20060626Decision memo.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
CO MMISSI 0 NER SMITH
COMMISSIONER HANSEN
COMMISSION SECRETARY
COMMISSION STAFF
LEGAL
FROM:CECELIA A. GASSNER
DATE:JUNE 24, 2006
SUBJECT:A VISTA CORPORATION'APPLICATION FOR AN ORDER
APPROVING A CORPORATE REORGANIZATION TO CREATE A
HOLDING COMPANY, AVA FORMATION CORP.; CASE NOS. AVU-
06-1 AND A VU-06-
On February 16, 2006, Avista Corporation ("Avista" or "Company ) filed an
Application with the Idaho Public Utilities Commission ("Commission ) seeking an order for
authority to conduct a corporate reorganization and form a holding company to be known
A V A Formation Corp. This Commission has jurisdiction over such request pursuant to Idaho
Code ~ 61-328.
On April 28, 2006, the Commission issued a Notice of Application, Notice of
Workshop and Notice of Modified Procedure, seeking comments from any interested persons.
See Order No. 30026. The Order specifically set forth that a public workshop would be held on
May 16, 2006 to discuss issues arising from the Application. No person or entity petitioned to
intervene in the matter.
BACKGROUND
In its Application, A vista has requested an order granting the Company authority to
modify its current corporate structure through the establishment of a holding company. The
holding company, A V A Formation Corp. (the "Parent Corporation ), would be formed as the
parent company of the existing regulated company, Avista Corporation. The Parent Corporation
would also be a parent company of Avista Capital, Inc., which would continue to hold non-
regulated subsidiaries.
DECISION MEMORANDUM
A vista Corporation, doing business as A vista Utilities, is currently the corporate
parent. The proposed structure would make A vista Utilities a separate company under the Parent
Corporation and A vista Corporation would no longer exist as an operating entity.
A vista states that due to the recent repeal of the Public Utilities Holding Company
Act of 1935 (PUHCA), the Company considers it to be in the best interest of customers and
shareholders to change the corporate structure of A vista into a holding company structure. The
Company believes that this reorganization would provide additional protection for ratepayers by
ring fencing" or further separating utility operations from the Company s other non-regulated
businesses.
Staff issued two requests for production to the Company, and received timely
responses. The information provided by the Company primarily addressed the intention and
ability of the Company to implement measures to maintain separation between the utility and the
non-regulated businesses that would result ifthe reorganization is approved.
THE STIPULATION
Pursuant to Order No. 30026 , representatives of the parties conducted a public
workshop on May 16, 2006, and engaged in discussions focusing on key protections for
ratepayers with a view toward resolving issues arising from the Application. No other persons
attended the meeting. Based upon the discussions between the parties as a compromise of the
positions in this case, and for other consideration as set forth below, the parties agreed to various
commitments that the Company will undertake as part of the reorganization.
The settlement Stipulation contains 33 "commitments" or conditions that the
Company commits to perform in support of the Application. The commitments address the need
for ring-fencing, allow the Commission and Staff substantial access to the books and records of
the utility and Parent Corporation, set forth cost allocation methodologies, and address equity
building mechanisms and dividend payments. The Stipulation parties assert that the
commitments satisfy the statutory standards for the Company s reorganization as set out in Idaho
Code ~ 61-328. Stipulation at ~ 9. In the Motion that accompanied the Stipulation, the parties
urged the Commission to adopt the Stipulation, its commitments, and issue an Order approving
the reorganization.
The Company will need to approach other states to seek their approval of the
reorganization. The settlement Stipulation also contains a "most favored nations" provision.
DECISION MEMORANDUM
Stipulation at ~ 7. This provision allows the Commission to review and adopt any commitment
or condition ordered by the other states, even after an Order in this matter is issued. Thus, any
assurances, conditions or benefits adopted in the other states that would create a benefit to Idaho
customers could subsequently be adopted in Idaho under the terms of the Stipulation.
