20090123Morris Direct.pdf

DAVID J. MEYER 1069 JAN 23 PM 12: 31
VICE PRESIDENT AND CHIEF COUNSEL OF
REGULATORY & GOVERNENTAL AFFAIRS
AVISTA CORPORATION
P . O. BOX 3727
1411 EAST MISSION AVENUE
SPOKANE, WASHINGTON 99220-3727TELEPHONE: [phone]FACSIMILE: [phone]
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF AVISTA CORPORATION FOR THE
AUTHORITY TO INCREASE ITS RATES
AND CHARGES FOR ELECTRIC AND
NATURAL GAS SERVICE TO ELECTRIC
AND NATURAL GAS CUSTOMERS IN THE
STATE OF IDAHO
CASE NO. AVU-E-09-01
CASE NO. AVU-G-09-01
DIRECT TESTIMONY
OF
SCOTT L. MORRI S
FOR AVISTA CORPORATION
(ELECTRIC AND NATURAL GAS)
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I. INTRODUCTION
Q.Please state your name, employer and business
3 address.
4 A.My name is Scott L. Morris and I am employed as
5 the Chairman of the Board, President, and Chief Executive
6 Officer of Avista Corporation (Company or Avista), at 1411
7 East Mission Avenue, Spokane, Washington.
8 Q.Would you briefly describe your educational
9 background and professional experience?
10 A.Yes. I am a graduate of Gonzaga University with a
11 Bachelors degree and a Masters degree in organizational
12 leadership.I have also attended the Kidder Peabody School
13 of Financial Management.
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I joined the Company in 1981 and have served in a
number of roles including customer service manager.In
16 1991, I was appointed general manager for Avista Utilities'
17 Oregon and California natural gas utility business.I was
18 appointed President and General Manager of Avista Utili ties,
19 an operating division of Avista Corporation, in August 2000.
20 In February 2003, I was appointed Senior Vice-President of
21 Avista Corporation, and in May 2006, I was appointed as
22 President and Chief Operating Officer. Effective January 1,
23 2008, I assumed the position of Chairman of the Board,
24 President, and Chief Executive Officer.
25 i am a member of the Western Energy Institute board of
26 directors, a member of the Gonzaga Uni versi ty board of
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1 trustees, a member of Edison Electric Institute board of
2 directors, a member of the American Gas Association board of
3 directors, a member of ReliOn board of directors, and board
4 director of the washington Roundtable.I also serve on the
5 board of trustees of the Greater Spokane Incorporated, which
6 was formerly two separate organizations, the Spokane Area
7 Economic Development Council and the Spokane Regional
8 Chamber of Commerce.
9 Q.What is the scope of your testimony in this
10 proceeding?
11 A.I will provide an overview of Avista Corporation
12 and Avista utilities.I summarize the Company's rate
13 requests in this filing, and the primary factors driving the
14 Company's need for general rate relief. I will provide an
15 overview of some of the initiatives that we have undertaken
16 in recent years to achieve operating efficiencies in an
17 effort to mitigate a portion of the increase in costs that
18 Avista, as well as other utilities in the industry are
19 experiencing.I will also briefly explain the Company's
20 customer support programs that are in place to assist our
21 customers.Finally, I will introduce each of the other
22 witnesses providing testimony on the Company's behalf.
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A table of contents for my testimony is as follows:
Description
I. Introduction
II. Cost Drivers for Avista
III. Cost Management and Efficiencies
IV. Cus tomer Support Programs
V. Overview of Avista
VI. Rate RequestsElectric
Natural Gas
VII. Other Company Witnesses
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Q.Are you sponsoring any exhibits in this
16 proceeding?
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A.Yes.I am sponsoring Exhibit No. 1 Schedule 1,
pages 1 through 2.Page 1 is a diagram of Avista' s
19 corporate structure; and page 2 includes a map showing
20 Avista's electric and natural gas service areas.These
21 exhibi ts were prepared under my direction.
22 Q.Please sumarize the proposed changes in retail
23 rates in this filing.
24 A.In this filing Avista is proposing a net increase
25 in electric retail rates of 7.8%. The proposal consists of
26 an increase in electric base retail rates of $31.2 million
27 or 12.8%, and a reduction in the current Power Cost
28 Adjustment (PCA) surcharge of 5.0%. We are proposing that
29 the reduction in the PCA surcharge become effective
30 coincident with the effective date of new retail rates from
31 this general rate case filing.
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1 Company witness Mr. Hirschkorn' s testimony discusses this
2 change in the PCA surcharge. Therefore, the proposed
3 electric bill increase to customers from this filing is a
4 net increase of 7.8%. The proposed natural gas increase in
5 The followingthe filing is $ 2.74 million, or 3.0%.
6 illustrates how the estimated electric net increase was
7 derived.
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Illustration No.1:
$45,000,000
$40,000,000
$35,000,000
$30,000,000
$25,000,000
$20,000,000
$15,000,000
$10,000,000
$5,000,000
Bil Impact to Customers
12.8%*
$-21 01-23-2009 07-01-2009
* The proposed increase is 12.8% as a percentage of present billed rates and14.2% as a percentage
22 of base tariff rates.
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II. COST DRIVERS FOR AVISTA
Q.Why is Avista proposing another electric revenue
3 increase following the recent general rate request?
4 This case is about more than just year-over-yearA.
5 changes in utility operating costs, such as power costs,
6 We are alsofuel, materials and supplies, and labor.
7 investing large amounts of capital to preserve and upgrade
8 our existing utility infrastructure to meet growing
9 customer demand. We are also continuing to experience major
10 cost impacts related to meeting new reliability standards,
11 environmental compliance, and litigation related to the
12 preservation of what have historically been our low-cost
13 resources we have used for decades to serve our customers.
