REGULATORY MATTERS

Regulatory Assets and Liabilities

The following table presents the Company’s regulatory assets and liabilities as of December 31, 2017 (dollars in thousands):



			Receiving Regulatory Treatment
	Remaining Amortization Period		(1) Earning A Return		Not Earning A Return		(2) Expected Recovery or Refund		Total 2017		Total 2016
Regulatory Assets:
Investment in exchange power-net	2019		$	4,083	$	—	$	—	$	4,083	$	6,533
Regulatory assets for deferred income tax	(3	)	90,315				—		90,315		109,853
Regulatory assets for pensions and other postretirement benefit plans	(4	)	—		209,115		—		209,115		240,114
Current regulatory asset for energy commodity derivatives	(5	)	—		24,991		—		24,991		11,365
Unamortized debt repurchase costs	(6	)	11,880		—		—		11,880		13,700
Regulatory asset for settlement with Coeur d’Alene Tribe	2059		43,954		—		—		43,954		45,265
Demand side management programs	(3	)	—		24,620		—		24,620		15,700
Decoupling surcharge	2019		22,359		—		—		22,359		43,126
Regulatory asset for utility plant to be abandoned	(7	)	24,330		—		—		24,330		19,100
Regulatory asset for interest rate swaps	(8	)	53,797		—		115,907		169,704		161,508
Non-current regulatory asset for energy commodity derivatives	(5	)	—		18,967		—		18,967		16,919
Other regulatory assets	(3	)	8,212		7,064		4,555		19,831		16,645
Total regulatory assets			$	258,930	$	284,757	$	120,462	$	664,149	$	699,828
Regulatory Liabilities:
Natural gas deferrals	(3	)	$	37,474	$	—	$	—	$	37,474	$	30,820
Power deferrals	(3	)	29,873		—		—		29,873		23,528
Regulatory liability for utility plant retirement costs	(9	)	285,786		—		—		285,786		273,983
Income tax related liabilities	(3) (10)		—		18,223		442,319		460,542		28,966
Regulatory liability for interest rate swaps	(8	)	11,257		—		7,381		18,638		21,191
Provision for earnings sharing rebate	(3	)	—		2,350		3,420		5,770		10,297
Decoupling rebate	2019		5,816		—		—		5,816		2,405
Other regulatory liabilities	(3	)	1,926		2,528		—		4,454		5,762
Total regulatory liabilities			$	372,132	$	23,101	$	453,120	$	848,353	$	396,952


(1)	Earning a return includes either interest on the regulatory asset/liability or a return on the investment as a component of rate base at the allowed rate of return.


(2)	Expected recovery is pending regulatory treatment including regulatory assets and liabilities with prior regulatory precedence.


(3)	Remaining amortization period varies depending on timing of underlying transactions.


(4)	As the Company has historically recovered and currently recovers its pension and other postretirement benefit costs related to its regulated operations in retail rates, the Company records a regulatory asset for that portion of its pension and other postretirement benefit funding deficiency.

(5)

The WUTC and the IPUC issued accounting orders authorizing Avista Corp. to offset energy commodity derivative assets or liabilities with a regulatory asset or liability. This accounting treatment is intended to defer the recognition of mark-to-market gains and losses on energy commodity transactions until the period of delivery. Realized benefits and losses result in adjustments to retail rates through purchased gas cost adjustments, the ERM in Washington, the PCA mechanism in Idaho, and periodic general rates cases. The resulting regulatory assets have been concluded to be probable of recovery through future rates.

(6)

For the Company’s Washington jurisdiction and for any debt repurchases beginning in 2007 in all jurisdictions, premiums paid to repurchase debt are amortized over the remaining life of the original debt that was repurchased or, if new debt is issued in connection with the repurchase, these costs are amortized over the life of the new debt. In the Company’s other regulatory jurisdictions, premiums paid to repurchase debt prior to 2007 are being amortized over the average remaining maturity of outstanding debt when no new debt was issued in connection with the debt repurchase. These costs are recovered through retail rates as a component of interest expense.

(7)

In March 2016, the WUTC granted the Company's Petition for an Accounting Order to defer and include in a regulatory asset the undepreciated value of its existing Washington electric meters and natural gas ERTs for the opportunity for later recovery. This accounting treatment is related to the Company's plan to replace approximately 253,000 of its existing electric meters with new two-way digital meters and the related software and support services through its AMI project in Washington State. Replacement of the meters is expected to begin in the second half of 2018.

