billed rate increase of 7.3% or $4.6 million. 11
12
II. WHY IS AVISTA REQUESTING A RATE INCREASE 13
Q. Why is Avista requesting a rate increase? 14
A. Before I address our rate request, I would like 15
to specifically address the issue of the economy. The 16
people of the State of Idaho and our Country are 17
continuing to face the challenges of a difficult economy. 18
In our 2011 general rate case proceeding, the Commission 19
received a number of comments from customers related to 20
our proposed rate increase. The comments addressed, among 21
other things, the state of the economy, the need for 22
Avista to “tighten its belt,” concerns about executive 23
Morris, Di 5
Avista Corporation
compensation, and an inability to pay energy bills by 1
seniors and those on limited incomes. We have read every 2
one of the written comments, and I can assure you that the 3
decisions we make at Avista are not made without taking 4
into consideration the current state of the economy, as 5
well as the other issues raised by our customers. 6
With regard to low income customers and seniors, we 7
understand that when energy costs go up, especially in 8
times like these, it affects everyone. Our prices remain 9
among the lowest in the nation and in the Northwest. While 10
that’s an important comparison, we know it doesn’t change 11
the fact that rates are rising during tough times. But we 12
make it a priority to do the best we can to assist 13
customers who need more help. I will describe in more 14
detail the Company’s support programs later in my 15
testimony. 16
With regard to cost-control, we contracted with a 17
consultant in 2010 to come in to Avista to take an 18
independent, objective look at opportunities to do our 19
work more efficiently and more cost-effectively. Although 20
some areas were identified where efficiencies could be 21
gained, we also found that many of our operations were 22
already efficient and cost-effective. 23
Morris, Di 6
Avista Corporation
In the past several years we have also made 1
substantial cuts in our capital budget in order to 2
mitigate rate impacts to customers. Because we have 3
chosen to not spend millions of dollars on facilities that 4
need to be replaced, this has also contributed to higher 5
unemployment in North Idaho and Eastern Washington. 6
At the same time, while we continue to maintain tight 7
controls on capital and O&M budgets, our customer service 8
surveys indicate that customer satisfaction remains high. 9
Our overall customer satisfaction from our voice-of-the-10
customer surveys in the second quarter of 2012 was 93% in 11
our Idaho, Washington, and Oregon operating divisions. 12
This rating reflects a positive experience for customers 13
who have contacted Avista related to the customer or field 14
service they received. 15
I believe that many of our customers, however, do not 16
understand that there are limitations on how far we, as a 17
utility, can go with cost-cutting before we begin to 18
jeopardize reliability of service and customer 19
satisfaction. As a regulated company Avista has an 20
obligation to safely and reliably serve every customer 21
that requests service. 22
Morris, Di 7
Avista Corporation
Q. How does that obligation to serve limit the 1
ability of Avista to cut spending? 2
A. Avista has a legal obligation to provide safe 3
and reliable service to every customer that requests 4
electric service from the Company. When a new customer 5
requests service, we must hook them up, even if the cost 6
to serve that customer results in increased costs to all 7
other customers. Likewise, if the facilities serving an 8
existing customer are deteriorating and need repair, we 9
must repair or replace them so that the customer continues 10
to receive safe, reliable service. 11
We have highlighted some of these points in prior 12
filings, but they bear repeating because they get to the 13
heart of why we are requesting a rate increase in the 14
midst of a continuing difficult economy. 15
We have heard the comments from some of our customers 16
to the effect that Avista should cut its costs, and 17
“tighten its belt” like other businesses are having to do 18
in these difficult economic circumstances. And we have 19
taken steps to do so. But at the same time we are not 20
like other businesses. Without the obligation to serve, 21
we could consider refusing to hook up new customers, 22
because it could avoid an increase in costs to our 23
Morris, Di 8
Avista Corporation
existing customers. Without an obligation to serve, we 1
could consider no longer serving some of the more remote, 2
more costly areas to provide service, which would allow us 3
to avoid further investment, and reduce labor and other 4
operating costs. Unregulated businesses have the 5
opportunity to shut down aging facilities or under-6
producing retail outlets, eliminate product lines, and cut 7
back on investment and maintenance. We do not. 8
We do have opportunities to cut back on investment 9
and operating costs, and we have where prudent to do so. 10
But those opportunities are limited by our obligation to 11
safely and reliably serve all customers, and our 12
obligation to comply with numerous mandatory state and 13
federal requirements. We simply don’t have the choice to 14
say no to new customers, no to maintaining a safe, 15
reliable system, and no to mandatory requirements. 16
Although we have taken measures to ensure that the costs 17
that we incur represent the most cost-effective and 18
reliable way to continue to serve our customers, we 19
continue to experience significant increases in costs. 20
Q. You mentioned earlier that as Avista removes old 21
worn-out equipment and replaces it with new, it results in 22
higher overall costs. Why does this cause Avista’s costs 23
Morris, Di 9
Avista Corporation
to go up when the Company has a depreciation component 1
included in retail rates to help cover the cost to replace 2
facilities? 3
A. Avista’s retail rates are cost-based, which 4
means the prices customers are paying today for 5
transformers, distribution poles, substations, and 6
transmission lines, among other facilities, are based on 7
the cost to install those facilities, in some cases, 40-, 8
50-, and even 60-years ago. The cost of the same 9
equipment and facilities today are many times more 10