14 Several examples of significant cost increases are as
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1.Compensation to the Coeur d' Alene Tribe (Tribe):
The recently announced Settlement Agreement among the
Tribe, Avista, and the U. S. Department of Interior,
provides compensation to the Tribe related to their
ownership of the Southern one-third of Lake Coeur d'Alene (CDA). Al though these cos ts were reviewed in
the prior general rate case, they were deferred for
future recovery in a subsequent rate case and are
included in the current filing. The annual cost to
Idaho customers from this Agreement is $1.5 million,
or a 0.7% increase in base retail rates.
2.SDokane River Relicensina: The resolution of issues
wi th the CDA Tribe helps clear the way for the Federal
Energy Regulatory Commission (FERC) to issue a new
license for the Post Falls Hydroelectric Project in
the State of Idaho. There is, however, one remaining
issue for the Proj ects in the State of Washington
related to water quality. We expect this issue to be
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resolved in the first half of 2009 and a new license
to be issued. The majority of the relicensing costs
were reviewed in the prior general rate case filing,
but were deferred for later recovery in this filing.
The annual cost to Idaho customers from relicensing
the Spokane River Projects is $3.8 million, or a 1.7%
increase in base retail rates.
3.Mi tigation of Mercury and Thermal O&M Cost Increases:
During 2009, the Colstrip owners, including Avista,
will begin to incur significant costs to comply with
new Mercury emissions laws in the State of Montana.
Avista is also experiencing a significant increase in
O&M at its thermal plants, due in part to the rapid
increase in the cost of materials and the age of the
plants. The increase in annual costs is $1.6 million,
or a 0.7% increase in base retail rates.
4.Increase in Power Supply Costs: In our last rate case
we included a "rate mitigation adjustment" such that
the full increase in power supply costs was not
included in retail rates resulting from that case.
This case reflects the total power supply costs to
serve customers' loads. The increase in costs is also
driven by, among other things, the expiration of low-
cost Mid-Columbia contracts, and an increase in retail
loads. Although the economy has slowed, the growth of
energy demands by customers continues to climb, we
believe due in part to a continuing increase in
televisions, computers, cell phone chargers, and other
consumer electronics in customers' homes. The
increase in annual power supply costs is $8.6 million,
or a 3.9% increase in base retail rates.
5.Investment in Facilities to Serve Customers: As other
wi tnesses will explain in more detail, we are
continuing to invest significant dollars in utility
infrastructure. The investment is necessary to serve
new customers, upgrade aging facilities - some of
which are over 70 years old - and meet recently-
enacted reliability requirements for our energy
delivery facilities. Although in recent months the
rapid increase in the cost of materials (concrete,
copper, steel, etc.) has abated, such costs are still
orders of magnitude higher than what they were even a
few years ago. New investment reflected in this
filing results in an increase in annual costs to
customers of $3.1 million, or a 1.4% increase in base
retail rates.
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2 These items alone total $18.6 million, representing an
3 increased. revenue requirement of 8.4% for the Idaho
4 jurisdiction, prior to even addressing other utility
5 ownership and operating costs.
6 In a November 2008 report prepared by the Brattle
7 Group for The Edison Foundation, "Transforming America's
8 Power Industry: The Investment Challenge 2010-2030."It
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10 The U. s. electric utility industry is facing the11 greatest challenge in its history. The demand for12 electric service is increasing, reserve margins are13 shrinking and input costs to build infrastructure for
14 all types of electricity production are soaring.15 Global climate change and other environmental issues16 are directing the industry toward greater development17 and use of energy efficiency products and services and18 low-emissions supply sources, all of which come with19 costs.
2021 We are a low-cost utility in the midst of a high-cost
22 environment:high cost of materials for utility
23 infrastructure, high fuel and purchased power costs, high
24 cost of compliance with environmental and reliability
25 requirements, and, recently, high costs to settle long-
26 standing litigation (CDA Tribe/Relicensing and Montana
27 Riverbed litigation). This is all in the face of increased
28 demands for service by our customers - and we need to meet
29 those needs by providing safe, reliable and efficient
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III. COST MAAGEMNT AN EFFICIENCIES
Q.What is Avista doing to mitigate the impact of
3 increased costs on its customers?
4 A.We recognized that these increases in costs will
5 result in electric bills that will be more difficult for
6 some of our customers to pay.I can assure you that we are
7 not just sitting on the sidelines as our costs go up.
8 i will explain a number of cost-cutting and efficiency
9 measures that we have undertaken recently in an effort to
10 mitigate the overall cost impacts to our customers.In
11 addition, we have a history of making it a priority within
12 our Company to maintain meaningful programs to assist our
13 customers that are least able to pay their energy bills,
14 including working cooperatively with our local community
15 action agencies.
16 We will continue to aggressively manage costs to
17 achieve the appropriate balance in providing safe and
18 reliable service at cost-effective rates, and a high level
19 of customer satisfaction, while preserving the financial
20 heal th of the utility.
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Q.What measures has the Company taken?
A.The measures below are among some of the actions
23 we have taken to mitigate the impact of increased costs on
24 our customers:
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1.Delayed the Reardan Wind Project. We have recently
delayed the construction of the $125+ million Reardan
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Wind Project to 2013, due, in part, to the current high
cost of wind turbines and other materials.
Cancelled Ross Court Office Space. Avista' s main
office building was constructed in 1958, and expanded
in 1978. Even though Avista' s ratio of the number of
customers served per employee continues to increase, we
have needed additional office space for some time. In
2008, in order to reduce costs, we cancelled plans to
build additional office space adjacent to the main
office, and instead chose to remodel existing space
formerly used by Horizon Credit Union nine miles fromthe main office.
