2001021228639.doc

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF THE APPLICATION OF AVISTA CORPORATION FOR A DEFERRED ACCOUNTING ORDER.
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CASE NO. AVU-G-00-7

ORDER NO. 28639
On December 21, 2000, Avista Corporation filed its Application for a Deferred Accounting Order. On January 9, 2001, the Commission issued Notice of Application and Notice of Modified Procedure which amongst other things required the parties to file written comments on or before January 30, 2001. Order No. 28608. The Commission Staff was the only party to file comments.
BACKGROUND
Avista alleges that because of the recent price volatility of the cost of gas it believes that a greater proportion of future natural gas costs should be hedged through fixed price financial transactions (financial instruments, instruments). Avista believes these transactions will add stability to the cost of natural gas to the Company and its customers on a going forward basis. However, Avista states that currently the cost of natural gas for its customers is determined exclusively by the Company’s Natural Gas Benchmark Mechanism in Tariff Schedule 163 which does not provide accounting treatment for additional transactions relating to gas supplies included in the Company’s PGA. Accordingly, Avista seeks a Commission order authorizing the deferral of revenues and expenses resulting from these transactions it enters to serve the Company’s retail natural gas customers and inclusion of any deferred amounts in its PGA mechanism. Avista states that through this Application it is not seeking to change the operation of the existing benchmark mechanism. Rather, its proposal merely is a request to supplement the accounting treatment to incorporate deferred amounts from financial instruments into the Company’s PGA mechanism. Avista concludes that if its Application is approved by the Commission, the Company still has the obligation to demonstrate the prudency of these fixed price transactions or any other gas supply transaction when it later seeks recovery of these amounts through its PGA mechanism.
Accordingly, Avista requests approval of deferred accounting treatment for the revenues and expenses associated with fixed price financial transactions for the period of January 1, 2001 to March 31, 2002.
STAFF ANALYSIS AND RECOMMENDATION

Staff agrees that the current benchmark mechanism does not provide an accounting mechanism to pass revenues and expenses for fixed-price transactions on to customers. These transactions may allow the Company to reduce price volatility. The Company currently purchases all its gas from an affiliate under the benchmark mechanism set up in Order No. 27908. Staff recommends amending the benchmark mechanism to allow the Company to defer the revenues and expenses associated with fixed price transactions, used to purchase gas, for the period of January 1, 2001 to March 31, 2002.
The Company currently has three instruments in place to fix the price of gas for customers from January through March of 2001. It has requested that it be able to pass the costs of these instruments on to customers. Staff performed an analysis on these three fixed-price transactions and it believes the results are typical of the risks and benefits that can happen with financial instruments. Staff Comments at 3-4. Staff estimates that based on futures prices, as of January 8, 2001, these three financial transactions will cost Idaho customers about $83,400 to have a portion of their gas prices fixed. However, because the market currently is extremely volatile entering fixed price transactions is risky as prices may rise above or fall below the fixed price. Accordingly, Staff believes it is important for the Company to share the risks and the benefits of these instruments with customers. Avista’s Application though does not address any sharing provisions. Accordingly, when Staff reviews the benchmark mechanism of Avista along with review of the PGA mechanism for Intermountain Gas Company, it will also investigate the possibilities of a sharing mechanism. Staff will also continue to monitor the prudency of gas-related costs based on the following criteria:
1. Current market conditions
2. Current and future prices
3. Information available to the affiliate marketer
Any other information useful in establishing purchase strategies