expensive. The depreciation component built into retail 11
rates today is based on the much lower cost to install 12
those facilities many years ago. Therefore, the 13
depreciation component in retail rates covers only a small 14
fraction of the annual costs associated with the 15
replacement of facilities. 16
Let me give you an example. The chart below provides 17
a comparison of the relative cost of a distribution power 18
pole in 2010, and for points in time 10-, 20-, 30-, 40- 19
and 50-years ago. The chart shows that distribution poles 20
are over ten times more expensive today than they were 21
fifty years ago. 22
23
Morris, Di 10
Avista Corporation
Illustration No. 1: 1
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10
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12
13
So when we replace a 50-year old distribution pole 14
with a new one, that provides the same amount of service 15
as the old one did, it results in a significant increase 16
in costs. 17
Company witness Mr. DeFelice provides additional 18
details related to the significant increase in the cost of 19
utility materials and equipment. 20
The distribution pole located in Hayden Idaho, shown 21
in Illustration No. 2 below, has deteriorated to the point 22
Morris, Di 11
Avista Corporation
where it needs to be replaced. We have over 240,000 1
distribution poles in our electric system. Based on a 40-2
year depreciable life, we would need to replace 3
approximately 6,000 poles every year. 4
Illustration No. 2: 5
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The replacement of distribution poles represents a 17
fraction of the infrastructure that needs to be replaced 18
each year. In the next five years, our relatively small 19
Company will need to spend approximately $1.2 billion of 20
capital on utility generation, transmission and 21
distribution facilities and other requirements. This $1.2 22
Morris, Di 12
Avista Corporation
billion represents over 54% of the current rate base of 1
approximately $2.2 billion dedicated to serving customers 2
today. Utility equipment and facilities are big and 3
expensive, and the required investment in new facilities 4
is one of the major reasons that we need an increase in 5
retail rates. 6
Q. Does growth in Avista’s electric and natural gas 7
retail sales revenue help cover the growth in net plant 8
investment over time? 9
A. Only very little. Our investment in facilities 10
used to serve customers is growing at a much faster pace 11
than retail sales. The red line on the graph below shows 12
the actual change in Avista’s actual net plant investment 13
from 2005 to 2011, and the forecasted change for 2012 to 14
2015. The purple and blue lines on the graph show the 15
changes in retail kilowatt-hour (kWh) sales and retail 16
therm sales, respectively, for the same time period. The 17
chart clearly shows that net plant investment is growing 18
at a much faster pace than sales. In fact, total therm 19
sales in 2011 are about the same as in 2005, despite the 20
addition of approximately 35,000 new customers being added 21
during that timeframe. Total electric sales from 2005 to 22
2011 grew 5.76%, which is equal to only 0.96% per year. 23
Morris, Di 13
Avista Corporation
The graph also shows this mismatch in new investment 1
and new sales is forecasted to continue to the future. 2
Therefore, retail rates must be increased to cover this 3
increase in net plant investment, since sales growth is 4
slow. The green line on the graph also shows that non-5
fuel operations and maintenance (O&M) expenses are growing 6
at a faster pace than sales. 7
Illustration No. 3: 8
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12
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17
Q. What is driving the increase in non-fuel O&M 18
costs? 19
A. Total utility non-fuel O&M increased 20
approximately $72 million over the six-year period from 21
2005 to 2011. Although increasing labor and employee 22
Morris, Di 14
Avista Corporation
benefit costs, such as medical costs and retirement plan 1
costs, are part of this increase, there have also been 2
significant increases in other costs. In recent years 3
there has been a significant increase in costly, mandatory 4
requirements on utilities related to, among others things, 5
reliability, environmental compliance, safety, and 6
security. These mandates, together with litigation and 7
other claims related to the ownership and operation of 8
hydroelectric resources, have added, and continue to add, 9
significant costs to run the utility. The penalties 10
associated with non-compliance with some of these 11
requirements can be as much as $1 million per day per 12
violation. A few examples of the costs associated with 13
these requirements are provided below: 14
15
1. Hydro-electric Plant Relicensing -- Under federal law 16
we must have a license to operate our hydro-electric 17
projects to serve customers. In recent years we 18
negotiated new licenses for the projects on both the 19
Clark Fork and Spokane rivers. The cost to gain new 20
licenses was over $40 million up front and 21
approximately $600 million over the life of the new 22
licenses (45 to 50 years). These costs reflect 23
aggressive bargaining on the part of the Company to 24
keep the costs as low as possible. The requirements 25
in the new long-term licenses address environmental 26
and cultural protection while preserving our low-cost 27
hydroelectric resources for the benefit of our 28
customers, but they also represent significant 29
increases in costs associated with owning and 30
Morris, Di 15
Avista Corporation
operating our hydro-electric system. The increase in 1
annual expenses from 2005 to 2011 is approximately $5 2
million. 3
4
2. Compliance with Mercury Emissions -- There are new 5
mercury emission limitation requirements in Montana 6
effective in 2010 related to our ownership interest in 7
the Colstrip Generating Projects that required capital 8
investment up front and annual costs of $1.5 million 9
per year (Avista share). 10
11
3. Federal Reliability Requirements -- The Energy Policy 12
Act of 2005 changed the national reliability standards 13
for utilities, enforced by the North American Electric 14
Reliability Corporation (NERC), from voluntary to 15
mandatory beginning June 2007. Non-compliance with any 16
