avug004.swah.doc

SCOTT WOODBURY
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 1895

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 FOR APPROVAL OF A REVISED INTEREST RATE TO BE
APPLIED TO DEFERRED GAS COSTS. )
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CASE NO. AVU-G-00-4

COMMENTS OF THE COMMISSION STAFF

COMES NOW the Staff of the Idaho Public Utilities Commission, by and through its Attorney of record, Scott Woodbury, Deputy Attorney General, and in response to Order No. 28590 issued on December 14, 2000, submits the following comments.
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 Customer Deposit Rate of 5.0% recently changed to the current rate of 6.0% for 2001, effective January 1, 2001. The Company claims the Customer Deposit Rate is substantially lower than its short-term borrowing rate of approximately 7.5% plus fees. According to the Company, short-term borrowings are used to finance the balance of deferred gas costs. The Company proposes to utilize a rate that is representative of the costs used to finance the deferred amounts.

BACKGROUND
The Company was allowed to accrue interest at the Customer Deposit Rate when the current PGA mechanism started. The Company has a history of both rebate and surcharge balances over the last ten years, but the interest rate was not a concern because the balances in that account have been relatively small and were usually trued up once a year. The Company states it is willing to continue to defer the high amounts in its deferral accounts if the Commission will grant an increase in interest amounts collected. Currently, the Company claims it has a significant incentive to pass all the gas costs on to customers as soon as possible because it is losing money on deferrals. The Company states that it is only asking to recover the cost to finance the deferral and that it will not profit from this increase.

STAFF ANALYSIS
Based on its analysis, the Commission Staff has determined that the Company’s cost of borrowing is currently higher than the current Customer Deposit Rate. Staff also acknowledges that the Company is accruing significant balances in its deferral accounts. The estimated balance as of December 31, 2000 is $12,420,000. However, the Company has elected not to recover the deferred amounts at this time because of the additional high customer rate increases that would occur. The Company believes it is reasonable to allow it to collect more in interest if it is willing to defer the excess gas costs for the customers.
In its Application, the Company states that it is the only Company in Idaho that uses the Customer Deposit Rate for interest calculations. It also states that Intermountain Gas receives interest based on their short-term debt rates. However, these assertions are not correct. Idaho Power and Avista Electric (on some deferrals) calculate interest based on the Customer Deposit Rate and Intermountain Gas receives interest based on their short-term investment rate, currently approximately 6%. PacifiCorp has no interest mechanism. Therefore, Avista Gas currently calculates interest at approximately the same rate as all the other utilities that have deferral mechanisms with an interest component.
Another concern that Staff has is that natural gas prices currently show no sign of significant decreases. As of December 21, 2000, current prices for the Company range from $9.00/MMBtu to over $13.00/MMBtu and NYMEX futures prices for summer and next winter are currently over $5.00/MMBtu. That means that even if the Commission grants the entire request in the Company’s current PGA Application (AVU-G-00-05), that the deferral account will continue to build up to substantial levels. All of the deferrals and interest charges will eventually have to be repaid by the customers. Staff’s analysis shows that even if there are no further deferrals after December 2000, the $12,420,000 of deferred gas costs will result in interest costs of approximately $821,000 by the end of 2001 using the Customer Deposit Rate of 6%. Using the latest Company short-term debt rate of 7.43% over the same period would result in an additional $200,000 of interest charges to the customers. Additional deferrals will only add to that difference.
Staff also considered interest rate trends in general. On January 3, 2001, the Federal Open Market Committee of the Federal Reserve (Fed) cut short-term interest rates. The central bank lowered the Fed funds rate from 6.5% to 6.0%. The Fed also cut the discount rate to 5.75% from 6.0% and it stands ready to approve a further reduction to 5.5%. According to analysts, the reduced rates should reduce the costs of borrowing money immediately and across the board for consumers and businesses.
With the increase in the Customer Deposit Rate to 6.0% for the year 2001, and the decrease in short-term rates from the Feds, the Company’s cost to borrow money will be closer to what the Company accrues on the deferred gas costs than in 2000. An interest rate of 6.0% for PGA accruals is reasonable.

RECOMMENDATION
At this time, there are at least three options that the Commission could chose 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. The 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 of calculating their short-term interest rates is acceptable to Staff. The Commission should require the Company to pay interest to the customers based on the same interest rate calculation as they collect it. That way, the customers would benefit when the costs of gas come down.
At this time, Staff believes that the Customer Deposit Rate is the appropriate rate for the Company to accrue interest on the PGA. The Staff recommends that the Company’s request be denied for the following reasons:
The Customer Deposit Rate rose from 5.0% to 6.0% on January 1, 2001. Six percent is much closer to the actual cost of borrowing than 5.0%. 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 the 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.

Dated at Boise, Idaho, this day of January 2001.

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Scott Woodbury
Deputy Attorney General

Technical Staff: Alden Holm

AH:SW:gdk:i:wpfiles/umisc/comments/avug004.swah

STAFF COMMENTS 3 JANUARY 5, 2001