Avista Utilities buoys start-up affiliates as Avista Corp. repositions

Pam Boschee, News Editor

Avista Utilities is the “old-timer” among the Avista Corp. subsidiaries, having been in the business for 111 years. In comparison, its sister businesses are recent newcomers, and Avista Corp.’s transformation from a traditional utility company has required change and repositioning throughout the organization.

Avista Corp. saw its energy marketing and trading subsidiary, Avista Energy, struggle with dwindling margins in 1999 due to increased consolidation of players within the energy trading industry and the addition of larger Wall Street investment firms into the mix. Consequently, Avista Energy shifted its focus to marketing services to large end-use customers in Western markets.

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In tandem with this change in strategy, Avista Corp. looked to its start-up affiliates to take advantage of three significant growth sectors-e-commerce, energy technology and telecommunications.

Providing a strong financial base (see Table 1), Avista Utilities has bolstered the start-ups-Avista Advantage, Avista Labs and Avista Communications (see Table 2).

EL&P spoke in May with Edward Turner, Avista Utilities’ president, about his strategies for continuing-and improving on-the solid perfor- mance that provides the stability for Avista Corp.’s long-term growth strategies.

EL&P: The 1999 strategy to expand service territory through acquisitions was changed. Why?

Turner: What we did is strategic. We kept our eyes on the market and how the marketplace was rewarding folks who were stepping out and acquiring utility assets. From our perspective, no one had built any value around that strategy. We have an obligation to reward shareholders, and the marketplace was not rewarding those kinds of strategies. The assets were overvalued at the time. We weren’t willing to put that type of capital at risk.

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It’s not that the strategy has changed; it’s that we believe the timing is not appropriate for us now. We’ve taken the talent we’ve developed in our 111-year history and leveraged that experience through our subsidiary businesses into three significant growth sectors: e-commerce, energy technology and telecommunications.

EL&P: What growth avenues are being pursued by Avista Utilities?

Turner: Our strategic initiatives include increasing the company’s customer base through new construction, promoting conversions from alternate fuels, expanding the natural gas system by competing for space-heating loads with neighboring public electric utilities and adjusting pricing strategies to ensure the company earns its cost of capital.

Growth opportunity is inherent in our region. There’s an unsurpassed quality of life here. We have a lot to offer. What we have to do as a region is aggressively market where we live from a perspective of improving economic development. Avista is leading an effort to get the community together and focus as a region. It’s not just Spokane, Wash., but the whole corridor between Spokane and Coeur d’Alene, Idaho. Packaging the region will have a significant positive impact on the community and the growth of the utility.

EL&P: Given your relatively small size, how will Avista Utilities remain competitive?

Turner: Avista Utilities serves 310,000 electric customers in eastern Wash- ington and northern Idaho, and provides natural gas service to 270,0000 customers in eastern Wash- ington, northern Idaho, and parts of Oregon and California. Unlike many utilities in the nation, we have for decades dealt with tough competition from the tax-exempt public utilities that surround us, so it’s not as if the threat of competition is far removed. Our talented employees have been thriving on it for years.

We have a very strong relationship with our work force, in particular our union, which is a strong competitive advantage. We also have a healthy working relationship with our regulatory commissions and have mutual respect for the roles we each play.

We continuously benchmark ourselves against others and that includes looking for opportunities to outsource anything we don’t excel at. Our drive today is to sharpen the business model that we currently have in order to operate more efficiently than any other utility in the nation. That gives us the ability to replicate our model in other areas when we see an opportunity to expand. When people come looking at Avista, they’ll see it’s a well-run organization-therefore holding little opportunity to drive out inefficiencies.

Because of our small size, we are very responsive. We’re like the little speedboat vs. the barge-we can turn on a dime. As an organization under the leadership of Tom Matthews, we do turn on a dime when we need quick decisions and quick responses-he expects it.

EL&P: Is Avista Utilities doing other things that more closely align with its core competencies?

Turner: Absolutely. The primary core competency we bring to the table is our relationships with our customers. We have high brand loyalty with our existing customer base. What we’ve done is ask, “How can we leverage that core competency?” Avista Services’ mission is enhancing existing customer relationships. We do that by offering third-party products and services through our bill.

Since we’re going to pay a minimum postage to send the bill out, we also sell information space in our bills.

We’re going into the HVAC business in June, and we’re going to brand some heating, ventilation and air conditioning services with the Avista name. It’s what our customers have asked for because they have depended on us for 111 years and they trust the Avista name.

We’re currently working with a small municipal to do their meter reading, bill processing and handle their call center functions.

