Avista's Rate Hike: A Mixed Bag for Customers and Shareholders

Avista Corporation (NYSE: AVA) recently received a decision from the Washington Utilities and Transportation Commission (WUTC) regarding its general rate cases, which will impact both customers and shareholders. The two-year rate plan, effective from January 1, 2025, and January 1, 2026, will change electric and natural gas rates, with varying impacts on revenue growth, profitability, and customer energy consumption patterns.

For electric operations, the Commission approved rates designed to provide a 0.1 percent, or $0.8 million increase in base revenue for Rate Year 1, and a 11.6 percent, or $68.9 million increase in base revenue for Rate Year 2. However, Avista believes there is a calculation error with respect to the level of power supply expenses removed from the final revenue requirement, which, if corrected, would move the revenue approved from $0.8 million to approximately $12 million. This would result in a base percentage increase of 2.0 percent for electric operations in Rate Year 1.

For natural gas operations, the Commission approved rates designed to provide a 11.2 percent, or $14.2 million increase in base revenue for Rate Year 1, and a 2.8 percent, or $4.0 million increase in base revenue for Rate Year 2.

The Commission approved a rate of return (ROR) on rate base of 7.32 percent, with a common equity ratio of 48.5 percent and a 9.8 percent return on equity (ROE). This decision reflects the Commission's recognition of Avista's investment in utility infrastructure and the need to recover costs to serve customers and continue investments in systems.

While the Commission did not, at this time, support a change to the mechanics of the Energy Recovery Mechanism (ERM), it did continue its support for important mechanisms such as Wildfire and Insurance balancing accounts, and decoupling. The forecasted power supply costs that were removed from Electric Rate Year 1, which makes up the majority of the reduction in revenue from the Company’s filed case, to the final order, would flow through the ERM deadband and sharing bands.

Avista's CEO, Dennis Vermillion, expressed satisfaction with the Commission's decision, stating that it provides a positive outcome for both customers and shareholders. The decision allows Avista's Washington electric customers to receive the benefit of the company's reduced power supply cost in Rate Year 1, mitigating the impact to their bills. At the same time, shareholders will benefit from the increase in margin, improving the return for shareholders.

The approved rate increases will significantly impact Avista's revenue growth and profitability over the next two years. For electric operations, the Commission approved a 0.1% increase in base revenue for Rate Year 1 and a 11.6% increase for Rate Year 2. For natural gas operations, the increases are 11.2% for Rate Year 1 and 2.8% for Rate Year 2. These increases will lead to a substantial boost in Avista's revenue, with a base percentage increase of 2.0% for electric operations in Rate Year 1, once a calculation error is corrected. The Commission also approved a rate of return (ROR) on rate base of 7.32%, with a common equity ratio of 48.5% and a 9.8% return on equity (ROE). This decision reflects the Commission's recognition of Avista's investment in utility infrastructure and the need to recover costs to serve customers and continue investments in systems.

The rate increases approved by the WUTC for Avista's electric and natural gas operations will have a significant impact on customers' energy bills and consumption patterns. For electric operations, the base revenue will increase by 0.1% in Rate Year 1 and 11.6% in Rate Year 2, while natural gas operations will see a 11.2% increase in Rate Year 1 and 2.8% in Rate Year 2. These increases will likely lead to higher energy costs for customers, potentially encouraging them to adopt energy-saving measures and switch to more efficient appliances. Additionally, Avista's launch of the My Energy Discount program in Washington, offering personalized monthly bill discounts for eligible customers, may help mitigate the impact of rate increases on low-income households.

The approved rate of return (ROR) of 7.32% and return on equity (ROE) of 9.8% by the WUTC will significantly impact Avista's investment decisions and capital expenditure plans. With a higher ROR and ROE, Avista can expect a better return on its investments, encouraging the company to allocate more resources towards capital expenditures. This could lead to increased investment in utility infrastructure, system upgrades, and renewable energy projects, ultimately benefiting both customers and shareholders.

The Energy Recovery Mechanism (ERM) deadband and sharing bands will mitigate the impact of power supply cost changes on Avista's customers in the short term. The ERM allows for the smoothing of power supply cost fluctuations, ensuring that customers are not disproportionately affected by sudden changes. In the long term, the ERM sharing bands will help distribute the costs more equitably between Avista and its customers, as the company will absorb a portion of the power supply cost increases. This mechanism aims to balance the interests of both the utility and its customers, promoting fairness and stability in the energy market.

Avista can employ several strategies to mitigate the impact of ERM deadband and sharing bands on its revenue while maintaining customer satisfaction and regulatory compliance. First, Avista can optimize its power supply costs by diversifying its energy mix and hedging against price fluctuations. This can help reduce the impact of power supply cost variations on its revenue. Second, Avista can invest in energy efficiency programs and demand response initiatives to reduce customer energy consumption and lower overall demand. This can help Avista manage its revenue requirements more effectively and mitigate the impact of ERM deadband and sharing bands. Third, Avista can work with regulators to advocate for a more flexible ERM mechanism that better aligns with its revenue requirements and customer needs. This can help Avista achieve a more balanced outcome between customer satisfaction and regulatory compliance. Finally, Avista can explore innovative rate designs and pricing structures that better reflect the costs of providing service and incentivize customers to use energy more efficiently. This can help Avista manage its revenue requirements more effectively and mitigate the impact of ERM deadband and sharing bands.

The ERM deadband and sharing bands play a crucial role in Avista's future rate case filings and the WUTC's decision-making process. The ERM is designed to mitigate the impact of volatile power supply costs on customers by allowing Avista to recover these costs over time. The deadband and sharing bands determine how much of the cost variance Avista can recover in a given period. In the recent rate case decision, the WUTC did not modify the ERM mechanics but acknowledged that forecasted power supply costs removed from Electric Rate Year 1 would flow through the ERM deadband and sharing bands. This means that Avista will likely seek to recover these costs in future rate cases, potentially leading to increased rates for customers. The WUTC, in turn, will need to consider the ERM's impact on customers and Avista's financial health when making decisions on future rate cases. By understanding the ERM's influence, investors can better anticipate Avista's rate case strategies and the WUTC's responses, allowing them to make more informed investment decisions.

In conclusion, Avista's recent rate case decision by the WUTC presents a mixed bag for customers and shareholders. While customers will face higher energy bills and may adopt energy-saving measures, shareholders can expect increased revenue and profitability. Avista's investment decisions and capital expenditure plans will be influenced by the approved ROR and ROE, potentially leading to increased investment in utility infrastructure and renewable energy projects. The ERM deadband and sharing bands will help mitigate the impact of power supply cost changes on customers in the short and long term, with Avista employing various strategies to manage its revenue requirements and maintain customer satisfaction. The ERM's influence on future rate case filings and the WUTC's decision-making process will be crucial for investors to consider when making informed investment decisions.