Avista trying new way to adjust for fixed costs

Mild winters used to put a dent in Avista Corp.’s profits. With customers using less power to heat their homes and businesses, the utility’s revenues lagged.

New billing practices are altering how the Spokane-based utility recovers its costs. The changes, recently approved by Washington regulators and under review in Idaho, allow Avista to collect more revenue during warmer years, but they also require the utility to issue customer rebates during years when power sales exceed projections.

Avista and other utilities say the changes benefit energy conservation by removing the utilities’ financial incentive to keep growing power sales. They won’t lose revenue when customers turn down the furnace or install insulation or storm windows. But since the change reduces the utilities’ risk from weather-related events and conservation, there’s some controversy associated with it. And advocates for low-income families say it could disproportionately affect small utility customers. The change is called a “fixed cost adjustment.”

Here’s how it works

If Avista doesn’t sell enough electricity and natural gas to recover the cost of operating its hydropower dams and energy distribution network during a given year, the utility will be able to add a surcharge to customers’ bills the following year. In Washington, the earliest the surcharge could appear on bills is Nov. 1, 2016.

Washington regulators capped the surcharge at 3 percent annually. However, if the utility’s costs are greater than 3 percent, Avista is allowed to extend the surcharge to customers’ bills in future years, said Pat Ehrbar, Avista’s manager of rates and tariffs.

But the utility also must provide customer rebates when power sales exceed projections, which can happen during cold years with high energy use. In the past, Avista was able to keep that extra revenue, and it became part of the company’s profits, Ehrbar said.

Why does Avista want the change?

Nationwide, utilities are looking for ways to recover more of their “fixed costs,” said Tom Schooley, assistant director of energy regulation for the Washington Utilities and Transportation Commission, which oversees investor-owned utilities. Generating and delivering power are a significant part of utilities’ costs, and those costs stay the same “whether customers use a little or a lot” of electricity and natural gas, he said.

For many utilities, including Avista, energy-efficient buildings and appliances have led to declines in per-customer use of electricity and natural gas.

The fixed cost adjustment is “the way the Utilities and Transportation Commission has chosen to give Avista a fair opportunity to earn back its investment in pipes and wires,” Schooley said. The adjustment was approved during Avista’s most recent rate case, which took effect Jan. 1.

Will the change boost conservation?

Yes, according to Avista officials.

The utility must already meet Washington’s state-mandated energy efficiency targets. Avista agreed to an extra 5 percent in electric savings in return for approval of the fixed cost adjustment.

Reducing demand for power at peak times will save both Avista and its customers money in the long-run, because the utility won’t have to build new generation or buy extra power on the wholesale market, Ehrbar said.

What do others think?

The Energy Project advocates for Washington’s low-income families in utility rate cases. Director Chuck Eberdt has mixed feelings about fixed cost adjustments.

“Historically, the Energy Project has not been a big supporter,” he said. “It’s not transparent. Most people don’t understand how rates are set, and this doesn’t make it any simpler.”

But he prefers fixed cost adjustments to the alternative pushed by some utility companies, which is a monthly service charge of $30 to $50 per customer, regardless of energy use. (Avista currently bills Washington residential customers about $18 per month in service charges for electric and natural gas. Idaho customers pay about $9 in monthly service charges, and the utility wants an increase.) “There’s a big push in the industry to change how we design rates,” Eberdt said. “The utilities are trying to shift more of the distribution costs into the service charge.”

In Washington, Avista’s fixed cost adjustment will be reviewed by the state Utilities and Transportation Commission in future years. That’s an important regulatory check, to see if it is working as proposed, Eberdt said.

How has it worked for other utilities?

In Washington, Puget Sound Energy has had the ability to impose fixed cost adjustments for about two years. As a result of the recent mild winter, its customers will see a monthly surcharge of about $3 on their electric bills and about $2 on their monthly gas bills for the next year.

In Idaho, Idaho Power Co. has been using fixed cost adjustments since 2007. During that time, customers received rebates during two years and surcharges during seven years. The rebates and surcharges ranged from 13 cents to $1.89 monthly for a typical residential customer.

Staff at the Idaho Public Utilities Commission recently tweaked the formula used by Idaho Power to make the outcome more favorable to customers, said commission spokesman Gene Fadness.

“We want it to be a benefit for both the companies and the customers,” he said. “If we’re not convinced that customers are benefiting, then the program is changed or goes away.”

Neither the Idaho Public Utilities Commission nor its staff has taken a position on Avista’s request for a fixed cost adjustment, Fadness said. That will occur over the next six months, as the commission reviews Avista’s current request for raising electric and natural gas rates in Idaho.