REGULATORY MATTERS

Regulatory Assets and Liabilities

The following table presents the Company’s regulatory assets and liabilities as of December 31, 2015 (dollars in thousands):



			Receiving Regulatory Treatment
	Remaining Amortization Period		(1) Earning A Return		Not Earning A Return		(2) Expected Recovery or Refund		Total 2015		Total 2014
Regulatory Assets:
Investment in exchange power-net	2019		$	8,983	$	—	$	—	$	8,983	$	11,433
Regulatory assets for deferred income tax	(3	)	101,240		—		—		101,240		100,412
Regulatory assets for pensions and other postretirement benefit plans	(4	)	—		235,009		—		235,009		235,758
Current regulatory asset for utility derivatives	(5	)	—		17,260		—		17,260		29,640
Unamortized debt repurchase costs	(6	)	15,520		—		—		15,520		17,357
Regulatory asset for settlement with Coeur d’Alene Tribe	2059		46,576		—		—		46,576		47,887
Demand side management programs	(3	)	—		3,168		—		3,168		4,603
Montana lease payments	(3	)	947		—		—		947		1,984
Lancaster Plant 2010 net costs	2015		—		—		—		—		1,247
Deferred maintenance costs	2017		—		4,823		—		4,823		5,804
Decoupling	2017		13,312		—		—		13,312		—
Power deferrals	(3	)	933		—		—		933		8,291
Regulatory asset for interest rate swaps	(7	)	—		83,973		—		83,973		77,063
Non-current regulatory asset for utility derivatives	(5	)	—		32,420		—		32,420		24,483
Other regulatory assets	(3	)	3,132		7,412		4,924		15,468		13,038
Total regulatory assets			$	190,643	$	384,065	$	4,924	$	579,632	$	579,000
Regulatory Liabilities:
Natural gas deferrals	(3	)	$	17,880	$	—	$	—	$	17,880	$	3,921
Power deferrals	(3	)	18,747		—		—		18,747		14,186
Regulatory liability for utility plant retirement costs	(8	)	261,594		—		—		261,594		254,140
Income tax related liabilities	(3	)	—		17,609		—		17,609		14,534
Regulatory liability for Spokane Energy	(9	)	—		—		—		—		29,028
Regulatory liability for rate refunds	(3	)	—		8,814		3,423		12,237		10,131
Decoupling	2017		2,373		—		—		2,373		—
Other regulatory liabilities	(3	)	2,395		1,048		—		3,443		7,688
Total regulatory liabilities			$	302,989	$	27,471	$	3,423	$	333,883	$	333,628


(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 UTC and the IPUC issued accounting orders authorizing Avista Corp. to offset 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 settlement. The orders provide for Avista Corp. to not recognize the unrealized gain or loss on utility derivative commodity instruments in the Consolidated Statements of Income. Realized gains or losses are recognized in the period of settlement, subject to approval for recovery through retail rates. Realized gains and losses, subject to regulatory approval, 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.

(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)

For interest rate swap agreements, each period Avista Utilities records all mark-to-market gains and losses as assets and liabilities and records offsetting regulatory assets and liabilities, such that there is no income statement impact. This is similar to the treatment of energy commodity derivatives described above. Upon settlement of interest rate swaps, the regulatory asset or liability (included as part of long-term debt) is amortized as a component of interest expense over the term of the associated debt.


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


(9)	Consists of a regulatory liability recorded for the cumulative retained earnings of Spokane Energy that the Company will flow through regulatory accounting mechanisms in future periods. During 2015, Spokane Energy was dissolved and the fixed rate electric capacity contract that was held at Spokane Energy was transferred to Avista Corp.

Power Cost Deferrals and Recovery Mechanisms

Deferred power supply costs are recorded as a deferred charge on the Consolidated Balance Sheets for future prudence review and recovery 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 and availability of hydroelectric generation,


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


•	retail loads.

In Washington, the ERM allows Avista Utilities to periodically increase or decrease electric rates with UTC 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. Total net deferred power costs under the ERM were a liability of $18.0 million as of December 31, 2015 compared to a liability of $14.2 million as of December 31, 2014, and 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. These annual 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 regulatory asset of $0.2 million as of December 31, 2015 compared to a regulatory asset of $8.3 million as of December 31, 2014.

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 $17.9 million as of December 31, 2015 compared to a liability of $3.9 million as of December 31, 2014.

Decoupling and Earnings Sharing Mechanisms

Decoupling is a mechanism designed to sever the link between a utility's revenues and consumers' energy usage. The Company's actual revenue, based on kilowatt hour and therm sales will vary, up or down, from the level included in a general rate case, which could be caused by changes in weather, energy conservation or the economy. Generally, the Company's electric and natural gas revenues will be adjusted each month to be based on the number of customers, rather than kilowatt hour and therm sales. The difference between revenues based on sales and revenues based on the number of customers will be deferred and either surcharged or rebated to customers beginning in the following year.

Washington Decoupling and Earnings Sharing

In Washington, the UTC approved the Company's decoupling mechanisms for electric and natural gas for a five-year period that commenced January 1, 2015. Electric and natural gas decoupling surcharge rate adjustments to customers are limited to 3 percent 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 will be made for the prior calendar year. These earnings tests will reflect actual decoupled revenues, normalized power supply costs and other normalizing adjustments.

As of December 31, 2015, the Company had a total net decoupling surcharge (asset) of $10.9 million for Washington electric and natural gas customers and a liability (rebate to customers) for earnings sharing of $3.4 million for Washington electric customers.

Idaho Fixed Cost Adjustment (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, commencing on 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. There was no provision for a surcharge to customers if the Company's ROE was less than 9.8 percent. This after-the-fact earnings test was discontinued as part of the settlement of the Company's 2015 Idaho electric and natural gas general rates cases. As of December 31, 2015 and December 31, 2014, the Company had total cumulative earnings sharing liabilities (rebates to customers) of $8.8 million and $10.1 million, respectively for electric and natural gas customers.