Staff proposes to conduct further review of the benchmark mechanism and hedging practices to determine whether the Company and its customers are receiving adequate services for the fees paid to Avista Energy for its expertise in gas acquisition and transport rather than receiving full exposure to a high-cost market. Staff believes its continued review should evaluate whether services that include risk assessment and development of a gas purchase strategy are a function for the distribution company or a service that should be included in the current contract with Avista Energy. The current PGA and benchmark mechanism simply track market prices to demonstrate customer costs and benefits. Sufficient information has not been provided on risk assessment/planning services provided by Avista Energy or that there are sufficient incentives to undertake such services to secure gas at the lowest possible cost for customers. The results of this review may require further changes to the benchmark mechanism.
Staff recommends approval of the Application as filed to allow the accounting entries to be recorded beginning January 1, 2001 for the remaining period under the benchmark mechanism. The gas purchased under these instruments is currently only about 5% of the total load. Staff intends to review this accounting policy along with a review of the PGA benchmark mechanism prior to the end of the trial period on March 31, 2002. Staff believes there should be accountability and sharing of the risks and rewards of financial instruments for the Company. Staff agrees with and reiterates the Company's statement that “the proposed changes to the PGA process does not relieve the Company of its obligation to demonstrate the prudency of its decisions.” Dukich letter dated December 20, 2000, attached to Application. Staff will continue to monitor the use of financial instruments by the Company and evaluate prudency for cost recovery when it is requested by the Company.
COMMISSION FINDINGS
It is reasonable for the Company to look for ways to reduce the cost of gas provided to customers and to provide price stability. One option is to use financial instruments to fix the price

of gas for a certain period in the future. During times of changing prices, financial instruments can be used to minimize price volatility and to provide stable, and potentially lower prices. However, these instruments contain an element of risk that is intensified by the volatility of prices in the natural gas market. If the market price drops below the instrument price, there will be a premium over market price that the customers will have to pay. If the market price goes above the instrument price, customers will enjoy prices that are below market prices as well as the benefits of stable prices. Thus, because of the risk of these transactions it would clearly be unfair for Avista’s customers to bear it alone. Accordingly, the Company should share the benefits and risks of these transactions with its customers.
Accordingly, based upon review of the Application and Staff’s comments the Commission will grant Avista’s Application for a Deferred Accounting Order. Commission authorization of this Application will allow the Company to defer the revenues and expenses associated with fixed price financial transactions in enters to serve its customers for the period of January 1, 2001 to March 31, 2002. The Commission also will authorize that any deferred amounts shall be included for review in the Company’s PGA mechanism. Commission approval of this Application provides Avista the opportunity to seek recovery of these costs but does not guarantee future cost recovery of amounts that may be deferred. When Avista asks for recovery of these amounts the Commission will review the Company’s PGA mechanism and the prudency of the fixed price financial transactions it entered into, which resulted in amounts that received deferred accounting treatment, to determine whether the Company is entitled to recover them from its customers.
O R D E R
IT IS HEREBY ORDERED that Avista Corporation’s Application for a Deferred Accounting Order is granted. Accordingly, Avista may begin to defer the revenues and expenses associated with fixed price transactions, used to purchase gas, for the period of January 1, 2001 to March 31, 2002.
IT IS FURTHER ORDERED that the amounts that receive deferred accounting treatment as a result of fixed price financial transactions shall be included in the Company’s PGA mechanism. IT IS FURTHER ORDERED that the Company include updates of all fixed price transactions, showing all calculations for deferred amounts resulting therefrom with the benchmark mechanism reports currently submitted to the Commission.
THIS IS A FINAL ORDER. Any person interested in this Order or in interlocutory Orders previously issued in this Case No. AVU-G-00-7 may petition for reconsideration within twenty-one (21) days of the service date of this Order with regard to any matter decided in this Order or in interlocutory Orders previously issued in this case. Within seven (7) days after any person has petitioned for reconsideration, any other person may cross-petition for reconsideration. See Idaho Code § 61626.
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this
day of February, 2001.

DENNIS S. HANSEN, PRESIDENT

MARSHA H. SMITH, COMMISSIONER

PAUL KJELLANDER, COMMISSIONER

ATTEST:

Jean D. Jewell
Commission Secretary

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The Sumas Instrument, AECO Instrument and Rockies Instrument. Staff Comments at 3-4.

Based on subsequent information received, Staff updated the estimates of the premiums associated with the fixed price transactions referenced in this case. Based on current and future prices as of January 30, 2001, Staff submits the following premiums estimated to be paid by the Company below or (above) market prices for the fixed price transactions referenced in this case:
January Savings (Premiums) $219,254.78
February Savings (Premiums) ($525,149.52)
March Savings (Premiums) ($575,447.11)
Total Savings (Premiums) ($881,341.85)

ORDER NO. 28639 -1-

Office of the Secretary
Service Date
February 12, 2001