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Avista's Wild Ride 

by Ted S. McGregor, Jr.


Like everybody else involved in energy over the past couple years, Avista has been tossed on the uncertain seas of the worst energy crisis in decades. But unlike some, Avista seems to be coming through the rough patch stronger than ever. That's good news for Spokane and the Inland Northwest, since a strong Avista can be a more active and effective player in local economic development.


"You can be good, or you can be lucky, and I'll take luck anytime," says Randy Barcus, Avista's chief economist. "But I think we're pretty good, too."


In 1999, things didn't look so good, however. Although Avista was riding a wave of excitement over its new name (replacing Washington Water Power) and new CEO, Tom Matthews, the year would not be a good one. Matthews, the first CEO in decades to come from outside the company, applied his free-wheeling style to the stodgy old institution. He diversified, pushing subsidiaries to new levels of prominence, but he also stumbled. He advocated the purchase of Vitol, a Boston-based energy trading firm. Although the company had no assets other than its employees and some software it developed, Avista paid $40 million for the firm. The purchase was a disaster, as the top traders left, winning sizable buyouts from their new parent company, and their contracts didn't pan out to be worth anything. It wound up being in the neighborhood of a $100 million mistake.


Another problem arose when an Avista Corporation trader (not an Avista Energy trader) sold the company short by 700 megawatts. Sadly, the man took his own life shortly thereafter, but Avista compounded the mistake by failing to cover the trades, meaning they didn't buy back the amount they were short. So what could have been a $20 million mistake became another $100 million mistake.


Meanwhile, the company was making another decision that would turn out badly. Avista owned a large stake in a coal-fired turbine in Centralia, Wash., which it used to serve its own customers. They sold that stake to another company, but did not replace it, thinking they could buy power off the open market, which at the time was very affordable (in 1999, the Columbia River had a record-setting runoff). That wound up being another expensive mistake, as the company was forced to buy off the inflated open market in May and June of 2000 just to serve its own customers.


Matthews became the lightning rod for these decisions. Some shareholders were concerned that he was taking the company too far from its humble roots in generating electricity and serving its community. Matthews, whose family never joined him in Spokane, eventually resigned. But his legacy is hardly all bad, as he is more responsible than anyone for setting up the Avista Energy subsidiary to become the powerhouse of the overall company, as it has in the past year, when it erased even the setbacks from 1999.


The internal reaction to the ups and downs of the past few years has been resolute: Avista does not want to make the same mistakes again. It has redoubled its efforts to cover its load so it never has to buy off the open market, and it seems to be less interested in trying to be a wildly diversified company.


Barcus says when he used to work at Southern California Edison in the 1970s, the company was so proud, it would never second-guess itself. He says Avista doesn't share that trait. "[SC Edison] would take the ship down trying to save a decision. But this company says, we're going to make good decisions going forward." Barcus says both Vitol and Centralia are examples of unfortunate decisions that weren't made worse by hand-wringing. Avista cut its losses and moved on.


With a new generating plant in Rathdrum set to come on line in July, Avista Energy should be poised to be successful for some time. And the loss at Centralia will be replaced by a new project in Oregon that Avista Utilities has a 280-megawatt stake in. Coyote Springs II, which comes on line in June of 2002, should guarantee that Avista can cover its load, and by 2002 Avista Utilities expects to have surplus power (unless there is another drought next year) that can either be sold back onto the grid or be allocated for new businesses moving to the Inland Northwest.


Never wanting to be short again, and to make it through the next year, in the fall of 2000 Avista locked in favorable prices for natural gas for its turbines and for any extra electricity it might need.


Avista has gone back to basics in other ways over the past year as well, going over its operation with a fine-tooth comb (as most utilities probably have). Kelly Norwood, vice president and general manager for energy resources at Avista, says the company has found many ways to maximize its assets and bring new generation on line. Avista has bought a new diesel turbine that it will install in a shuttered facility in Othello, and the generation plant on North Market in Spokane will be allowed to run for longer hours starting in August when new emissions controls are installed. And simply upgrading the turbines at existing dams will allow even more power to be coaxed out of the existing grid.


"Some of this technology is from the 1950s," says Norwood. At Noxon on the Clark Fork River, Avista expects to grow its 55-megawatt turbine to perhaps 80 megawatts with new technology. Meanwhile, Avista just relicensed its Clark Fork River dams for 45 years and is just beginning to do the same with its six Spokane River dams.


In some cases, Avista has had to buy equipment, which is in high demand, from Europe, giving their engineers a crash-course in retrofitting. All that equipment costs money, and Avista is able to make those investments on the strength of its trading over the past year -- and on the knowledge that within a year, it should have a long position and be able to sell even more power onto the spot market.


But the other side to Avista's strategy is to promote conservation. If less power is used, it is less likely that Avista will have to buy power on the open market. And the less that has to happen, the stronger a company Avista will be.


But success has its own risks, and some Avista watchers fear that if it continues to thrive, it will become attractive to larger energy companies looking to consolidate. While Avista Energy may be very attractive right now, to get to it you'd have to mount a takeover of the entire company. The fact that Avista serves a region seen as remote to the rest of the country may make it less attractive as a potential purchase, says one person familiar with Avista and national energy markets. Others say Avista can do things to prevent what would be a major blow to the local economy (having Avista run from, say, Houston would certainly make for a different company, likely one less focused on local economic development initiatives).


Like a puffer fish that makes itself look bigger to ward off predators, Avista could protect itself by making its stock more valuable. And that has happened, as in recent months the stock has gone from $16 a share to $22. Or Avista may want to seek a regionally sensible merger, as it did in the mid-1990s with Sierra Pacific of Nevada. That merger never panned out, but a company like Idaho Power, which is in a similar boat as Avista, could make good sense as a potential partner.


Or Avista could spin off Avista Energy as a separate company, with an IPO, and keep a good chunk of it. That way, Avista Corp. could insulate itself from suitors who really just want a little moneymaker to add into their corporate collection.


Although some are predicting a merger mania in energy similar to the one seen in banking in the '90s, the threat to Avista doesn't appear to be that imminent. And even though its recent history seems to indicate the company may shy away from major, course-altering decisions, if the future is anything like the past few years, Avista will have some important decisions to make soon enough.
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