Idaho Public Utilities Commission

Case Nos. AVU-E-08-01, AVU-G-08-01 (General electric and gas rate cases)

Case Nos. AVU-E-08-05, AVU-G-08-03 (Annual power cost and gas cost surcharges)

October 1, 2008

Contact: Gene Fadness (208) 334-0339, 890-2712

Avista rate increases and surcharges effective today

State regulators have approved a negotiated settlement that, effective today, increases base rates for Avista Utilities’ electric and gas customers. Also authorized was an increase to two yearly surcharges to pay for increasing gas and electric supply costs.

In the base rate case, the Idaho Public Utilities Commission approved a settlement, negotiated by four major parties, that allows Avista to increase its annual revenue for electric service by $23.2 million, or 11.98 percent. For the average Avista residential customer who uses about 977 kilowatt-hours per month, the increase is $7.89 per month.

The settlement resulted in a $9.1 million reduction from the company’s original request of $32.3 million in increased annual revenue, which would have meant an average 16.7 percent rate increase.

On the gas side, the commission approved the settlement’s proposal of an annual increase of $3.9 million or 4.7 percent. For the average Avista residential customer who uses 65 therms per month, the increase to permanent base rates is about $4.03. Avista originally requested an increase of $4.7 million in annual revenue or 5.8 percent.

This is the first Avista general rate case since 2004. However, it comes on top of Avista’s annual Power Cost Adjustment (PCA) and Purchased Gas Cost Adjustment (PGA), both adjusted annually on Oct. 1.

The PCA effective today is an increase from the current surcharge of 0.267 cents per kWh to 0.61 cents. For the average residential customer, that’s a monthly increase of about $3.43.

The PGA is about a 4 percent increase, or $2.96 per month for the average residential customer. When Avista originally filed its gas cost surcharge on Aug. 18 it requested a 14.2 percent increase in the surcharge. But declining wholesale gas prices since then and the company’s ability to purchase additional natural gas for the coming year resulted in the company adjusting its filing on Sept. 15 from 14.2 percent to 4 percent.

The commission noted the impact the permanent rate increase and the electric and gas surcharges have on all customers, particularly those on fixed and low incomes. “This commission is not oblivious to the consequences of its rate orders,” the commission said. “The volatility in the energy markets, however, shows no sign of abating.”

In response to rising gas and electric prices, which are occurring nationwide, the commission adopted the rate case settlement proposal to increase funding for low-income weatherization and authorized funding for low-income outreach and conservation education. It also ordered Avista, and other Idaho regulated utilities, to participate in upcoming energy affordability workshops. As part of this process, Avista has agreed to attempt creation of a low-income rate assistance program for its Idaho customers.

Unlike an increase to permanent base rates, the electric and gas cost adjustment surcharges are one-year adjustments that track the variable costs of energy and gas supply. The PCA and PGA are impacted primarily by wholesale market costs for electricity and for natural gas and, on the electric side, by reduced hydro generation due to less snowpack. During years when wholesale market prices are lower than normal and hydro conditions are normal, customers can get a credit rather than a surcharge. In 2006 and 2007, Avista customers received PGA reductions. Also, unlike a permanent base rate change, increased revenue from the PCA and PGA can not increase profits. They can be applied only toward meeting Avista’s power and gas supply expenses.

Some Avista customers filed written comments protesting the surcharge increases as a means to enhance the company’s profits or the salaries of executives.

“We assure customers that neither the company’s corporate profits nor executive salaries are included in or increased” by the power and gas supply surcharges, the commission said. “It is not possible for us to just say ‘no’ to increases that have been shown to be necessary to maintain a utility’s financial health. To do so would violate the law.”

In both the permanent rate case and in the electric and gas cost adjustment cases, customers responded to a newspaper article that reported a 72 percent increase in profits for Avista from the second quarter of 2007 to the second quarter of 2008.

The commission said the figure is misleading. During the second quarter of 2007 the company recorded the sale of Avista Energy, an affiliate of Avista Utilities, at a loss of $12 million. Even though customers did not have to pay for that loss, Avista Energy, at the time, was part of Avista Corporation, thus the loss was included in the company’s quarterly earnings report, reflecting an abnormally low second quarter of 2007. In 2008, earnings were closer to normal. During 2007, Avista still failed to realize the overall rate of return authorized by the commission. Avista, like many utilities nationwide, remains in a situation where costs are increasing more rapidly than revenues.

In this case, the commission established an allowed rate of return of 8.45 percent for Avista and a return on equity of 10.2 percent.

Customers also responded to a newspaper report that listed compensation for the top five Avista executives at about $3.6 million. While base salaries are included in rates, bonuses and other cash incentives for executives are paid by shareholders. In the settlement effective today, the annual rate compensation for the top five executives is $1.45 million. While still seemingly high, commission staff noted that if compensation for Avista’s top 12 executives was entirely eliminated the reduction for customers would be 0.5 percent.

Some customers were critical of the settlement, alleging it precluded customer participation. The commission follows specified rules of procedure that establish the framework for settlements. The commission invites all interested parties to participate in the settlement process and then invites other customers not involved in the settlement to comment on a settlement before it is approved, modified or denied by the commission.

In this case, parties to the settlement included the commission staff, which is obligated to represent the interests of all customer classes. Other parties included Avista, Potlatch, and the Community Action Partnership Association of Idaho (CAPAI), which represents primarily low-income customers.

CAPAI was instrumental in securing an increase of $115,000 per year – from $350,000 to $465,000 – for weatherization projects for homes of low-income customers. Currently only 10 percent of homes receiving funds under the federal Low Income Heating and Energy Assistance Program (LIHEAP) are weatherized. In addition, the settlement allocates $25,000 for community action agency personnel to assist in low-income outreach and conservation education.

“Opportunity for near-term relief for customers … lies in their ability to enact energy efficiency and conservation measures and reduce their energy demand,” the commission said.

The permanent rate increase is to meet significant increases in fuel costs as well as increased costs Avista incurred to purchase power it needs to meet growing customer demand. Avista also invested in upgrades to aging infrastructure to increase capacity and reliability. Those investments include upgrades to the Noxon Rapids and Cabinet Gorge hydroelectric projects and the Colstrip thermal project. The company spent more than $130 million to upgrade its electric transmission system.

On the gas side, $3 million of the $3.9 million increase in annual revenue will go toward the acquisition of the Jackson Prairie Natural Gas Storage Facility and the installation of automated meters. The additional storage is designed to allow Avista to purchase gas supply when costs are down and store it for use during heavy demand months when gas costs are higher. That should result in lower purchased gas costs adjustments in future years. The automated meters will provide savings in meter reading and customer service expense in addition to allowing for time-of-use pricing which can result in shifting use away from peak-use periods when prices are higher.

A full text of the commission’s orders, along with other documents related to this case, is available on the commission’s Web site at www.puc.idaho.gov. Click on “File Room” and then on “Electric Cases” or “Gas Cases.” For the electric and gas permanent rate case, click on either AVU-E-08-01 or AVU-G-08-01. For the power cost surcharge, click on AVU-E-08-05 and for the gas cost surcharge, click on AVU-G-08-03.

Interested parties may petition the commission for reconsideration by no later than Oct. 21. Petitions for reconsideration must set forth specifically why the petitioner contends that the order is unreasonable, unlawful or erroneous. Petitions should include a statement of the nature and quantity of evidence the petitioner will offer if reconsideration is granted.

Petitions can be delivered to the commission at 472 W. Washington St. in Boise, mailed to P.O. Box 83720, Boise, ID, 83720-0074, or faxed to 208-334-3762.