of the requirements may result in monetary penalties up 17
to $1 million per day per violation. The planning 18
standards require utilities to perform planning studies 19
at least 10 years in the future to ensure sufficient 20
facilities are in place to avoid real time loss of 21
customers or impact to neighboring utilities for the 22
loss of transmission facilities. If a potential 23
violation is observed in the future analysis, then 24
Avista must develop a project plan to ensure that the 25
violation is fixed prior to it becoming a reality. 26
Avista budgets for future projects and ensures that the 27
design and construction of the required projects are 28
completed prior to the time they are needed. A 29
Compliance Manager and Analyst was hired to coordinate 30
the Company’s compliance program. The Company also 31
added an additional System Operator to allow adequate 32
time for operator training, a Training Coordinator to 33
train, track and manage all the extensive training 34
needs and continuing education hours required for 35
System Operators to maintain certification, and two 36
additional engineers to support the new Critical 37
Infrastructure Protection standards. Avista was 38
required to construct a redundant Backup Control Center 39
at a cost of approximately $6 million to meet one of 40
the emergency operating standards. Avista also has 41
approximately 25 subject matter experts that spend 42
anywhere from 10-30% of their time working on 43
compliance initiatives and documentation. 44
45
Morris, Di 16
Avista Corporation
There are other significant cost increases from 2005 1
to 2011 in areas such as compliance with Sarbanes/Oxley and 2
information technology related to cyber security and 3
increased automation. Although we have taken extensive 4
measures to ensure that the costs that we incur represent 5
the most cost-effective and reliable way to continue to 6
serve our customers, we continue to experience significant 7
increases in annual operating expenses. 8
Q. Why is Avista experiencing low sales growth? 9
A. The slow growth in our sales is due in part to 10
the continuing slow economy in our region. But the 11
Company has also had aggressive energy efficiency programs 12
in place for many years, which are designed to assist our 13
customers in using less energy. While the partnership 14
with our customers to conserve energy reduces the need to 15
build new, expensive generating resources, it also limits 16
the growth in revenue to cover increases in other 17
investment and costs. 18
Q. Are other utilities experiencing the same kinds 19
of issues related to the need to invest in utility 20
infrastructure to maintain a reliable system, as well as 21
increasing O&M costs? 22
Morris, Di 17
Avista Corporation
A. Yes. Other electric utilities, whether 1
consumer-owned or investor-owned, are also increasing 2
their rates on a more regular basis, and this will likely 3
continue into the near future. It is simply not possible 4
to cuts costs enough to fully offset other cost increases 5
and the costs associated with new plant investment. 6
Illustration No. 4 below identifies some of the 7
recent rate increases for utilities in the Pacific 8
Northwest that have either already occurred, or proposals 9
that are currently pending. 10
Morris, Di 18
Avista Corporation
Illustration No. 4: 1
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Idaho Fuel Case Status Effective Date Rate Increase
Rocky Mountain Power Electric New Rates Approved 01-01-2012 7.8% (1)
Rocky Mountain Power Electric New Rates Approved 01-01-2013 7.2% (1)
Idaho Power Electric New Rates Approved 01-01-2012 4.1%
Oregon
Eugene Water & Electric*Electric New Rates Approved 11-01-2012 5.0%
Eugene Water & Electric*Electric New Rates Approved 05-01-2012 5.5%
Idaho Power Electric New Rates Approved 03-01-2010 15.4%
Idaho Power Electric New Rates Approved 03-01-2012 4.5%
Oregon Trail Electric Coop*Electric New Rates Approved 10-01-2011 7.1%
Pacificorp Electric New Rates Approved 01-01-2011 8.5%
Pacificorp Electric Pending 01-01-2013 4.3%
NW Natural Gas Pending 11-01-2012 6.2%
Washington
Benton County PUD Electric New Rates Approved 01-01-2012 6.0%
Benton County PUD Electric New Rates Approved 01-01-2011 8.0%
Clallum County PUD Electric New Rates Approved 01-01-2011 8.0%
Clallum County PUD Electric New Rates Approved 01-01-2012 3.0%
Clark County PUD Electric New Rates Approved 11-01-2011 3.9%
Cowlitz County PUD Electric New Rates Approved 01-01-2011 9.0%
Cowlitz County PUD Electric New Rates Approved 11-01-2011 17.5%
Grant County PUD Electric New Rates Approved 01-01-2012 6.8%
Inland Power & Light*Electric New Rates Approved 04-01-2012 6.0%
Pacific Power Electric New Rates Approved 01-01-2010 5.3%
Pacific Power Electric New Rates Approved 04-03-2011 10.7% (2)
Pacific Power Electric New Rates Approved 06-01-2012 1.5%
Puget Sound Energy Electric New Rates Approved 04-07-2010 2.8%
Puget Sound Energy Electric New Rates Approved 05-14-2012 3.2%
Snohomish County PUD*Electric New Rates Approved 04-01-2012 2.9%
Tacoma Power*Electric New Rates Approved 04-11-2012 5.8%
(1) Approved Increase was two-year rate plan, subject to compliance filing on November 1, 2012
(2) Approved Increase was 10.7% (March 2011), subject to reconsideration
Source: E Source, February 2012, except where denoted by *
Recent Rate Increase Activity
Morris, Di 19
Avista Corporation
III. SUMMARY OF RATE REQUESTS 1
Q. Please provide an overview of Avista’s electric 2
rate request in this filing. 3
A. Avista is proposing an increase in electric 4
billed retail rates of $11.4 million or 4.6%. The 5
Company’s request is based on a proposed rate of return of 6
10.9% with a common equity ratio of 50.0% and a 8.46% 7
return on equity. 8
Mr. Ehrbar will provide details related to rate 9
spread and rate design. The proposed increase to each 10
electric customer class is shown in the illustration 11
below. 12
Illustration No. 5: 13
Service Schedule Proposed Increase 14
in Billed Revenues 15
16
Residential Service Schedule 1 5.3% 17
General Service Schedules 11 & 12 4.1% 18
Large General Service Schedules 21 & 22 4.8% 19
Extra Large General Service Schedule 25 3.9% 20
Extra Large General Service Schedule 25P 3.3% 21
Pumping Service Schedules 31 & 32 5.7% 22
Street & Area Lighting Schedules 41-48 4.5% 23