(8)

For interest rate swap derivatives, Avista Corp. records all mark-to-market gains and losses in each accounting period as assets and liabilities and records offsetting regulatory assets and liabilities, such that there is no income statement impact. The interest rate swap derivatives are risk management tools similar to energy commodity derivatives. Upon settlement of interest rate swap derivatives, the regulatory asset or liability is amortized as a component of interest expense over the term of the associated debt. The Company records an offset of interest rate swap derivative assets and liabilities with regulatory assets and liabilities, based on the prior practice of the commissions to provide recovery through the ratemaking process. Settled interest rate swap derivatives which have been through a general rate case proceeding are classified as earning a return in the table above, whereas all unsettled interest rate swap derivatives and settled interest rate swap derivatives which have not been included in a general rate case are classified as expected recovery. See below for additional information regarding the Company's 2016 settled interest rate swaps in the Washington general rate cases. The Idaho and Oregon portion of the 2016 settled interest rate swaps are included in earning a return because they were approved for recovery in those respective states.


(9)	This amount is dependent upon the cost of removal of underlying utility plant assets and the life of utility plant.

(10)

The amount pending recovery represents amounts due back to customers and resulted from the new federal income tax law and changing the federal income tax rate from 35 percent to 21 percent and revaluing all deferred income taxes as of December 31, 2017. The Company currently expects the amounts for utility plant items for Avista Utilities to be returned to customers over a period of approximately 36 years using the ARAM. The Company expects the AEL&P amounts to be returned to customers over a period of approximately 40 years. The Company does not currently have an estimate for non-plant items included in this balance as the Company is waiting for additional implementation guidance from various regulatory agencies. In addition, none of the excess deferred tax amounts have been through a regulatory proceeding as of this filing; therefore, a definitive amortization period has not been established. See Note 11 for additional discussion regarding the new federal income tax law.

Power Cost Deferrals and Recovery Mechanisms

Deferred power supply costs are recorded as a deferred charge or liability on the Consolidated Balance Sheets for future prudence review and recovery or rebate through retail rates. The power supply costs deferred include certain differences between actual net power supply costs incurred by Avista Utilities and the costs included in base retail rates. This difference in net power supply costs primarily results from changes in:


•	short-term wholesale market prices and sales and purchase volumes,


•	the level, availability and optimization of hydroelectric generation,


•	the level and availability of thermal generation (including changes in fuel prices),


•	retail loads, and


•	sales of surplus transmission capacity.

In Washington, the ERM allows Avista Utilities to periodically increase or decrease electric rates with WUTC approval to reflect changes in power supply costs. The ERM is an accounting method used to track certain differences between actual power supply costs, net of wholesale sales and sales of fuel, and the amount included in base retail rates for Washington customers and defer these differences (over the $4.0 million deadband and sharing bands) for future surcharge or rebate to customers. For 2017, the Company recognized a pre-tax benefit of $4.6 million under the ERM in Washington compared to a benefit of $5.1 million for 2016. Total net deferred power costs under the ERM were a liability of $23.7 million as of December 31, 2017 and a liability of $21.3 million as of December 31, 2016. These deferred power cost balances represent amounts due to customers.

Avista Utilities has a PCA mechanism in Idaho that allows it to modify electric rates on October 1 of each year with IPUC approval. Under the PCA mechanism, Avista Utilities defers 90 percent of the difference between certain actual net power supply expenses and the amount included in base retail rates for its Idaho customers for future surcharge or rebate to customers. The October 1 rate adjustments recover or rebate power costs deferred during the preceding July-June twelve-month period. Total net power supply costs deferred under the PCA mechanism were a liability of $6.1 million as of December 31, 2017 and a liability of $2.2 million as of December 31, 2016. These deferred power cost balances represent amounts due to customers.

Natural Gas Cost Deferrals and Recovery Mechanisms

Avista Utilities files a PGA in all three states it serves to adjust natural gas rates for: 1) estimated commodity and pipeline transportation costs to serve natural gas customers for the coming year, and 2) the difference between actual and estimated commodity and transportation costs for the prior year. Total net deferred natural gas costs to be refunded to customers were a liability of $37.5 million as of December 31, 2017 and a liability of $30.8 million as of December 31, 2016. These balances represent amounts due to customers.

Decoupling and Earnings Sharing Mechanisms

Decoupling (also known as an FCA in Idaho) is a mechanism designed to sever the link between a utility's revenues and consumers' energy usage. In each of Avista Utilities' jurisdictions, Avista Utilities' electric and natural gas revenues are adjusted so as to be based on the number of customers in certain customer rate classes and assumed "normal" kilowatt hour and therm sales, rather than being based on actual kilowatt hour and therm sales. The difference between revenues based on the number of customers and "normal" sales and revenues based on actual usage is deferred and either surcharged or rebated to customers beginning in the following year. Only residential and certain commercial customer classes are included in decoupling mechanisms.