3.Out sourced Billing and Disaster Recovery. Avista
recently outsourced its bill printing and mailing
services, and at the same time complying with
requirements related to disaster-recovery for billingdata. The objectives were to move bill printing,
inserting and mailing offsite and leverage core
competencies of the provider, to obtain disaster
recovery and avoid the cost of duplicate data storage,
ensure daily print volume flexibility, and reduce costs
for bill printing, inserting and mailing.
4.Additional On-line Service Offerings. In January 2008the Company completed the redesign of
ww.avistautilities.com. The primary objectives of
this proj ect were to lower costs and enhance customer
satisfaction through the deployment of additional self-
service options, such as open/close/move, reporting and
making payment arrangements, enrolling in Comfort Level
Billing, and/or Automatic Payment Service (APS) .
Customers also have access to tools to help analyze
their bills and are provided with meaningful
information to make informed energy management choices.
The cost-saving objective is to achieve a 10% reduction
in the Company's Contact Center total call volume,
which results in lower staffing and lower costs to
customers.
Q. Are these the only measures the Company has taken
44 recently to mitigate increased costs?
45 Avista is constantly looking forA.No.
46 improvements in the way it provides services to its
47 customers, as well as ways to reduce the costs of those
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1 services.Ideas are generated through periodic evaluation
2 of its operating practices, and communications with other
3 utili ties, and other industry participants, across the
4 country on best practices.While a later witness, Don
5 KopcZYnski, will explore cost-saving initiatives in more
6 detail, I would like to highlight a few:
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1.Mobile Dispatch. The Mobile Dispatch Project achieveda number of financial and customer service benefits,
including increased productivity, enhanced customerservice, reduced costs, and improved field safety.
This project uses wireless communications between the
home office and laptop computer in service trucks to
dispatch field crews. These capabilities allow for
efficient order dispatch, enhanced customer service
wi th efficient order booking, improved safety, and
reduced costs to perform the work.
2.OUtage Management. The Outage Management tool is
linked to the Company's Geographic Information System
(GIS mapping system). It allows the Company's
distribution facilities to be linked to individual
customer service points in a computer based model.
The connectivity provides tools to determine outage
areas and affected protective devices. Accurate outage
data can be collected for all incidents providing
feedback to improve reliability and outage statistics
which can be monitored in real time to indicate the
severity of major events and assist in resource
planning. These capabilities allow for quicker
restoration of electrical service for our customers,
thereby reducing labor expenses and enhancing customerservice.
3.Regional Infrastructure Efficiency. Prior to the
construction season each year, Avista, in partnership
with the City of Spokane, hosts Spokane's Joint
Utilities Coordination Council to bring together
regional municipali ties, utili ty companies,
telecommunications providers, sewer, water and the
railroad to coordinate construction activities.
Municipalities and utilities share their project plans
and schedules so as to increase the coordination and
mi tigate the risk of unknown proj ects . The efforts of
the Joint Utilities Coordination Council have resulted
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in greater coordination and efficiencies across the
Spokane region.
Q. Has Avista considered additional measures to
mitigate increased costs?
A.Yes. In fact we are currently in the process of
8 revisiting our capital budget for 2009 for potential cuts.
9 wi th regard to operating expenses, in recent years Avista
10 has run its operations with attention to minimizing
11 expenses while providing reliable service and a high level
12 of customer satisfaction.Following the energy crisis of
13 2000/2001, we cut our operating expenses as we worked
14 toward regaining an investment grade credit rating. Since
15 that time we have continued to pay particular attention to
16 limiting the growth in these costs,while meeting
17 important reliability and environmental compliance
18 requirements, and preserving a high level of customer
19 satisfaction.
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iV. CUSTOMER SUPPORT PROGRAS
Q.What is Avista doing to assist customers with
23 their energy bills?
24 A.As I mentioned earlier, we have a history of
25 making it a priority within our Company to maintain
26 meaningful programs to assist our customers that are least
27 able to pay their energy bills.We also have programs to
28 assist our entire customer base, i. e., not just our low-
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1 income cus tomers .Some of the key programs that we offer
2 or support are as follows:
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1.Increased DSM Programs and Funding. In March 2008
Avista proposed, and the IPUC approved, modifications
to the Company's energy efficiency program offerings.
The modifications further broadened the technical and
financial support Avis ta provides to its cus tomers , and
provides cus tomers wi th increased opportuni ty to manage
their energy bills. In 2008 Avista also launched the
award-winning "Every Little Bit" energy efficiency
promotional campaign which integrates all of the
Company's energy efficiency programs into one location.
2.project Share. Project Share is a voluntary program
allowing customers to donate funds that are
distributed through community action agencies to
customers in need. In addition to the customer and
employee contributions of $67,468 (through November,
2008) in Idaho, Avista shareholders contributed
$74,781, Idaho's share, to the program in 2008.
3.Comfort Level Billing. The Company offers the option
for all customers to pay the same bill amount each
month of the year by averaging their annual usage.
Under this program, customers can avoid unpredictable
winter heating bills.
4.Payment Arrangements. The Company's Contact Center
Representatives work with customers to set up payment
arrangements to pay energy bills.
5.CARS Program. Customer Assistance Referral andEvaluation Services provides assistance to special-
needs customers through access to specially trained
(CARES ) representatives who provide referrals to area
agencies and churches for help with housing,
utilities, medical assistance, etc.