Overall Increase 4.6% 24
Morris, Di 20
Avista Corporation
Q. What is Avista’s natural gas rate request in 1
this filing? 2
A. With regard to natural gas, the Company is 3
requesting an increase of $4.6 million or 7.3% of billed 4
rates. As with the electric increase, the Company’s 5
request is based on a proposed rate of return of 10.9% 6
with a common equity ratio of 50.0% and a 8.46% return on 7
equity. The proposed rate increase for each natural gas 8
customer class is shown in the illustration below: 9
Illustration No. 6: 10
Service Schedule Proposed Increase 11
in Billed Revenues 12
13
General Service Schedule 101 7.8% 14
Large General Service Schedule 111 5.7% 15
Interruptible Sales Service Schedule 131 5.9% 16
Transportation Service Schedule 146 17
(excluding natural gas costs) 12.8% 18
Overall Increase 7.3% 19
20
Q. What are the primary factors causing the 21
Company’s request for electric and natural gas rate 22
increases in this filing? 23
Morris, Di 21
Avista Corporation
A. Approximately 70% of the Company’s electric 1
revenue requirement, and 48% for natural gas, is due to an 2
increase in Net Plant Investment (including return on 3
investment, depreciation and taxes, and offset by the tax 4
benefit of interest).1 5
The remaining revenue requirement request is due to 6
increases in distribution, operation and maintenance 7
(O&M), and administrative and general (A&G) expenses for 8
both electric and natural gas operations. However, the 9
increased costs for electric operations are partially 10
offset by a reduction in net power supply and transmission 11
expenditures. 12
Also impacting the Company’s electric request, is the 13
Energy Efficiency Load Adjustment (EELA), which increases 14
the Company’s revenue requirement by approximately $1.6 15
million. This adjustment is explained by Mr. Ehrbar and 16
Ms. Andrews. 17
Q. Is the Company proposing any changes to the cost 18
of natural gas for its retail natural gas customers in 19
this case? 20

1 These figures represent an approximate breakdown of amounts between
the Company’s request in this case compared to that approved in the
Company’s prior general rate case proceeding (Case Nos. AVU-E-11-01
and AVU-G-11-01). Due to the black-box nature of the Company’s prior
settlement approved by the IPUC in Case Nos. AVU-E-11-01 and AVU-G-11-
01, the Company made certain assumptions as to the amounts approved
for various rate base and expense items in order to create the
estimate of the breakdown of the rate increase request.
Morris, Di 22
Avista Corporation
A. No. Avista is not proposing changes in this 1
filing related to the cost of natural gas included in 2
current rates for natural gas customers. Changes in 3
natural gas costs are addressed in the annual Purchase Gas 4
Adjustment (PGA) filings. 5
Q. How do Avista’s electric retail rates compare to 6
other utilities in the Northwest and across the country? 7
A. Edison Electric Institute prepares an annual 8
comparison of residential electric bills for investor-9
owned utilities across the country. Illustration No. 7 10
provides a comparison of an Avista customer’s monthly bill2 11
in Idaho and Washington, with utility bills in other 12
states. The chart shows that Avista’s residential 13
customers’ rates are the lowest, or are among the lowest, 14
in the Country. 15

2 Based on a residential customer’s average usage of 930 kWh per month.
Morris, Di 23
Avista Corporation
1
Illustration No. 7: 2
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Our relatively low retail rates are due in large part 19
to a history of our Company aggressively pursuing the 20
acquisition and preservation of a diversified portfolio of 21
low cost resources for the benefit of our customers. This 22
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0.00 50.00 100.00 150.00 200.00 250.00 300.00 350.00 400.00 450.00
Avista Washington
Arkansas
Washington
Idaho
Avista Idaho
Tennessee
Montana
Iowa
North Dakota
New Mexico
Louisiana
Kentucky
Oklahoma
Utah
South Dakota
Illinois
Texas
Wyoming
West Virginia
Missouri
Virginia
Oregon
Arizona
North Carolina
Mississippi
Kansas
Minnesota
Georgia
South Carolina
Florida
Indiana
Nevada
Alabama
Maryland
Wisconsin
District of Columbia
Ohio
USA Average
Colorado
Michigan
Pennsylvania
Rhode Island
Delaware
New Hampshire
New York
Maine
Vermont
Massachusetts
New Jersey
Connecticut
California
Hawaii
Morris, Di 24
Avista Corporation
portfolio includes hydroelectric, wood-waste fired, 1
natural gas-fired baseload, natural gas-fired peakers, and 2
coal-fired generation, together with long-term purchases 3
of power and an aggressive energy efficiency program. 4
Our low rates are also a result of Avista’s 5
aggressive efforts to control its costs, in order to keep 6
retail rates as low as reasonably possible. 7
8
IV. COST MANAGEMENT AND EFFICIENCIES 9
Q. Is Avista continuing to pay particular attention 10
to controlling its costs in order to mitigate the level of 11
price increases to its customers? 12
A. Yes. In the last couple of years we have 13
renewed our efforts to control our costs and improve 14
efficiency, while continuing to meet our reliability and 15
environmental compliance requirements, and preserving a 16
high level of customer satisfaction. We are focused on 17
long-term sustainable savings to continuously improve our 18
service to customers and manage costs into the future. 19
Some of the measures from the last couple of years 20
that we are continuing are briefly explained below, as 21
well as a number of more recent initiatives. 22
Morris, Di 25
Avista Corporation
1
Hiring Restriction 2
The Company continues to operate under a hiring 3
restriction which requires approval by the 4
Chairman/President/CEO, President of the Utility, the 5
CFO, and the Sr. VP for Human Resources for all 6
replacement or new hire positions. 7
8
Limitations on Capital Spending 9
Avista approved a lower capital budget than was 10
requested by the Company’s Engineering and Operations 11
personnel. The original capital projects request for 12
approval in 2012 consisted of projects totaling over 13
$269 million. The Capital Prioritization Committee 14
reduced the list of recommended projects by $19 15
million to the $250 million capital budget approved 16
by the Board. In addition, the Company prioritized O 17