We do not have the luxury of being in a marketplace like Phoenix or Vegas where there’s five and six percent growth. Though our growth is above the national average of two percent, our challenge is to find additional ways to grow. We are executing specific strategies targeted to growing margin at a rate faster than customer growth. Revenue growth must exceed inflation and any other cost pressures, otherwise it’s a losing battle.

EL&P: How much of your budget depends on each line of business?

Turner: Electric about 70 percent, gas is about 30 percent.

EL&P: How much of your electricity is purchased from other suppliers?

Turner: Around 25 to 30 percent. Our largest sources, which align well with our existing hydro facilities, come from mid-Columbia River hydro projects.

EL&P: Avista earned the 1999 National Hydropower Achievement Award for Stewardship of Water Resources with its Living License on the Clark Fork River in Montana. What is unique about this agreement?

Turner: It’s the first time that large hydroelectric projects-Noxon [Montana] and Cabinet Gorge [Idaho], with approximately 800 MW total capacity-have received 45-year licenses on time. That has never been done before. FERC is promoting it as being the national model for collaborative re-licensing. The reason it’s called a Living License is that the signatories remain involved in the process as it moves forward. We are using this same collaborative approach for the re-licensing of our projects on the Spokane River.

EL&P: Avista Utilities’ net income totaled $19.9 million for the first quarter, surpassing last year’s $19.5 million for the same period. How did you achieve this in spite of the warm winter?

Turner: There are a couple of elements. First, we received a small rate increase in Idaho, which is probably about 30 percent of our business.

The second element is aggressive cost management. We realize what type of business we’re in-particularly in the Northwest. The weather can swing our returns, so we watch and manage that on a monthly basis. We don’t wait until the end of the year to be responsive to a revenue shortfall-we respond as the year goes. But the trick is aggressive cost optimization and operational efficiencies.

EL&P: What interaction do you have with your Avista energy affiliates?

Turner: We’re vertically integrated. Our other companies are all part of Avista Corp. as separate, unregulated subsidiaries. We keep a pretty bright line of distinction between those.

What is unique about working in an organization like Avista Corp. is, every two weeks, the presidents of the different businesses gather with Tom Matthews, our CEO. There’s a lot of energy around the table. When you have all that energy around the table and you talk about your business, you get lots of input and lots of guidance. It’s very rejuvenating for everyone at the table. You go forward with what you learn in those meetings every two weeks and take that back to your organization.

EL&P: How involved is Avista Utilities in e-commerce?

Turner: We’re doing more business on our Web page. We have developed a presence on the Internet and have automated a number of customer service functions. Our customers can personalize their Internet experience with us; pay their bills on line and complete a home energy audit. Over time, we expect to expand our Internet retail services.

We have considered the utility exchange business models of the Chicago 22 and Big 15. We prefer our current approach of long-term supplier alliances and together-leveraging technology to drive mutual value through the entire supply chain. We are working with global suppliers and other regional utilities to determine if an opportunity for equal stake between buyers and suppliers could yield more sustainable supply chain value.

EL&P: What are your goals for Avista Utilities over the next five years?

Turner: Our overall objective is to remain a leader in the energy industry with our employees yielding sustainable results and customer focus.

Three and five year goals are important, but the longer view is not driven by current business models, such as regulation, deregulation, competition, etc. It will be driven by technology, which will fundamentally change our industry. This dovetails into our history of innovation, current strengths and future vision.

Our biggest challenge will be to earn adequate returns with the regulated business so we can continue to provide our customers the safe and reliable service.

But this is not as easy as it first sounds. We have not had a general rate increase for the past 13 years. During that time, inflation has increased 48 to 50 percent. That means we have held prices down by driving our cost savings. For example, we install a common ditch for the installation of all utilities in new building developments. Right now we are completing telephone installations to the pedestal to reduce the cost of service.

When you look in the Northwest, there is a definite shortage of generation. Another strategy over the next three years will be determining the best solution for acquiring generation that is cost effective for our customers and reduces our exposure in the marketplace. We’re proud to be the lowest cost utility in the WSCC (Western States Coordinating Council).

We must become a first-quartile performer when it comes to safety. We have on our Web site homepage listings of regional peer gas and electric utility safety results. Everyone can see how the other utilities are doing.

Another goal is to improve communication and strengthen leadership capabilities of our management team. A lot of folks think leadership just comes naturally; there are some elements that do come naturally. However, it’s very easy to manage, it’s more difficult to lead. We have an initiative under way which focuses on making our supervisors and managers more effective leaders. That requires being able to deliver performance expectations to employees, ensuring employees know you care , and communicating openly and regularly with your employees. Those are characteristics that we will continue to emphasize and model in our leadership at Avista Utilities.

Edward Turner
President
Avista Utilities

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