6.Customer Service Automtion. Customers are able to
access Avista' s Interactive Voice Response system
(IVR) for automated transactions to enter their own
payment arrangements, listen to outage messages and
conduct other business such as obtaining account
balances and requesting a duplicate bill.
7.Power to Conserve. In partnership wi th KREM
television, a half-hour television program is annually
developed that covers low-cost and no-cost ways to
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1 save energy at home. The goal of the program is to
2 help limited income seniors and other vulnerable
3 populations with their energy bills by providing home
4 energy conservation education. The program provides
5 helpful energy conservation tips, information on
6 community resources and ways for customers to manage
7 their energy bills. A DVD of the program has also
8 been produced which is included as part of energy
9 conservation kits provided in senior conservation10 workshops.
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12 8. Senior Energy Workshops. Energy efficiency workshops13 that focus on comfort and safety as well as the wise14 use of energy have been specially designed for the15 senior population. Kits are provided that contain16 energy-saving items such as compact fluorescent light17 bulbs, draft stoppers, rope caulking, etc. The Power
18 to Conserve program DVD along with energy efficiency19 tip sheets are also included in the kit. Workshops20 are held at senior meal sites, senior centers and21 other senior support locations.
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23 9. KHQ.com - Caregivers Resource. Avista sponsors the
24 Caregivers Resource page on KHQ'S Senior Life website25 in order to reach seniors and caregivers with a wide26 variety of resource information including energy27 efficiency, energy assistance information, Avista28 CARES, bill paying assistance, etc. Several video29 clips offer low-cost, no-cost energy saving ideas.
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31 10. Senior Publications. Avista created a one page32 advertisement that is placed in several senior33 directories and publications as part of an effort to34 reach seniors with information about energy35 efficiency, Comfort Level Billing, Avista CARES, and36 energy assistance information.
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38 Again, Mr. KopczYnski provides additional detail in
39 his testimony concerning these and other programs designed
40 to assist customers.
41 As discussed in Mr. Folsom's testimony, the Company
42 proposes to increase its low-income weatherization funding
43 for electric and natural gas service by a percentage
44 amount equal to the percentage rate increase granted in
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1 this case for residential customers (net of the PCA
2 surcharge reduction for electric service). The additional
3 funding would be provided through the DSM tariff rider,
4 Schedules 91 and 191.
5 In addition, Avista actively participated in the
6 energy affordability workshops in Case No. GNR-U-08-01. In
7 that Case, workshop participants are exploring ways to
8 address energy affordability and the difficulty some
9 customers experience in paying their energy bill. Avista
10 supports Staff's recommendation in that Case in favor of
11 legislation to allow the Commission to adopt a Low Income
12 Rate Assistance Program (LlRAP) for its Idaho customers,
13 at the request of the utility.
14 The LlRAP program would allow Avista, with I PUC
15 approval, to collect through a small monthly charge to all
16 customers, additional dollars that would be directed to
17 customers least able to pay their energy bills. The local
18 community actions agencies that are already in place would
19 administer these dollars.
20 Q.Are there other programs in the State of idaho
21 that are available to provide assistance to customers that
22 need help with their energy bill?
23 A.Yes.On September 30, 2008, President Bush
24 signed legislation that provides $5. i billion for the Low
25 Income Home Energy Assistance Program (LIHEAP) for the
26 2008/2009 heating season. This increased funding will
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1 serve an additional two million households and raise the
2 average grant from $355 to $550, and also allows states to
3 carryover any funds remaining to next year's heating
4 season.Idaho's share of the LIHEAP funding was increased
5 from $12,376,000 to $26,969,000. This bill also provides
6 increased funding for weatherization assistance programs.
7 Q.Is Avista communicating with its customers to
8 explain what is driving the increase in costs?
9 A.Yes. The Company proactively communicates with
10 its customers in a number of ways:electronic customer
11 communications, one-on-one customer interactions through
12 field personnel and account representatives, proactive and
13 reactive media contacts,and through our employees'
14 involvement in community,business and civic
15 organizations,to name a few.We believe our
16 communications are helping our customers,and the
17 communities that we serve, better understand the issues
18 faced by the Company, such as increased environmental
19 mitigation,infrastructure investment,and generation
20 constraints, all of which have lead to higher costs for
21 our customers.
22 We have made extensive efforts to communicate with
23 our customers concerning the cost challenges that we are
24 facing, and we believe these communications are helping
25 customers better understand the factors that are causing
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1 increased costs for Avista, and the utility industry in
2 general.
3 Q.Would you please comment on the employees'
4 dedication to achieve customer satisfaction?
5 A.Yes, I am pleased with the dedication of Avista
6 Utili ties' employees and their commitment to provide
7 quality service to our customers.While we continue to
8 maintain tight controls on capital and O&M budgets, our
9 customer service surveys indicate that customer
10 satisfaction remains high. Our recent fourth quarter 2008
11 customer survey results show an overall customer
12 satisfaction rating of 93% in our Idaho, Washington and
13 Oregon operating divisions.This rating reflects a
14 positive experience for the majority of customers who have
15 contacted Avista related to the customer service they
16 received. These results can be achieved only with very
17 committed and competent employees.
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V. OVERVIEW OF AVISTA
Q.Please describe Avista' s current business focus
21 for the utility and subsidiary operations.
22 A.Our strategy continues to focus on our energy and
23 utili ty-related businesses, with our primary emphasis on
24 the electric and natural gas utility business.There are
25 four distinct components to our business focus for the
26 utility, which we have referred to as the four legs of a
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1 stool, with each leg representing customers, employees, the
2 communities we serve, and our financial investors. For the
3 stool to be level, each of these legs must be in balance by
4 having the proper emphasis.This means we must maintain a
5 strong utility business by delivering efficient, reliable
6 and high quality service, at a reasonable price, to our
7 customers and the communities we serve, and provide the
8 opportunity for sustained employment for our employees,
9 while providing an attractive return to our investors.