& M facility maintenance and improvement projects and 18
removed projects that could be delayed without safety 19
or operational concerns. 20
21
Reduced Pension Benefit for New Hires 22
As part of the new contract negotiated with Avista’s 23
bargaining unit employees, the Defined Benefit 24
Pension Plan’s benefit formula was reduced by 25
approximately 28% for all bargaining unit new hires, 26
effective January 1, 2011. This change was earlier 27
made for non-bargaining unit employees effective 28
January 1, 2006. 29
30
Performance Excellence Initiative 31
In May 2010, the Company enlisted the help of Booz & 32
Company to work with us on what we have referred to 33
as Performance Excellence. They brought with them 34
industry knowledge, expertise and a phased-approach. 35
Phase 1 involved assessing and identifying Avista’s 36
top opportunities to better align our resources so we 37
can run our business more efficiently, and be better 38
prepared to meet customers’ future needs for energy 39
and energy information. In Phase 2 we designed 40
changes to our processes to capture these 41
opportunities. These changes encompassed six areas: 42
T&D Work Estimating/scheduling, Supply Chain 43
Morris, Di 26
Avista Corporation
Sourcing, Integrated Planning (Capital & O&M), Asset 1
Management, Enterprise Technology, and Integrated 2
Measurement(Metrics). In phase 3, teams completed 3
work plans to implement the new designs. This work 4
began in November 2010 and will be completed by year 5
end. The changes have resulted in either improved 6
efficiency, avoided costs, and/or enhanced customer 7
service. 8
9
We recognize that our proposed rate increases will 10
result in energy bills that will be more difficult for 11
some of our customers to pay. I can assure you that we 12
are not just sitting on the sidelines as our costs go up, 13
as evidenced by the measures described above and others 14
explained in more detail by Company witness Mr. 15
Kopczynski. 16
17
V. COMMUNICATIONS WITH CUSTOMERS 18
Q. How is Avista communicating with its customers 19
to explain what is driving increased costs for the 20
Company? 21
A. The Company proactively communicates with its 22
customers in a number of ways: electronic communications 23
on issues of importance to them, customer forums, one-on-24
one customer interactions through field personnel and 25
account representatives, bill inserts, social media, media 26
contacts, group presentations, and through our employees’ 27
Morris, Di 27
Avista Corporation
involvement in community, business and civic 1
organizations, to name a few. We believe our 2
communications are helping our customers and the 3
communities we serve better understand the issues faced by 4
the Company, such as increased environmental mitigation, 5
infrastructure investment and generation constraints, all 6
of which have led to higher costs for our customers. 7
We have listened to our customers and learned that 8
they want information and conversations with Avista 9
employees to better understand the choices they have to 10
manage how they use energy and the forces that are 11
impacting their energy prices. 12
That’s why we are continuing to build on our 13
communications, so that customers receive information 14
directly from us on issues important to them. We are also 15
continuing to engage employees in the Company in our 16
efforts to more directly communicate with customers. 17
Q. How has the Company stepped-up communications 18
with its customers? 19
A. One of the important principles in our 20
intensified outreach is to meet customers where they 21
gather. Our customer conversation uses traditional and 22
non-traditional communication channels, including one-on-23
Morris, Di 28
Avista Corporation
one and group presentations, print, radio, website, 1
newsletters, videos, social media and direct emails. 2
One important customer segment that we target are 3
those customers who gather online. We are continuing to 4
focus on our social media program with the Avista blog as 5
our foundation. We also communicate on Twitter©, in online 6
discussion forums when appropriate and this year have 7
added the Avista Utilities Facebook© page. For customers 8
who want a more private online conversation, we offer 9
customers a conversation email account to make sure 10
they’re comfortable communicating with us. 11
One important customer communication channel is our 12
website at www.avistautilities.com. A section focusing on 13
rates provides customers a video on how rates are set, 14
including the regulatory process; other videos focus on 15
the components of general rate requests, and provided 16
additional information on general rate requests. 17
Our employees provide excellent customer service, and 18
this focus on communicating with our customers includes 19
providing them messaging and new tools and training to 20
make it easier to have conversations about Avista with 21
friends, family and customers. We are finding that once a 22
customer talks with one of our employees and has the 23
Morris, Di 29
Avista Corporation
opportunity to voice their concerns and receive answers to 1
their questions, their satisfaction level increases. 2
We are continuing our focus on informing customers of 3
the many programs we offer to provide assistance in 4
managing their energy bills, and ensuring that our 5
employees are equipped to engage in these conversations. 6
Q. What are some of the topic areas you are 7
focusing on as you communicate with your customers? 8
A. Among other areas, we are increasing our efforts 9
to directly address some of the issues raised by our 10
customers in their comments to the Commission. For 11
example, our proxy statement issued each year prior to our 12
annual shareholder meeting includes compensation 13
information for each of our top five executive officers. 14
This information is usually published in our local 15
newspaper, which triggers comments from our customers to 16
the Commission, letters to the editor, and a flurry of 17
activity on social media. 18
Many of the comments suggest that our customers 19
believe all, or the majority, of the compensation 20
reflected in the proxy is being included in the retail 21
rates approved by the Commission. Although the 22
stakeholders involved in the ratemaking process know this 23
