Agenda Date:   January 24, 2001  
Item Number:   2A

Docket:   UE-002066
Company:   Avista Corporation     

Staff:   Merton Lott, Energy Coordinator
   Roland C.  Martin, Energy Regulatory Consultant

Recommendation:

Grant Avista  Corporation’s request for an accounting order Docket No. 
UE-002066.

Discussion:

On December 26, 2000, Avista Corporation (“Avista” or “Company”) filed a 
request to defer as regulatory assets or liabilities offsets to the accounting 
entries that will be required under Financial Accounting Standards Numbers 133 
and 138 (FAS 133/138) related to certain derivative and hedging activities as 
they apply to resource acquisitions for the Company’s retail electric and 
natural gas customers. 

The Financial Accounting Standards Board (FASB) issued FAS 133 in June 1998, 
and amended it with FAS - 138 in June 2000.  All companies are required to 
carry all derivatives and certain embedded derivatives on their balance sheet 
at fair market value, sometimes referred to as mark-to-market.  These 
requirements represent a change in accounting for Avista with respect to 
certain contracts for the sale or purchase of power, (currently all electric), 
for financial reporting  beginning January 1, 2001.  

Avista’s review of their power contracts identified a few contracts that would 
require accounting under FAS 133/138.  The application of these requirements to 
Avista’s 2000 results would have created large liabilities (in excess of 
$100,000,000) and corresponding reductions to their 2000 earnings.  These 
liabilities and earnings would ultimately be reversed when the contracts were 
actually fulfilled and the power delivered or received.  The net impact of the 
new accounting requirements is that earnings in the long run would not be 
affected nor would Avista’s cash flow, but on a quarter by quarter basis income 
could fluctuate substantially.

Avista’s proposal in this proceeding is to create regulatory assets and 
liabilities that would offset the assets and liabilities created by valuing the 
implied derivatives at market.  The intent of the proposal is to continue the 
treatment of long term sales and purchase contracts as they have been in the 
past.  In this fashion, expenses would continue to be recognized for a period 
at the embedded prices contained in the contract rather than restating the 
costs of these contracts at market prices.  Staff believes that the historic 
pricing contained within these contracts is consistent with the regulatory 
treatment authorized by this Commission.

Avista’s petition also addresses the situations where a contract is settled for 
cash in advance of normal delivery of power.  In these cases, the resulting 
gain or loss on the transaction would be available for Commission consideration 
in the determination of rates. The petition does not limit the Commissions 
authority to review the prudence of the original contract, or actions, or lack 
of action, by the Company with respect to settling the contract prior to 
completion.   

Conclusion and  Recommendation:

Staff believes that for ratemaking purposes the revaluing of derivatives or 
implied derivatives to market value related to contracts for the purchase or 
sale of power (gas or electric) is not consistent with Commission policy.  
Staff concludes that Avista’s petition for accounting treatment as outlined in 
their petition is reasonable.  Therefore, Staff recommends that the Commission 
issue an accounting order consistent with Avista’s petition.