10 The Company recently received upgrades its corporate
11 credit ratings to investment grade by Moody's Investors
12 Service in December 2007 and Standard & Poor's in February
13 2008.Al though we are continuing to make progress in
14 improving the Company's financial condition, we are still
15 not as strong financially as we need to be. The Company
16 continues to be below investment grade with Fitch Ratings.
17 Timely rate relief through this filing is an important
18 element in continuing to gain financial strength and
19 improving our credit rating.Wi th higher levels of
20 capi tal spending required over the next several years (i. e. ,
21 approximately $420 million during 2009-2010), it is more
22 important than ever that the Company remain financially
23 healthy in order to attract capital inves tmen t and
24 financing at the lowest cost possible. Company witness Mr.
25 Thies will discuss further the actions taken by the Company
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1 to improve cash flow, reduce debt, and our continuing
2 efforts to improve our financial condition.
3 Q.Please briefly describe Avista's subsidiary
4 businesses.
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A.Avista Corp. ' s primary subsidiary is the
information and technology business,Advantage IQ,
described below,which is headquartered in Spokane,
8 Washington. In 2007, Avista completed the sale of the
9 operations of Avista Energy to Coral Energy Holding, L. P. ,
10 and certain of its subsidiaries, a subsidiary of Shell.
11 Avista currently holds a 6.8% share in Avista Labs'
12 successor company, ReliOn, which is held under Avista
13 Capital.A diagram of Avista' s corporate structure is
14 provided on page 1 of Exhibit No.1, Schedule 1.
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Q.Please provide an overview of Advantage IQ.
A.Advantage IQ, formerly known as Avista Advantage,
17 commenced operations in 1998 and is a provider of utility
18 bill processing, payment and information services to multi-
19 site cus tomers .Advantage IQ analyzes and presents
20 consolidated bills on-line, and pays utility and other
21 facili ty-related expenses for multi-site customers
22 throughout North America. Customers include, CSK Auto, Jack
23 in the Box, Staples, and Big Lots, to name a few.
24 Information gathered from invoices, providers and other
25 customer-specific data allows Advantage IQ to provide its
26 customers with in-depth analytical support,real-time
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1 reporting and consulting services with regard to facili ty-
2 related energy, waste, repair and maintenance, and telecom
3 In 2007, Advantage IQ was awarded the ENERGYexpenses.
4 STAR~ Sustained Excellence Award in recognition of its
5 continued leadership in protecting our environment through
6 energy efficiency.
7 What is the status of the formtion of a holdingQ.
8 company?
9 In February 2006, Avista filed for regulatoryA.
10 approval of the proposed formation of a holding company
11
12 Commission (FERC) and the public utility commissions in
(reorganization)Federal Regulatory
13
14
15
16
17
with the Energy
Idaho, Washington, Oregon and Montana,condi tioned on
approval by shareholders.On April 18, 2006, FERC issued
its "Order Authorizing Disposition of Jurisdictional
Facili ties"EC06-85-000,approving thein Docket No .
Company's reorganization.Shareholder approval of the
18 reorganization was granted at Avista Corp. ' s Annual
19
20 Idaho Public Utilities Commission issued an order approving
Shareholder meeting May 11, 2006.On June 30 , 2006 , the
21 Avista' s reorganization application, based on a settlement
22 in that state. On February 28, 2007, the Washington
23 Utili ties and Transportation Commission issued an order
24 approving Avista' s reorganization application, based on a
25 The Montana Commission has yetsettlement in that state.
26 to act on Avista' s Reorganization application, and the
Morris, Di 19
Avista Corporation
1 procedural schedule for consideration of the Company's
2 application in Oregon has been suspended by agreement of
3 the parties to allow additional time for discussion among
4 the parties.
5
6
Q.Please briefly describe Avista utilities.
A.Avista Utilities provides electric and natural
7 gas service within a 26,000 square mile area of eastern
8 Washington and northern Idaho. Of the Company's 352,423
9 electric and 309,912 natural gas customers (as of
10 September 30, 2008), 120,972 and 72,326, respectively,
11 were Idaho cus tomers .The Company,headquartered in
12 Spokane, also provides natural gas distribution service in
13 southwestern and northeastern Oregon.A map showing
14 Avista' s total electric and natural gas service areas are
15 provided in page 2 of Exhibit No.1, Schedule 1.
16 As of September 30, 2008, Avista Utilities had total
17 assets (electric and natural gas) of approximately $3.3
18 billion (on a system basis), with electric retail revenues
19 of $620 million (system) and natural gas retail revenues of
20 $447 million (system).As of September 2008, the Utility
21 had 1,491 full-time employees.
22 Avista has a long history of innovation and
23 environmental stewardship. At the turn of the 20th century,
24 the Company built its first renewable hydro generation
25 plant on the banks of the Spokane River.In the 1980's,
Morris, Di 20
Avista Corporation
1 Avista developed an award-winning biomass plant (Kettle
2 Falls) that generates energy from wood-waste.
3 To the future, Avista as well as other utilities are
4 facing new state and federal mandates for renewable energy
5 and carbon control standards. For example, washington's
6 Senate Bill 6001 and Initiative 937 require certain public
7 and private utilities to produce 15 percent of their power
8 from new renewable resources by 2020, not including legacy
9 hydro production, and to eliminate the option of coal-fired
10 generation because of carbon emission limitations.