Morris, Di 30
Avista Corporation
is not true, many of our customers do not. So we are 1
providing more information to our customers. None of the 2
long-term incentive compensation is included in customers’ 3
rates, and even a portion of the base salary of officers 4
is allocated to our subsidiary operations and is not paid 5
by our customers. Approximately 42% of the total 6
executive officer salaries and short term incentives are 7
included in retail rates for customers in Idaho, 8
Washington, and Oregon. The remainder is born by 9
shareholders. Ms. Andrews provides additional details 10
related to Avista’s compensation for all employees, 11
including officers. 12
Q. Is Avista providing additional information to 13
customers related to Company profits? 14
A. Yes. Following each quarter we issue an 15
earnings release that details the profits for Avista 16
Corp., including the utility and our subsidiary 17
operations. Some of the comments from our customers, in 18
response to the earnings release, suggest that they 19
believe the profits are excessive, or represent dollars 20
that are over and above what is needed to own and operate 21
the utility. So we are making more information available 22
to explain that the utility profit is not excess profit, 23
Morris, Di 31
Avista Corporation
but represents a rate of return for our common equity 1
shareholders for the use of their money to finance the 2
utility infrastructure used to provide service to 3
customers, and therefore, it is an essential cost of 4
owning and operating the utility. 5
Q. Are there any other topics the Company is 6
emphasizing in its communications? 7
A. Yes. There are other related areas that I have 8
already addressed in my testimony, and I will not belabor 9
them here. Some of our customers believe that our annual 10
depreciation expense should cover the cost to replace our 11
old facilities, and others have wondered why we are still 12
talking about replacing our aging infrastructure when we 13
did that last year and the year before. 14
Therefore, we are providing more information to our 15
customers to explain, as I illustrated earlier, that the 16
cost of new facilities is multiple times more expensive 17
than the old facilities, and the annual depreciation 18
expense we are currently collecting in retail rates is 19
well below what is needed to cover the cost of new 20
facilities. And with each passing year, our facilities 21
are getting older and we need to replace some of them 22
every year to maintain a safe, reliable system. 23
Morris, Di 32
Avista Corporation
We believe our communication efforts; including both 1
the content as well as the avenues in which we are 2
communicating, are helping more customers better 3
understand why we need to increase retail rates on a 4
regular basis. 5
6
VI. CUSTOMER SATISFACTION 7
Q. What kind of feedback are you receiving from 8
customers related to customer satisfaction? 9
A. I am pleased with the dedication of Avista 10
Utilities’ employees and their commitment to provide 11
quality service to our customers. As I indicated earlier, 12
while we continue to maintain tight controls on capital 13
and O&M budgets, our customer service surveys indicate 14
that customer satisfaction remains high. Our overall 15
customer satisfaction from our voice-of-the-customer 16
surveys in the second quarter of 2012 was 93% in our 17
Idaho, Washington, and Oregon operating divisions. This 18
rating reflects a positive experience for customers who 19
have contacted Avista related to the customer or field 20
service they received. These results can be achieved only 21
with very committed and competent employees. 22
23
Morris, Di 33
Avista Corporation
VII. CUSTOMER SUPPORT PROGRAMS 1
Q. What is Avista doing to assist customers with 2
their energy bills? 3
A. More than 360,450 electric and 320,741 natural 4
gas customers in three states rely on Avista for their 5
electricity and natural gas services. One of the 6
challenging aspects of the utility business is to receive 7
payment from those least able to pay. In the past few 8
years, this challenge has broadened with the serious 9
economic impact the national recession has had on 10
individuals and businesses. 11
Avista is committed to reducing the burden of energy 12
costs for our customers most affected by rising energy 13
prices, including low income individuals and families, 14
seniors, disabled and vulnerable customers. To assist our 15
customers’ in their ability to pay, the Company focuses on 16
actions and programs in four primary areas: 1) advocacy 17
for and support of programs providing direct financial 18
assistance; 2) low income and senior outreach programs; 3) 19
energy efficiency and energy conservation education; and 20
4) support of community programs that increase customers’ 21
ability to pay basic costs of living. 22
Morris, Di 34
Avista Corporation
In the 2011/2012 heating season, 23,695 Idaho 1
customers received approximately $4 million in various 2
forms of energy assistance (Federal LIHEAP program, 3
Project Share, and local community funds). Some of the 4
key programs that we offer or support are as follows: 5
6
1. Project Share. Project Share is a voluntary 7
program allowing customers to donate funds that are 8
distributed through community action agencies to 9
customers in need. In 2011, Avista Utilities’ 10
customers donated $302,505 on a system-wide basis, 11
of which $82,009 was directed to Idaho Community 12
Action Agencies. In addition, the Company 13
contributed $61,800 to Project Share for the 14
benefit of Idaho customers in 2011. 15
16
2. Comfort Level Billing. The Company offers the 17
option for all customers to pay the same bill 18
amount each month of the year by averaging their 19
annual usage. Under this program, customers can 20
avoid unpredictable winter heating bills. 21
22
3. CARES Program. Customer Assistance Referral and 23
Evaluation Services provides assistance to special-24
needs customers through access to specially trained 25
(CARES) representatives who provide referrals to 26
area agencies and churches for help with housing, 27
utilities, medical assistance, etc. 28
29
These programs and the partnerships we have formed 30
with community action agencies have been helpful to 31
customers who often have nowhere else to go. Company 32
