REGULATORY MATTERS

Regulatory Assets and Liabilities

The following table presents the Company’s regulatory assets and liabilities as of December 31, 2018 (dollars in thousands):



			Receiving Regulatory Treatment						2018				2017
	Remaining Amortization Period		(1) Earning A Return		Not Earning A Return		(2) Expected Recovery or Refund		Current		Non-current		Current		Non-current
Regulatory Assets:
Deferred income tax	(3	)	$	91,188	$	—	$	—	$	—	$	91,188	$	—	$	90,315
Pensions and other postretirement benefit plans	(4	)	—		228,062		—		—		228,062		—		209,115
Energy commodity derivatives	(5	)	—		58,294		—		41,428		16,866		24,991		18,967
Unamortized debt repurchase costs	(6	)	10,255		—		—		—		10,255		—		—
Settlement with Coeur d’Alene Tribe	2059		42,643		—		—		—		42,643		—		43,954
Demand side management programs	(3	)	—		19,674		—		—		19,674		—		24,620
Decoupling surcharge	2020		20,909		—		—		3,408		17,501		19,759		2,600
Utility plant to be abandoned	(7	)	24,334		—		—		—		24,334		—		24,330
Interest rate swaps	(8	)	94,289		—		39,565		—		133,854		—		169,704
Other regulatory assets	(3	)	14,555		6,658		12,480		3,716		29,977		—		35,794
Total regulatory assets			$	298,173	$	312,688	$	52,045	$	48,552	$	614,354	$	44,750	$	619,399
Regulatory Liabilities:
Deferred natural gas costs	(3	)	$	40,713	$	—	$	—	$	40,713	$	—	$	37,474	$	—
Deferred power costs	(3	)	42,005		—		—		25,072		16,933		5,816		24,057
Utility plant retirement costs	(9	)	297,379		—		—		—		297,379		—		285,786
Income tax related liabilities	(3) (10)		436,404		16,900		306		27,997		425,613		—		460,542
Interest rate swaps	(8	)	12,359		—		15,719		—		28,078		—		18,638
Decoupling rebate	2020		6,986		—		—		6,782		204		—		5,816
Other regulatory liabilities	(3	)	17,280		3,704		4,155		12,645		12,494		4,974		5,250
Total regulatory liabilities			$	853,126	$	20,604	$	20,180	$	113,209	$	780,701	$	48,264	$	800,089


(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 PGAs, the ERM in Washington, the PCA mechanism in Idaho, and periodic general rates cases. The resulting regulatory assets associated with energy commodity derivative instruments 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 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. In September 2017, the WUTC also approved the Company's request to defer the undepreciated net book value of existing natural gas ERTs (consistent with the accounting treatment for the electric meters) that will be retired as part of the AMI project. Replacement of the meters and natural gas ERTs began 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, as well as 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.


(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 TCJA, which changed the federal income tax rate from 35 percent to 21 percent. The Company revalued all deferred income taxes as of December 31, 2017. The Company expects the amounts for utility plant items for Avista Utilities to be returned to customers over a period of approximately 36 years. The Company expects the AEL&P amounts to be returned to customers over a period of approximately 40 years. The regulatory liability attributable to non-plant excess deferred taxes is approximately $18.5 million (among all jurisdictions) as of December 31, 2018. The return of this amount to customers will be determined by final orders from the WUTC, IPUC and OPUC during 2019. 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 2018, the Company recognized a pre-tax benefit of $6.1 million under the ERM in Washington compared to a benefit of $4.6 million for 2017. Total net deferred power costs under the ERM were a liability of $34.4 million as of December 31, 2018 and a liability of $23.7 million as of December 31, 2017. These deferred power cost balances represent amounts due to customers. These deferred power cost balances represent amounts due to customers. Pursuant to WUTC requirements, should the cumulative deferral balance exceed $30 million in the rebate or surcharge direction, the Company must make a filing with the WUTC to adjust customer rates to either return the balance to customers or recover the balance from customers. Avista Utilities makes an annual filing on or before April 1 of each year to provide the opportunity for the WUTC staff and other interested parties to review the prudence of and audit the ERM deferred power cost transactions for the prior calendar year. The filing in 2019 will also contain a proposed rate adjustment or refund, effective July 1, 2019, due to the rebate balance exceeding $30 million.

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. 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 $7.6 million as of December 31, 2018 and a liability of $6.1 million as of December 31, 2017. 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 $40.7 million as of December 31, 2018 and a liability of $37.5 million as of December 31, 2017. 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. In February 2019, the WUTC approved an all-party agreement that extends the life of the mechanisms through the end of the Company's next general rate case, or April 1, 2020, whichever comes first. In that general rate case the Company will seek to either make permanent or extend the mechanisms for an additional multi-year term. 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. During the first quarter of 2018, the FCA in Idaho was extended for a one-year term through December 31, 2019. The Company expects to seek an extension of the FCAs in its next general rate case, expected in the second quarter of 2019.

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, 2018 and December 31, 2017, 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,
	2018			2017
Washington
Decoupling surcharge	$	12,671		$	14,240
Provision for earnings sharing rebate	(693		)	(3,420		)
Idaho
Decoupling surcharge	$	2,150		$	3,471
Provision for earnings sharing rebate	(774		)	(2,350		)
Oregon
Decoupling rebate	$	(898	)	$	(1,168	)
Provision for earnings sharing rebate	—			—