20010119_sw.doc

DECISION MEMORANDUM

TO: COMMISSIONER HANSEN
COMMISSIONER SMITH
COMMISSIONER KJELLANDER
JEAN JEWELL
RON LAW
LOUANN WESTERFIELD
TONYA CLARK
DON HOWELL
DAVE SCHUNKE
TERRI CARLOCK
ALDEN HOLM
RANDY LOBB
WORKING FILE
FROM:
DATE:
JANUARY 19, 2001 RE: CASE NO. AVU-G-00-04 (Avista)
INTEREST RATE—DEFERRED GAS COSTS

On November 29, 2000, Avista Corporation dba Avista Utilities – Washington Water Power Division – Idaho (Avista) filed an Application with the Idaho Public Utilities Commission (Commission) requesting a change in the interest rate applied to deferred gas costs, costs recorded monthly in Accounts 191.30 and 191.31. The interest rate presently applied to the balance in these accounts is the customer deposit rate, a rate that is published annually by the Commission. The current customer deposit rate is 5.0%. Avista indicates that this rate is substantially less than its short term borrowing rate. Short-term borrowings, the Company states, are used to finance the balance of deferred gas costs. The Company proposes to utilize a rate that is more representative of its short term borrowing costs.
As represented by the Company, its present (variable) short term borrowing cost is approximately 7.5%, excluding fixed charges and fees. Fixed charges and fees currently add about 1% to the rate. Recent increases in gas prices, the Company states, have caused the Company’s deferral balance to increase substantially. Without a compensatory rate applied to the deferred balance, the Company states that it has a financial incentive to collect a deferred balance owing the Company as quickly as possible and to refund a balance owing customers as slowly as possible.
In order to simplify the monthly calculation of the rate to be applied to deferred gas costs and to provide a reasonable audit trail, the Company proposes to use an average of the variable rate under its line of credit for the first and last day of each month. The Company receives a bank confirmation showing the effective variable interest date for each day it borrows funds under its credit line, and therefore contends that the rate applied to the gas deferral balances will be simple to calculate and supported by just two documents each month.
The Company requested that its Application be approved on or before December 15, 2000. The Commission in Order No. 28590 suspended the proposed effective date to February 01, 2001.
On December 14, 2000, the Commission issued a Notice of Application and Modified Procedure in Case No. AVU-G-00-04. The deadline for filing written comments was January 5, 2001. The Commission Staff was the only party to file comments (attached). Staff recommends that the Company’s request be denied.
Staff acknowledges that the Company is accruing significant balances in its deferral accounts. The estimated balance as of December 31, 2000, is $12,420,000.
Based on its review of other utilities, Staff states that despite the Company’s contentions to the contrary, Avista gas currently calculates interest at approximately the same rate as all other utilities that have deferral mechanisms with an interest component.
Staff believes that the customer deposit rate is the appropriate rate for the Company to accrue interest on Purchase Gas Adjustment (PGA) deferral amounts. Staff recommends that the Company’s request be denied for the following reasons.
The customer deposit rate increased from 5.0% to 6.0% on January 1, 2001. Six percent is much closer to the actual cost of borrowing than 5%. This increase helps to mitigate the costs to the Company.

The Federal Reserve lowered the fed funds rate and the discount rate to 6.0% and 5.75% on January 3, 2001. The discount rate may be further reduced to 5.5%. This discount should allow the Company to pay a lower rate on its short-term borrowings.

By maintaining the customer deposit rate as a rate for the Company to accrue interest for the PGA, the Company will accrue interest at a rate that is similar to the other utilities in Idaho that accrue interest on deferred balances.

The increased interest costs will be passed on to customers.

At this time, Staff states, that there are at least three options that the Commission could choose from. The first option is to continue accruing interest on the PGA balances at the customer deposit rate. The second option would be to allow the Company to accrue a rate based on its short-term investment rate like Intermountain Gas. However, this rate is probably very close to the customer deposit rate and would only add complexity to the interest calculations. Finally, the Commission could accept the Company’s proposal to accrue and pay interest based on its short-term debt rates. Staff doesn't recommend this but if the Commission decides to accept the Company’s proposal and grant the requested change in the way interest rates are calculated, the Company-proposed method for calculating its short-term interest rates is acceptable to Staff. In such case, the Commission, Staff contends, should require the Company to pay interest to the customers based on the same interest rate calculation as they collect it. That way, the customer would benefit when the costs of gas come down.
Commission Decision
Avista requests a change in the interest rate applied to its PGA deferred gas costs. The interest rate presently applied to the balance in these accounts is the customer deposit rate. The Company proposes changing to a rate that is more equivalent to its short-term borrowing rate. Should a change in the interest rate apply to deferred gas costs be authorized? If so, what change is reasonable?

vld/M:AVU-G-00-04_sw2

DECISION MEMORANDUM 2