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Take a (Rate) Hike 

by Pia K. Hansen


While the rest of the Inland Northwest is getting pretty tired of the weather, at least one Spokane executive greets every snowy morning with a smile on his face. The more snow, the better business in the year to come. No, Scott Morris isn't the owner of a ski shop. He's the president of Avista Utilities.


"The snow helps us," he says, smiling at the motorists driving slowly along icy roads. "Last year we just had the worst conditions. Not only did power prices skyrocket, but we had a drought. Actually, we had the worst drought we've had in the 73 years Avista, or Washington Water Power before that, has been in business."


That drought is one of the reasons Avista asked the Washington Utilities and Transportation Commission (UTC), which regulates and oversees the utility company, for permission to raise electricity rates by 10 percent. On March 4, Avista was granted an interim rate increase of 5 percent -- which will take effect on March 15. But there may be more increases to follow.


Last fall, Avista requested a 37.5 percent permanent increase to its base rates. The utility has since been granted one emergency rate increase and another interim rate increase, totaling a 31.25 percent hike. According to the UTC, power rates may go up by an additional 6.25 percent if Avista prevails in its general rate case. Power consumers will not find out until later this year -- there's a public hearing scheduled in Spokane on June 27.


Avista's argument for the hikes is that they are necessary to make up for last year's huge losses.


"We were losing money every time we sold power last year," says Morris. "Prices were going crazy. We paid as much as a dollar per kilowatt, and we would sell that to consumers for five cents."


One of the problems was that Avista couldn't generate enough power to cover its own needs. The company usually generates about 90 percent of its own power, but last year Avista was only able to pull off 65 percent of normal generation.


"Normally we are short about 10 percent, but last year we continued to be short 20 to 30 percent," says Scott.


At the end of the summer of 2001, Avista was looking at a loss of $350 million. The company saw its bond rating downgraded so severely that all of sudden it was considered a high-risk company on Wall Street.


While the power crisis was at its height, Avista was allowed to defer payment of some expenses, and it's to pay off those deferrals that the utility company has been allowed the latest rate hikes.


But Avista can't just arbitrarily raise its rates every time business gets a little tough. The company has to present a case before the UTC, explaining why the rate hikes are necessary and, in this case, why the utility needed to purchase as much power as it did last year. That process can take as long as a year.


"Ninety percent of the power we purchased last summer was deemed prudent [by the UTC]," says Morris. "The 10 percent left over, we are going to have to let the shareholders eat." Altogether, electricity rates have increased by more than 30 percent since October, but it will still take Avista until 2007 to pay off the deferrals from last year.


In other words, don't look for electricity rates to drop any time soon -- actually, they may increase before then.


"You are not getting me to say that we won't raise rates," says Morris. "Our goal is to not have to raise our rates, but they may raise with inflation." He adds that prior to the past six months, Avista hadn't raised its power rates since the early 1980s.


However, there may be good news to report within the year on the natural gas front. If trends hold, as more production comes on line, Avista may seek reductions in residential natural gas rates (which had nearly doubled over the past few years) by October.





In the meantime, at the hearing held in Spokane prior to the latest rate hike approval, angry consumers testified that they simply can't afford to pay any more for power than they already do. And they wanted to know why prices had to go up by so much all of a sudden?


There are many answers to that question. One answer is connected to Enron. Though Morris assures Avista customers that Enron's ungraceful fall isn't going to have a direct impact on Avista's books, one shouldn't be blind to the fact that Enron was one of the driving forces behind the push for energy deregulation throughout the '90s. And it was part of this deregulation effort that pushed power prices through the roof last year. (Several Western senators have threatened to hold hearings to investigate whether Enron somehow manipulated the Western power markets, which caused scores of utilities to lose money the way Avista did.)


Markets in California were deregulated in 1998, but somehow the market didn't develop to the consumers' advantage -- the low prices consumers had bargained for never materialized.


"Part of what happened in California was that private investors did not respond to the market as expected," says Andrew Ford, an environmental science professor at WSU in Pullman. Ford follows power systems in the Western U.S. and he says some utilities were blinded by the promises of big earnings in a booming power market. So blinded, in fact, that they "forgot" to plan ahead for worst-case scenario years.


"Where there was planning before, there now was a free-for-all," he says. "Essentially, deregulators said 'We'll let the market take care of that.' "


But deregulation proved painfully expensive and unpredictable.


"What happened in California was that the utilities down there weren't allowed to go into long-term contracts," says Scott. "Every day, you had these giants jumping into the market, trying to purchase the power they needed." Prices were going up across the board, including at the Bonneville Power Administration, which jacked its prices up by 45 percent.


"Everyone raised their rates," says Morris. And those utilities that, like Avista, weren't in a position to generate all the power they needed got to pay the bill.


Ford agrees: "Avista was not alone in this predicament."


And the company did look inward before it passed the buck on to consumers.


"We did everything we could to cut costs at the company," says Morris. "We saved $6 million on our own budgets, and believe me, there wasn't a lot to cut. We made it without any direct layoffs." Some contractors were let go, however, and a hiring freeze was put in place.


Another problem for Avista was that the utility fell short on producing enough power to cover its own needs.


"The way you prepare yourself for a scenario like this one is you become a net-seller. That means you have plenty of generating capacity to cover your own needs, and then you have something to sell," says Ford. "If they had started building power plants earlier, they could have sold into that booming market."


It seems Avista learned that lesson, and it wants to cover 100 percent of its load so it won't be caught at the mercy of the market. But it's the ratepayers who will pay the price for Avista's not having learned the lesson before disaster struck. Still, to prevent a repeat of what happened last year, the utility is currently applying for an expansion to its power plant in Rathdrum.


"We want rate stability more than anything else, and the cheapest way we can work toward that is to expand the existing plant in Rathdrum," says Morris. Avista plans to implement a heat-recovery system on this older plant, similar to the one in place at the brand-new Cogentrix/Avista Power plant that went online from the Rathdrum Prairie last summer.


"This will let us make electricity cheaper than anything we can get anywhere else," says Morris. Hydropower still accounts for 65 percent of the company's generating capacity.


Finally, in the late 1990s, Avista was diversifying, trying to grow and capitalize on new markets developing subsidiaries in fuel cells and the communications industry. Some say the utility was spreading its resources and its attention on too many areas, but those days seem to be over as well.


"We are going to be looking for a partner for the fuel cell business," says Morris. "Other than that, we are going to be an energy-related company. What we are focusing on now is that it's okay to be a well-run regional utility company."
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