Washington Decoupling and Earnings Sharing

In Washington, the WUTC approved the Company's decoupling mechanisms for electric and natural gas for a five-year period beginning January 1, 2015. Electric and natural gas decoupling surcharge rate adjustments to customers are limited to a 3 percent increase on an annual basis, with any remaining surcharge balance carried forward for recovery in a future period. There is no limit on the level of rebate rate adjustments.

The decoupling mechanisms each include an after-the-fact earnings test. At the end of each calendar year, separate electric and natural gas earnings calculations are made for the calendar year just ended. These earnings tests reflect actual decoupled revenues, normalized power supply costs and other normalizing adjustments. If the Company earns more than its authorized ROR in Washington, 50 percent of excess earnings are rebated to customers through adjustments to decoupling surcharge or rebate balances. See below for a summary of cumulative balances under the decoupling and earnings sharing mechanisms.

Idaho FCA and Earnings Sharing Mechanisms

In Idaho, the IPUC approved the implementation of FCAs for electric and natural gas (similar in operation and effect to the Washington decoupling mechanisms) for an initial term of three years, beginning January 1, 2016.

For the period 2013 through 2015, the Company had an after-the-fact earnings test, such that if Avista Corp., on a consolidated basis for electric and natural gas operations in Idaho, earned more than a 9.8 percent ROE, the Company was required to share with customers 50 percent of any earnings above the 9.8 percent. This after-the-fact earnings test was discontinued, effective January 1, 2016, as part of the settlement of the Company's 2015 Idaho electric and natural gas general rates cases. See below for a summary of cumulative balances under the decoupling and earnings sharing mechanisms.

Oregon Decoupling Mechanism

In February 2016, the OPUC approved the implementation of a decoupling mechanism for natural gas, similar to the Washington and Idaho mechanisms described above. The decoupling mechanism became effective on March 1, 2016. There will be an opportunity for interested parties to review the mechanism and recommend changes, if any, by September 2019. In Oregon, an earnings review is conducted on an annual basis. In the annual earnings review, if the Company earns more than 100 basis points above its allowed ROE, one-third of the earnings above the 100 basis points would be deferred and later returned to customers. The earnings review is separate from the decoupling mechanism and was in place prior to decoupling. See below for a summary of cumulative balances under the decoupling and earnings sharing mechanisms.

Cumulative Decoupling and Earnings Sharing Mechanism Balances

As of December 31, 2017 and December 31, 2016, the Company had the following cumulative balances outstanding related to decoupling and earnings sharing mechanisms in its various jurisdictions (dollars in thousands):



	December 31,			December 31,
	2017			2016
Washington
Decoupling surcharge	$	14,240		$	30,408
Provision for earnings sharing rebate	(3,420		)	(5,113		)
Idaho
Decoupling surcharge	$	3,471		$	8,292
Provision for earnings sharing rebate	(2,350		)	(5,184		)
Oregon
Decoupling surcharge/(rebate)	$	(1,168	)	$	2,021
Provision for earnings sharing rebate	—			—

Interest Rate Swaps included in the 2017 Washington General Rate Cases

On October 27, 2017, WUTC Staff and other parties to Avista Corp.'s electric and natural gas general rate cases filed their testimony. These parties recommended lower revenue requirements than what was proposed in Avista Corp.'s original filings. Additionally, the WUTC Staff recommended the exclusion of the Company's 2016 settlement costs from the cost of capital calculation. The total amount of the 2016 settlement costs was $54.0 million, with approximately 60 percent of this total being allocable to Washington.

In addition to the settlement costs from 2016, the Company has a net regulatory asset of $8.8 million for interest rate swaps settled during the third quarter of 2017, and a net regulatory asset of $66.0 million for unsettled interest rate swaps as of December 31, 2017 related to forecasted debt issuances. Of those amounts, approximately 60 percent relate to Washington. If recovery of the 2016 settled interest rate swap settlement payments referenced above is disallowed by the WUTC, this could change the Company's current conclusion that settlement payments related to the 2017 settled interest rate swaps and the unsettled interest rate swaps are probable of recovery through rates. If the Company concluded that recovery of these swap related payments were no longer probable, the Company will be required to derecognize the related regulatory assets and liabilities with an adjustment through the income statement, and any subsequent gains and losses would be recognized through the income statement rather than recorded as a regulatory asset or liability.

Interest rate swaps are a tool used throughout multiple industries to manage interest rate risk. They also provide certainty for future cash flows associated with future borrowings. Since interest costs are included in the Company's costs of service to be recovered from customers, the Company has used this tool to manage these costs for the benefit of the Company's customers. The settlement of interest rate swaps results in either a benefit or a cost to the Company which, in either case, has historically been reflected in rates authorized by the WUTC in general rate cases. Accordingly, the Company still believes the interest rate swap payments are probable of recovery and will continue to work through the rate case process. Depending on the outcome of this proceeding, the Company could determine to not manage interest rate risk through swap transactions in the future.