Stoddard_sw.doc

October 18, 2000

Robert J. Stoddard
880 E Pearl Ave
Hayden, ID 83835

Dear Mr. Stoddard:

Thank you for your letter regarding Avista Corporation and the Washington Commission’s recent order rejecting the Company’s requested electric rate hike in the state of Washington. You infer that the Washington Commission is doing a better job looking out for the ratepayers than the Idaho Commission. I disagree. In a generic sense, different decisions should not be interpreted as meaning that one Commission was wrong. Instead, the decision may reflect different regulating philosophies, different methodologies and different perceptions of reasonableness. More particularly, it should be noted that the application and issues brought to the Washington and Idaho Commissions were different. Many of the differences were functions of time, e.g., a different test year, a different resource mix, different supply contracts, different costs of equity and debt.

The Company’s general rate case filing in Idaho for its electric operations was in December 1998. Following a public hearing held in Sandpoint, Idaho on June 8-9, 1999, the Idaho Commission approved a $9.3 million (7.5%) increase. The Company in its Application had requested a $14 million or 11.56% increase. The Company’s filing in Idaho was its first general rate case since 1986.

Presently, a residential customer of Avista in Idaho using 1,000 kilowatt hours of electric energy is billed $51.07 (5.1¢/kWh). A similar customer in Washington would receive a bill of $45.04 (4.5¢/kWh). The difference in actual rates for residential customers in part reflects differences in rate design and how the Company recovers its cost-of-service. To the extent that a rate class (e.g., residential) does not pay its full cost of service, that cost must be picked up or subsidized by other classes (e.g., commercial or industrial). The lines are not always drawn exactly. The Idaho rates for residential customers more fully reflect true cost of service. You have provided me with a copy of a newspaper article on the Washington Commission’s general rate order.

By way of illustrative comparison, in Washington the Commission authorized a one-time bill credit to reflect Avista’s sale of its share of the Centralia coal plant. For a residential customer this translated into a credit of $50. In Idaho the Centralia sale was still pending during the Company’s rate case. The Idaho Commission in a subsequent case, rather than a one-time credit required the Company to reduce its retail rates by a uniform 1.318% for an eight-year period. The revenue requirement reduction for Idaho customers equates to approximately $1.58 million per year. Reference Case No. AVU-E-99-06, Order No. 28297.

It should also be noted that much of the Washington Commission’s adjustment in its rate case was related to the Company’s 1998 restructuring of its 1992 power sales contract with PGE and the proper accounting treatment. Under the contract, Avista had been receiving about $18 million annually from PGE. The Commission determined that customers should receive more immediate benefits from the $145 million one-time cash payment Avista received instead of the proposed 14 annual payments of $18 million. The PGE contract restructuring was not an issue in the Company’s Idaho rate case.

It should further be noted that in Washington the Company has operated without an electric power cost adjustment (PCA) mechanism. The PCA rate mechanism, as implemented in Idaho, is designed to recover/rebate variances in power supply expenses. Since its inception in October 1989, there have been nine rebates in Idaho totaling $23 million and three surcharges totaling $6.7 million. No similar adjustments were made in Washington. In its recent rate order, the Washington Commission, which has never approved a PCA for Avista, has now directed the Company to file a power cost rate case by December 1st, 2000.

I appreciate your bringing this matter to my attention. I hope my comments convey the reasons why Avista’s Washington rates for electricity cannot be easily compared to Avista’s rates in Idaho. The Idaho Commission endeavors to hold hearings in Avista’s Idaho service territory whenever public interest merits same, generally in all cases that are not simply of a technical nature. In all cases however, a customer’s written comments are accepted and considered by the Commission in its deliberations. Again, thank you for your letter.

Sincerely,

Dirk Kempthorne
Governor of Idaho

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Robert J. Stoddard
10/18/00
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