witness Mr. Kopczynski provides additional detail in his 33
Morris, Di 35
Avista Corporation
testimony concerning these and other programs designed to 1
assist customers. 2
3
VIII. OTHER COMPANY WITNESSES 4
Q. Would you please provide a brief summary of the 5
testimony of the other witnesses representing Avista in 6
this proceeding? 7
A. Yes. The following additional witnesses are 8
presenting direct testimony on behalf of Avista: 9
Mr. Mark Thies, Senior Vice President and Chief 10
Financial Officer, will provide a financial overview of 11
the Company and will explain the overall rate of return 12
proposed by the Company in this filing for its electric 13
and natural gas operations. The proposed rate of return 14
is derived from Avista’s total cost of long-term debt and 15
common equity, weighted in proportion to the proposed 16
capital structure. 17
He will address the proposed capital structure, as 18
well as the proposed cost of total debt and equity in this 19
filing. In brief, he will provide information that shows: 20
Avista’s plans call for significant capital 21
expenditure requirements for the utility over 22
the next two years to assure reliability in 23
serving our customers and meeting customer 24
Morris, Di 36
Avista Corporation
growth. Capital expenditures of approximately 1
$500 million are planned for 2012-2013 for 2
customer growth, investment in generation 3
upgrades and transmission and distribution 4
facilities, as well as necessary maintenance and 5
replacements of our natural gas utility systems. 6
Capital expenditures of approximately $1.2 7
billion are planned for the five-year period 8
ending December 31, 2016. Avista needs adequate 9
cash flow from operations to fund these 10
requirements, together with access to capital 11
from external sources under reasonable terms. 12
13
Avista’s corporate credit rating from Standard & 14
Poor’s (S&P) is currently BBB and from Moody’s 15
Investors Service (Moody’s) it is Baa2. Avista 16
must operate at a level that will support a 17
solid investment grade corporate credit rating 18
in order to access capital markets at reasonable 19
rates, which will result in lower long-term 20
borrowing costs to customers. A supportive 21
regulatory environment is an important 22
consideration by the rating agencies when 23
reviewing Avista. Maintaining solid credit 24
metrics and credit ratings will also help 25
support a stock price necessary to issue equity 26
under reasonable terms to fund capital 27
requirements. 28
29
The Company is proposing an overall rate of 30
return of 8.46%, including a 50.0% equity ratio 31
and a 10.90% return on equity. Our proforma 32
cost of debt is 6.02%. 33
34
Dr. William E. Avera, as President of Financial 35
Concepts and Applications (FINCAP), Inc., has been 36
retained to present testimony with respect to the 37
Company’s cost of common equity. He concludes that: 38
Morris, Di 37
Avista Corporation
In order to reflect the risks and prospects 1
associated with Avista’s jurisdictional utility 2
operations, his analyses focused on a proxy group 3
of twenty-six other utilities with comparable 4
investment risks. Consistent with the fact that 5
utilities must compete for capital with firms 6
outside their own industry, he also references a 7
proxy group of comparable risk companies in the 8
non-utility sector of the economy; 9
Because investors’ required return on equity is 10
unobservable and no single method should be viewed 11
in isolation, he applied the DCF, CAPM, and risk 12
premium methods, as well as the expected earnings 13
approach, to estimate a fair ROE for Avista; 14
Based on the results of these analyses, and giving 15
less weight to extremes at the high and low ends of 16
the range, Dr. Avera concluded that the cost of 17
equity for the proxy group of utilities is in the 18
10.0 percent to 11.4 percent range, or 10.2 percent 19
to 11.6 percent after incorporating an adjustment 20
to account for the impact of common equity 21
flotation costs; and, 22
Avista is requesting a fair ROE of 10.9 percent, 23
which is equal to the midpoint of his recommended 24
range. Considering capital market expectations, 25
the exposures faced by Avista, and the economic 26
requirements necessary to maintain financial 27
integrity and support additional capital investment 28
even under adverse circumstances, it is Dr. Avera’s 29
opinion that 10.9 percent represents a fair and 30
reasonable ROE for Avista. 31
32
Mr. Robert Lafferty, Director of Power Supply, will 33
provide an overview of Avista’s resource planning and 34
power supply operations. This includes summaries of the 35
Company’s generation resources, the current and future 36
load and resource position, and future resource plans, 37
Morris, Di 38
Avista Corporation
including the power purchase agreement with Palouse Wind, 1
LLC. As part of an overview of the Company’s risk 2
management policy, he will provide an update on the 3
Company’s hedging practices. He will address 4
hydroelectric and thermal project upgrades, followed by an 5
update on recent developments regarding hydro licensing. 6
Mr. Clint Kalich, Manager of Resource Planning & 7
Power Supply Analyses, will describe the Company’s use of 8
the AURORAXMP dispatch model, or “Dispatch Model.” He will 9
explain the key assumptions driving the Dispatch Model’s 10
market forecast of electricity prices. The discussion 11
includes the variables of natural gas, Western 12
Interconnect loads and resources, and hydroelectric 13
conditions. He will also describe how the model 14
dispatches its resources and contracts to maximize 15
customer benefit and tracks their values for use in pro 16
forma calculations. Finally, he will present the modeling 17
results provided to Company witness Mr. Johnson for his 18
power supply pro forma adjustment calculations. 19
Mr. William Johnson, Wholesale Marketing Manager, 20
will 1) identify and explain the proposed normalizing and 21
pro forma adjustments to the July 2011 through June 2012 22
test period power supply revenues and expenses, and 2) 23
Morris, Di 39
Avista Corporation
describe the proposed level of expense and load change 1
adjustment rate for Power Cost Adjustment (PCA) purposes, 2
using the pro forma costs proposed by the Company in this 3
filing. 4
Mr. Steve Harper, Director of Gas Supply, will 5