11 Recognizing these changes, the Company dropped all new coal
12 generation in its 2007 electric IRP, instead relying on
13 natural gas, renewables, and energy efficiency.Today,
14 Avista has one of the smallest carbon footprints in the
15 U. S.
16 VI. RATE REQUESTS
17 Q.Please provide an overview of Avista' s electric
18 rate request in this filing.
19 A.As previously discussed, in this filing Avista is
20 proposing a net increase in electric retail rates of 7.8%.
21 The proposal consists of an increase in electric base retail
22 rates of $31.2 million or 12.8%, and a reduction in the
23 current Power Cost Adjustment (PCA) surcharge of 5.0%. The
24 Company's request is based on a proposed rate of return of
Morris, Di 21
Avista Corporation
1 8.80% with a common equity ratio of 50.00% and an 11.0%
2 return on equity.
3
4
Mr. Hirschkorn will provide details related to rate
spread and rate design.The proposed rate spread for the
5 net increase to each electric customer class is shown in the
7
8
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11
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21
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6 illustration below.
Illustration No.2:
Proposed
Service Schedule
Residential Service Schedule 1
General Service Schedules 11 & 12
Large General Service Schedules 21 & 22
Extra Large General Service Schedule 25
Potlatch Service Schedule 25P
Pumping Service Schedules 31 & 32
Street & Area Lighting Schedules 41-49
Overall Increase
Increase
8.7%
7.8%
7.8%
7.8%
5.7%
7.8%
8.9%
7.8%
Q. What is Avista' s natural gas rate request in this
filing?
A.Wi th regard to natural gas, the Company is
requesting an increase of $2,740,000 or 3.0%.As with the
25 electric increase, the Company's request is based on a
26 proposed rate of return of 8.80% with a common equity ratio
27 of 50.00% and an 11.0% return on equity. The proposed rate
28 spread for each natural gas customer class is shown in the
29 illustration below.
Morris, Di 22
Avista Corporation
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13
Illustration No.3:
Proposed
Service Schedule
General Service Schedule 101
Large General Service Schedule 111/112
Interruptible Sales Service Schedule 131/132
Transportation Service Schedule 146
(excluding natural gas costs)
Overall Increase
Increase
3.1%
2.5%
1.7%
10.9%
3.0%
14 request for an electric rate increase in this filing?
Q.What are the primary factors causing the Company's
15 A.The Company's electric general rate case test
16 period is based on 12 months ending September 30, 2008, and
17 a July 1, 2009 through June 30, 2010 proforma period.As
18 shown in Illustration No.4, the Company's electric request
19 is driven primarily by hydro relicensing and compliance
20 costs, increased capital investment to preserve and upgrade
21 our utility infrastructure to meet growing customer demand,
22 and higher power supply costs.
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24
25
26
27
28
29
30
Morris, Di 23
Avista Corporation
9
10
11
12
13
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15
16
1 Illustration No.4:
2
3 Prary Components of Electc Revenue Requirement
4
Pructon &TrminExpe
38%
Increed Lo
Mid Columbia Puhaes
Pructon O&M - Plant Exp.
& Merur Abatment Exp.
5 Incr Net Plt
Investment!
35%
Generaon Upgr
-Hydr & Th
Trasmission Upgres
Distrbution
Prpert Tax on CS2
6
7
8
Ditrbution & Otr
Expens
11%
Distrbution Opration &
Maintenace Costs
Admistrve & Gener Expenses
Hydr Relcensin &Compl Isue
16%
Spokae River Relicensing
CDA Tribe SettementIlnclude re on investnt, detion and
taes. offse by th ta beeft of interet.
Later witnesses provide details explaining these
17 changes in costS.
18 Q.What are the primary factors driving the Comany's
19 request for a natural gas rate increase?
20 A.The Company's natural gas request is primarily
21 dri ven by changes in various operating cost components,
22
23
mainly distribution maintenanceoperationand and
administrative and general expenditures.This causes an
24 increase in the fixed costs of providing gas service to
25 customers.
Morris, Di 24
Avista Corporation
1 Q.The proposed rate increase is related to changes
2 in the fixed costs of providing natural gas service to
3 customers. Is the Company proposing any changes related to
4 the cost of natural gas in this case?
5 A.No. Avista is not proposing changes in this filing
6 related to the cost of natural gas included in customers'
7 current rates.Changes in natural gas costs are addressed
8 in the annual purchased gas adjustment (PGA) filings.
9
10
11
VII. OTHER COMPAN WITNESSES
Q.Would you please provide a brief sumry of the
12 testimony of the other witnesses representing Avista in this
13 proceeding?
14 A.Yes.The following additional witnesses are
15 presenting direct testimony on behalf of Avista:
16 Mr. Mark Thies,Senior vice President and Chief
17 Financial Officer will describe, among other things, the
18 overall financial condition of the Company, its current
19 credit ratings,the Company's plan for improving its
20 financial health, its near term capital requirements, the
21 proposed capital structure, and the overall rate of return
22 proposed by the Company. Mr. Thies explains that:
23
24
25
26
27
28
29
. Avista' s plans call for significant capital
expenditure requirements for the utility
over the next two years to assure
reliability in serving growth in the numer
of customers and customer demand. Capital
expenditures of approximately $420 million
are planned for 2009-2010 for customer
Morris, Di 25
Avista Corporation
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growth, investment in generation,
transmission and distribution facilities for
the electric utility business as well asnecessary maintenance and replacements of
our natural gas utility systems. Avistaneeds adequate cash flow from operations tofund these requirements, together wi th
access to capital from external sourcesunder reasonable terms.