The parties to the Stipulation recommend that the Commission approve and adopt the
commitments in their entirety. They further agree not to appeal any portion of the Stipulation or
any Order approving the same. The Stipulation parties also recognize that approval of the
Stipulation and commitments shall not bind the Commission "in other proceedings with respect
to the determination of prudence, just and reasonable character, rate or ratemaking treatment, or
public interest of services, accounts, costs, investments, in any particular construction project
expenditures or actions referred to in (the) Commitments.
COMMENTS
Comments to the Application were received from a member of the public and from
the Commission Staff. The member of the public is a customer and shareholder of the Company.
The customer expressed concern that the Parent Corporation may be unable to resolve bad loans
it may procure without negatively impacting the utility company. The customer urged the
Commission to deny the Company s Application.
Staff believes that the Application along with the commitments in the Stipulation
meet the requirements set forth under Idaho Code ~ 61-328. It is Staffs belief that Commitment
Nos. 1 , 4, 8 , 9, 10, 11 , 15 , 17, 18, 19, 29, 30, and 31 address the need for ring-fencing, with
provisions ranging from separate books and records for each entity to providing a non-
consolidated opinion to the Commission demonstrating that the ring-fencing around Avista
Utilities is sufficient to prevent A vista Utilities from being pulled into a Parent Corporation
bankruptcy proceeding. Additionally, Commitment Nos. 2 , 3 , 5, 13 , 23, and 24 provide Staff
with access to a full range of books, records and other documents which would pertain to A vista
Utilities and its affiliates, including the Parent Corporation. Comprehensive reporting
requirements are also included in the commitments that would require the Parent Corporation
and A vista Utilities to report to Staff and request approval from the Commission when certain
events occur, such as the procurement of loans, the spin-off of any entity, the dissolution of
business activities, dividend payment arrangements, and changes in the credit ratings of each
entity.
DECISION MEMORANDUM
In addition Staff supports the commitments that include comprehensive
arrangements for complying with cost allocation methodologies, as well as commitments
involving the payment of dividends. The Company agreed, in Commitment No. 18 , that A vista
Utilities will not make any dividends to the Parent Corporation that would reduce A vista
Utilities ' common equity capital below 25% of its Total Adjusted Capital without the
Commission s approval.
Staff, in reviewing the Company s Application and discussing the agreed-upon
Commitments, took into account customer comments that expressed concerns regarding loan
arrangements and intercompany financing. Commitment No. 29 addresses these concerns by
requiring A vista Utilities to demonstrate that the procurement of any loan from the Parent
Corporation does not interfere with any of the ring-fencing mechanisms that secure the utility.
Staff believes that the reorganization should reduce the utility s risk and improve
credit ratings. Staff does not anticipate rating downgrades based on recent credit rating reviews.
However, in the event of a credit rating downgrade due to the reorganization, Staff will calculate
the impact on customers and propose an adjustment be made to Avista Utilities ' revenue
requirement in the appropriate rate proceedings.
Further, Staff believes that the commitments assure that the public interest is
protected with ring-fencing provisions and that these barriers are not overcome by any affiliate
where the credit rating of one is used to offset the diminished rating of the other. The operations
and structure of A vista Utilities and the Parent Corporation would continue to meet the
requirement of having the bona fide intent and financial ability to operate and maintain said
property in the public service.
Staff recommends approval of the proposed reorganization given that the Company
and its affiliates have agreed to implement these specific commitments, conditions and reporting
mechanisms. Staff recommends that the Commission accept and approve the Stipulation and
adopt the Commitments in Appendix A thereto. Staff believes that these Commitments
adequately protect Idaho ratepayers and serve the public interest.
DECISION MEMORANDUM
COMMISSION DECISION
Does the Commission desire to accept and approve the Application and the
Stipulation filed by the parties?
M:A VU-O6-A VU-O6-cg2
DECISION MEMORANDUM