describe Avista’s natural gas procurement planning process 6
for retail distribution service, and provide an overview 7
of the Company’s 2012 Natural Gas Integrated Resource Plan 8
development. 9
Mr. Don Kopczynski, Vice President of Energy 10
Delivery, will describe Avista’s electric and natural gas 11
energy delivery facilities and operations, and recent 12
efforts to increase efficiency and improve customer 13
service. He will describe Avista’s efforts to control 14
costs, increase efficiency, and improve customer service. 15
He will also discuss the replacement of the Company’s 16
legacy customer information system (CIS), as well as 17
summarize Avista’s customer support programs in Idaho. 18
Finally, he will address the Company’s plans to replace 19
Aldyl A piping in our natural gas distribution system. 20
Mr. Scott Kinney, Director, Transmission Operations, 21
describes Avista’s pro forma period transmission revenues 22
and expenses. He will also discuss the Transmission and 23
Morris, Di 40
Avista Corporation
Distribution expenditures that are part of the capital 1
additions, as well as projects associated with the 2
Company’s Asset Management Program. 3
Ms. Elizabeth Andrews, Manager of Revenue 4
Requirements, will cover accounting and financial data in 5
support of the Company's need for the proposed increase in 6
rates. She will explain pro formed operating results, 7
including expense and rate base adjustments made to actual 8
operating results and rate base. 9
Mr. Dave DeFelice, Senior Business Analyst, will 10
cover the Company’s proposed pro forma adjustments for 11
capital investments in utility plant for the 2013 rate 12
period. In addition, his testimony and exhibits will 13
cover the Company’s proposed changes in depreciation rates 14
pertaining to electric and natural gas plant-in-service 15
using the recently completed depreciation study. 16
Ms. Tara Knox, Senior Regulatory Analyst, will cover 17
the Company’s electric and natural gas cost of service 18
studies performed for this proceeding. Additionally, she 19
is sponsoring the electric and natural gas revenue 20
normalization adjustments to the test year results of 21
operations and the proposed Load Change Adjustment Rate 22
(LCAR) to be used in the Power Cost Adjustment (PCA). 23
Morris, Di 41
Avista Corporation
Mr. Patrick Ehrbar, Manager of Rates and Tariffs, 1
discusses the spread of the proposed annual revenue 2
changes among the Company’s general service schedules as 3
well as the proposed rate design within each schedule. He 4
explains, among other things, that: 5
The proposed increase in electric base rates is 6
4.6%, which consists of an increase in electric 7
base retail revenues of $11.4 million. 8
9
The monthly bill for a residential customer 10
using an average of 930 kWhs per month would 11
increase from $78.69 to $82.89 per month, an 12
increase of $4.20 or 5.3%. 13
14
The proposed natural gas annual revenue increase 15
in base rates is $4.6 million, or 7.2%. 16
17
The monthly bill for a residential customer 18
using 60 therms per month would increase from 19
$52.55 to $56.67 per month, an increase of $4.12 20
or 7.8%. 21
22
23
In addition, he will provide further information 24
related to the Company’s proposed Energy Efficiency Load 25
Adjustment, and provide an overview of the items required 26
of the Company in Order No. 32371, and the related 27
Settlement Stipulation, in Case Nos. AVU-E/G-11-01. 28
Q. Does this conclude your pre-filed direct 29
testimony? 30
A. Yes. 31

DAVID J. MEYER
VICE PRESIDENT AND CHIEF COUNSEL FOR
REGULATORY & GOVERNMENTAL AFFAIRS
AVISTA CORPORATION
P.O. BOX 3727
1411 EAST MISSION AVENUE
SPOKANE, WASHINGTON 99220-3727
TELEPHONE: [phone]
FACSIMILE: [phone]
[e-mail]

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF THE APPLICATION ) CASE NO. AVU-E-12-08
OF AVISTA CORPORATION FOR THE ) CASE NO. AVU-G-12-07
AUTHORITY TO INCREASE ITS RATES )
AND CHARGES FOR ELECTRIC AND )
NATURAL GAS SERVICE TO ELECTRIC ) EXHIBIT NO. 1
AND NATURAL GAS CUSTOMERS IN THE )
STATE OF IDAHO ) SCOTT L. MORRIS
)

FOR AVISTA CORPORATION

(ELECTRIC AND NATURAL GAS)

Exhibit No. 1
Case No. AVU-E-12-08/AVU-G-12-07
S. Morris, Avista
Schedule 1, p. 1 of 2
Description of Avista Utilities
Avista Utilities provides electric and natural gas service within a 26,000 square mile area
of eastern Washington and northern Idaho1. Of the Company’s 360,450 electric and 320,741
natural gas customers (as of December 31, 2011), 236,623 and 149,161, respectively, were
Washington customers. The Company, headquartered in Spokane, also provides natural gas
distribution service in southwestern and northeastern Oregon. A map showing Avista’s electric
and natural gas service areas is provided in Exhibit 1, Schedule 2.
As of December 31, 2011, Avista Utilities had total assets (electric and natural gas) of
approximately $4.1 billion (on a system basis), with electric retail revenues of $736 million
(system) and natural gas retail revenues of $352 million (system). As of December 2011, the
Utility had 1,594 full-time employees.

1 Avista also serves approximately 20 retail electric customers in western Montana.
Exhibit No. 1
Case No. AVU-E-12-08/AVU-G-12-07
S. Morris, Avista
Schedule 1, p. 2 of 2
Avista
Corp.
Avista
Utilities
Regulated Non-regulated
Avista
Capital
Ecova
Other
Description of Avista’s subsidiary businesses
Avista Corp.’s primary subsidiary is the information and technology business, Ecova,
described below, which is headquartered in Spokane, Washington. A diagram of Avista’s
corporate structure is provided below:

Advantage IQ, and Ecos, an Advantage IQ subsidiary delivering electric and natural gas
utility demand-side management services, joined forces to become Ecova in October 2011.
Ecova provides utility expense management and energy management solutions to multi-site
companies across North America. This includes more than 450,000 business sites. Ecova clients
include Fortune 1000 companies such as GameStop, Panda Restaurant Group, Petco, Shell,
Staples and, many North American electric and natural gas utilities. Avista currently holds a
79.2% share in Ecova, which is held under Avista Capital.
Exhibit No. 1
Case No. AVU-E-12-08/AVU-G-12-07
S. Morris, Avista
Schedule 2, p. 1 of 1
Avista’s Electric and Natural Gas Service Areas