. Avista' s corporate rating from Standard &Poor's is currently BBB-. Avista Utilities
needs to operate at a level that will
support a strong investment grade corporate
credit rating, meaning "BBB" or "BBB+", in
order to access debt capital markets at
reasonable rates, which will decrease long-term costs to customers. Maintaining solidcredi t metrics and credit ratings will also
help support a stock price necessary to
issue equity to fund capital requirements.
. The Company has proposed an overall rate of
return of 8.80%, including a 50.00% equity
ratio and an 11.0% return on equity. We
believe the 11.0% provides a reasonable
balance of the competing objectives ofcontinuing to improve our financial health,
and the impacts that increased rates have on
our customers.
Dr. William E. Avera, as a President of Financial
35 Concepts and Applications (FINCAP), Inc., has been retained
36 to present testimony with respect to the Company's cost of
37 common equity. He concludes that:
38
39
40
41
42
43
44
. Application of quantitative methods to alternative
groups of proxy companies imply a cost of equity
range of 11.3 percent to 13.3 percent.
. Because Avista' s requested ROE of 11.0% percent
falls below the lower end of the recommended
range, it represents a conservative estimate ofinvestors' required rate of return.
Morris, Di 26
Avista Corporation
1 . Considering investors' expectations for capital2 markets and the need to support financial
3 integrity and fund crucial capital investment even
4 under adverse circumstances, 11.0% percent is a
5 reasonable, albeit conservative, ROE for Avista.
6 . Because of Avista' s reliance on hydroelectric
7 generation, the Company is exposed to relatively8 greater risks of power cost volatility.
9 . Investors view the Power Cost Adjustment ("PCA")10 as supportive of the Company's financial11 integri ty, but they understand that the PCA does12 not insulate Avista from the need to finance
13 accrued power production and supply costs or14 shield the Company from potential regulatory15 disallowances.
16 . Avista' s requested capitalization is consistent17 with the Company's need to strengthen its credit18 standing and financial flexibility as it seeks to19 raise additional capital to fund significant
20 system investments and meet the requirements of21 its service territory.
22 . The reasonableness of a minimum 11.0% percent ROE23 for Avista is also supported by the greater risks24 associated with the Company's relatively small25 size and the need to consider flotation costs.
2627 Mr. Richard Storro, Vice President of Energy Resources,
28 will provide an overview of Avista' s resource planning and
29 power operations. He will discuss the Company's resources,
30 current and future load and resource position, and future
31 resource plans.He will also discuss Company hydroelectric
32 upgrades, current hydro relicensing issues, and mercury
33 abatement at Colstrip. Mr. Storro explains:
34
35
36
37
38
39
40
41
42
. Avista' s electric generation portfolio, including
power supply operations;
. The Company is in an annual balanced-to-surplus
energy position through 2017 with the addition of
the Lancaster Power Purchase Agreement (PPA);
. The Company's involvement with the Chicago Climate
Exchange; and
. Avista' s risk management policy for energy
resources, including the electric hedging plan.
Morris, Di 27
Avista Corporation
1
2 Mr. Clint Kalich, Manager of Resource Planning & Power
3 Supply Analyses, will describe the Company' s AURO~ model
4 (Dispatch Model) inputs, assumptions, and results related to
5 the economic dispatch of Avista' s resources to serve load
6 requirements, and market forecast of electricity prices. He
7 explains:
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19
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21
22
23
24
. The key assumptions driving the Dispatch Model's
market forecast of electricity prices. This
discussion includes the variables of natural gas,
Western Interconnect loads and resources, and
hydroelectric conditions.. The model dispatches Avista' s resources and
contracts in a manner that maximizes benefits tocustomers.
. The use of quantitative rate-period loads for July
2009 through June 2010, for modeling pro forma netpower supply expenses.
. The output results from the model, includingthermal generation and short-term wholesale sales
and purchases, were provided to Mr. Johnson to
incorporate into the power supply pro formaadjustments.
25 Mr. william Johnson, Wholesale Marketing Manager, will
26 identify and explain the proposed normalizing and pro forma
27 adjustments to the test period power supply revenues and
28 expenses. He will also explain the new base level of power
29 supply costs for Power Cost Adjustment (PCA) calculation
30 purposes using the pro forma costs proposed by the Company
31 in this filing. Mr. Johnson describes:
32
33
34
. The adjustment of revenues and expenses based on
normal streamflow and weather conditions, and
expected wholesale market power prices.
Morris, Di 28
Avista Corporation
1
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. Adjustments made to reflect known and measurable
changes in power contracts, thermal generation
fuel expense, and transmission expense, between
the test period, and the pro forma period.
. The net effect of the adjustments to the test
period power supply expense is an increase of
$27,645,000 on a system basis, $9,789,095 Idahoallocation.
. This increase in pro forma power supply expense
over the expense currently in base rates is based
on numerous factors, primarily reduced hydro
generation due to the elimination of the ratemitigation adjustment included in last year i s
general rate case and higher retail loads.
. Certain proposed revisions to the PCA, including a
95%/5% sharing mechanism.
18 Mr. Don Kopczynski, Vice President of Transmission and
19 Distribution Operations, will describe Avista' s electric and
20 natural gas energy delivery facilities and operations, and
21 recent efforts to increase efficiency and improve customer
22 service. Mr. Kopczynski describes:
23 . Avista' s customer service programs such as energy24 efficiency, Project Share, CARES program, Senior
25 Outreach Program, and payment plans. Some of26 these programs will serve to mitigate the impact27 on customers of the proposed rate increase.
