BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION WASHINGTON UTILITIES AND ) TRANSPORTATION COMMISSION, ) ) DOCKET UE-002066 IN THE MATTER OF THE PETITION ) OF AVISTA CORPORATION ) ACCOUNTING PETITION For an Accounting Order related to ) ORDER Derivatives and Hedging Activities ) Related to the Purchase and Sale of Energy ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ) BACKGROUND 1 On December 26, 2000, Avista Corporation, (“Avista” or the “Company”) filed a petition with this Commission under WAC 480-09-420(7) seeking an order regarding the accounting treatment for certain derivative instruments and certain hedging activities. The Company proposes, that for those purchased energy contracts or sales contracts (gas and electric), for which the company is required under Financial Accounting Standards numbers 133 and 138 (FAS 133/138) to value the contracts on the balance sheet at fair value, that the Company be allowed to offset these assets and/or liabilities with regulatory liabilities and/or regulatory assets. Further, the Company requests that the entries to the regulatory liabilities and assets be made simultaneous to the required booking entries required by FAS 133/138 so as to result in no impact on the Company’s statement of income and comprehensive income. 2 FAS 133 was issued by the Financial Accounting Standards Board (FASB) in June 1998. The FASB amended it with FAS 138 in June 2000. Avista Corporation is required to adopt the accounting procedures in FAS 133/138 as of January 1, 2001. 3 Avista, in the provision of service to its retail customers, enters into contracts for the purchase and sale of energy, gas and electric. Further, the company may enter contracts to hedge the price related to purchases and sales of energy. Some of the contracts and all of the hedging activity appear to fall under the requirements of FAS 133/138. As a result Avista will be required to book assets or liabilities, created by the difference in each contract’s stated price and the current market price, in financial statements issued between the time of the original contract and the final settlement of the contract terms. In offsetting bookkeeping entries, Avista will have to record gains and losses in their income statements. For contracts that are ultimately fulfilled by the delivery of the energy, the interim gains and losses related to the valuing of the contracts at fair value will offset, resulting in no net gain or loss upon settlement of contract other than the actual expense or revenue generated by the contract. Further, these accounting entries will have no direct effect on the company’s cash flows. 4 Avista’s analysis of contracts, held during 2000, indicate that several contracts would have required the fair value accounting. Their analysis indicates that if the requirements had been applied to 2000’s financial statements, the company would have incurred net interim losses during the year in excess of $100,000,000. This net loss is composed of losses in several months and gains in others. The net loss determined under this approach would be reversed in future periods, but not before other fluctuations in the Company’s earnings are recorded. DISCUSSION: 5 Normally, the Commission establishes rates by determining a company’s rate of return for a historical period pro-formed for all known and measurable changes. In these analyses, purchase and sales contracts for energy are generally pro-formed to the actual known and measurable prices contained in the contracts for the rate period. Market prices have not been considered relevant to the pricing of contracts which have stated prices. The adoption of FAS 133/138 by Avista will result in Avista’s financial statements being inconsistent with the normal practice used by this Commission in setting rates. The use of fluctuating market pricing rather than embedded contract pricing is not appropriate for setting rates, particularly when the fluctuating market prices have no long term impact on the company’s earnings or cash flow. 6 Therefore, the Commission accepts the proposed accounting for derivatives and hedging activities as contained in Avista’s petition. Acceptance of the accounting treatment of these activities in no way makes determination on the prudence of any energy contract or derivative for rate making purposes. FINDINGS THE COMMISSION FINDS: 7 (1) Avista is a public service company furnishing electric and gas service primarily in the Spokane area in the eastern part of the state of Washington and is subject to the regulatory authority of the Commission as to its rates, service, facility, and practices. 8 (2) On December 26, 2001, Avista filed with the Commission a petition for an order regarding the Company’s accounting treatment related to certain derivatives and hedging activities. 9 (3) The accounting treatment proposed by Avista is reasonable and should be approved. ORDER 10 THE COMMISSION ORDERS That: 11 It has jurisdiction over the subject matter and the parties to these proceedings; 12 Avista Corporation’s petition is granted, and effective January 1, 2001, the Company is authorized to record regulatory assets and liabilities in account 186, Miscellaneous Deferred Debits, and account 253, Other Deferred Credits, to offset the assets and liabilities required by FAS 133/138 related to certain derivatives and hedging activities described in the Company’s petition. These entries are to be made simultaneously with the entries required by FAS 133/138. 13 Nothing herein shall be construed to waive or otherwise impair the jurisdiction of the Commission over rates, services, accounts, and practices of Applicant, Avista Corporation. 14 THE COMMISSION ORDERS FURTHER That it retains jurisdiction over the subject matter and the Parties to effectuate the provisions of this Order. DATED at Olympia, Washington, and effective this 24th day of January, 2001. WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION MARILYN SHOWALTER, Chairwoman RICHARD HEMSTAD, Commissioner