28 . The Company's multi-faceted effort to increase29 customer service automation, including replacement
30 and upgrade of the new Interactive Voice Response
31 (IVR) system, Mobile Dispatch, Outage Management32 System, transmission and distribution system33 efficiencies, and Web Redesign.
34 . The decision by the Company to outsource our bill35 printing and mailing services. This decision was
36 based on Company needs for disas ter recovery37 compliance, added scalability and flexibility, and38 cos t savings.
39
40 Mr. Scott Kinney, Director, Transmission Operations,
41 will discuss the electric transmission and distribution
Morris, Di 29
Avista Corporation
1 investments included in this case,and presents the
2 Company's pro forma period transmission revenues and
3 expenses.In addition, he describes the Company's Asset
4 Management Program. Mr. Kinney explains:
5
6
7
8
9
10
11
12
. Avista is expecting to invest over $15.1 million
(system) in electric transmission projects with
completion dates in 2009.
. Several revisions have been made to transmission
expenses for the 2009/2010 pro forma period.
. Changes in replacement and maintenance costs
associated with the Company's asset management.
13 Mr.Dave DeFelice,Senior Business Analyst,will
14 describe the pro forma adjustment for non-revenue capital
15 expendi tures. Mr. DeFelice explains:
16
17
18
19
20
21
22
23
. The rising cost of essential materials specific to
the utility industry is causing significant
increases in capital proj ect funding requirements.
. These costs must be pro formed into historical
test-year computations in order to allow necessary
recovery of our costs to serve customers.
Ms. Elizabeth Andrews, Manager of Revenue Requirements,
24 will discuss the Company's overall revenue requirement
25 proposals.In addition, her testimony generally provides
26 accounting and financial data in support of the Company iS
27 need for the proposed increase in rates. She sponsors:
28
29
30
31
32
~,3
34
. Electric and natural gas revenue requirementcalculations.
. Electric and natural gas results of operations.
. Pro forma operating results including expense and
rate base adjustments.
. System and jurisdictional allocations.
Morris, Di 30
Avista Corporation
1 Ms. Tara Knox, Senior Regulatory Analyst, sponsors the
2 cost of service studies for electric and natural gas
3 service, the revenue normlization adjustments to results of
4 operations, and the proposed retail revenue credit rate for
5 the PCA. Ms. Knox studies indicate:
6
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. Electric residential service, extra large general
service and street and area lighting service
schedules are earning less than the overall rate
of return under present rates, while general
service, large general service and pumpingservice schedules are earning more than the
overall rate of return under present rates.However, all customer groups are currently
providing a rate of return lower than the rate of
return requested in this case.
. Natural Gas small firm service is earning less
than the overall rate of return at present rates,
while residential, interruptible and
transportation service schedules are earning more
than the overall rate of return to varying
degrees. All of the schedules are relatively
close to the overall return indicating the
current rate spread is fair.
Mr. Brian Hirschkorn, Manager of Pricing, discusses the
26 spread of the proposed annual revenue changes among the
27 Company's general service schedules.He explains, among
28 other things, that:
29 . The proposed net increase in electric retail rates30 is 7.8%, which consists of an increase in electric31 base retail rates of $31.2 million or 12.8%, and a32 reduction in the current PCA Surcharge.
33 . The monthly bill for a residential customer using
34 an average of 982 kWhs per month would increase35 from $78.47 to $85.18 per month, an increase of36 $6.71 or 8.6%. This includes the proposed37 increase in the monthly basic or customer charge38 from $4.60 to $5.00.
39 . To achieve this, the Company is requesting that40 the reduction in the PCA Surcharge become
Morris, Di 31
Avista Corporation
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12
effective coincident with the effective date of
new retail rates.
. The proposed natural gas annual revenue increase
is $2.7 million, or 3.0%.
. The monthly bill for a residential customer using
66 therms per month would increase from $79.38 to
$81.94 per month, an increase of $2.56 or 3.2%.
This includes the proposed increase in the monthly
basic or customer charge from $4.00 to $4.25.
Mr. Bruce Folsom,Senior Manager of Demand Side
13 Management, provides an overview of the Company's DSM
14 programs and documents Avista' s expenditures for electric
15 and natural gas energy efficiency programs.Mr. Folsom
16 explains that:
.
The Company exceeded its 2008 electric efficiency
targets by approximately 40% and 2008 natural gas
efficiency target by approximately 34%.
Avista's expenditures for electric and natural gas
energy efficiency programs from January 1, 2008through November 30, 2008 have been prudentlyincurred.
17
18
19
20
21
22
23
24
25
.
Q.Does this conclude your pre-filed direct
26 testimony?
27 A.Yes.
Morris, Di 32
Avista Corporation
.. ~cr: IVF ;"'¡Wit.. .. ì"""
DAVID J. MEYER 70nQ JMl 23 PM \2: 31
VICE PRESIDENT AND CHIEF COUNSEL O?
REGULATORY & GOVERNENTAL AFFAIRS
AVISTA CORPORATION
P.O. BOX 3727
1411 EAST MISSION AVENUE
SPOKAE, WASHINGTON 99220-3727
TELEPHONE: [phone]
FACSIMILE: [phone]
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION ) CASE NO. AVU-E-09-01
OF AVISTA CORPORATION FOR THE ) CASE NO. AVU-G-09-01
AUTHORITY TO INCREASE ITS RATES )
AND CHARGES FOR ELECTRIC AN )
NATURAL GAS SERVICE TO ELECTRIC ) EXHIBIT NO. 1
AND NATURAL GAS CUSTOMERS IN THE )STATE OF IDAHO ) SCOTT L. MORRIS
)
FOR AVISTA CORPORATION
(ELECTRIC AND NATURAL GAS)
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