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Avista Reassigns Blame for Losses by Karen Dorn Steele, Staff Writer The Spokesman Review, September 29, 2000

Management now takes heat officials first pinned on trader

In June, Avista Corp. executives blamed much of their $140 million in real and projected energy trading losses on Roger Scholten, a senior energy trader who killed himself in mid-April.

But after a barrage of skeptical questions from Wall Street, the company has backed off what one Dow Jones columnist calls "Avista's Dead Guy Excuse."

"We sincerely regret the association of any individual employee with the losses. They are solely the responsibility of management," Avista spokesman Steve Becker says.

Avista's regulated utility is working to add 300 megawatts of new power generation so it won't be caught again with big losses when it buys pricey wholesale power to meet demand, Becker says.

Avista has promised that shareholders of its parent company -- not ratepayers -- will absortb this year's trading losses. But Avista has also asked regulators to track the region's soaring power costs for a year -- and adjust rates upward if necessary.

Avista is vulnerable to rising power costs because it doesn't generate enough power to meet the needs of its 310,000 electricity customers. It must buy power from other generators on the wholesale power market to cover the shortfall.

It wasn't the only utility caught with big losses in this year's turbulent energy market, where short-term power costs surged to record highs. But Avista's explanations for its losses were disingenuous, observers say.

In a conference call with Wall Street analysts in June, Avista blamed 60 percent of the $90 million it had already lost and an additional $50 million it expected to lose by October on Scholten's trades.

"A trade within the utility went beyond management guidelines and made what in hindsight turned out to be some pretty lousy power deals," Avista CEO Tom Matthews told the analysts.

The financial press quickly rejected Matthews' explanation.

Avista "hit a new low" when the company blamed the dead trader for their unusual losses, wrote Mark Golden of Dow Jones Newswires. It was an explanation "that market prices, traders and logic all contradict," he wrote.

Avista's decision to blame Scholten was cowardly, say two former Avista managers who have recently left the company for other jobs. They both asked not to be named in this story.

"If Roger did improper trades, management should have known. If they didn't know, that's even worse," says one of the managers.

Several energy traders dispute claims that Scholten made big "forward" trades for May and June in the weeks before his death that committed Avista to selling power without having the electricity to back up the trades.

Another former Avista manager says the company simply decided to let Scholten's trades ride in hopes wholesale market prices would fall.

"After Roger died, they said, `We could cover this and lose $10 to $20 million, or ride it out and cover when the prices drop.' Only they didn't drop," the ex-manager says.

Avista dropped its "rogue trader" theory -- a term coined by the press -- before its required quarterly financial report was filed in late June with the Securities and Exchange Commission.

In September, Avista announced the resignation of three managers, including Patrick Damiano, the director of wholesale marketing and trading who was Scholten's supervisor.

Damiano declined comment this week on what happened with Scholten's trades in April.

After the losses were disclosed, Matthews told the Avista board he was prepared to offer his resignation as well, but the board said no.

Matthews admitted the company was caught short this spring.

"We just did not expect that changes in power costs would hit the unheard-of heights, with a sudden change in a matter of literally a few days in early May, and then stay at those levels. ... We were caught off guard," he said in the June 21 conference call.

Avista's earlier decision to sell its 175-megawatt share of the 1,340-megawatt coal-fired Centralia, Wash., generating plant compounded the problem. The company had to turn to the volatile wholesale market to make up the loss in power generation. A megawatt can provide power to about 600 homes.

On May 5, Avista's legal right to purchase power from Centralia terminated.

Although spring runoff usually means cheaper power in the Northwest, prices this year began moving dramatically higher on May 1. The squeeze caught Avista with large forward sales not covered by power resources or purchases.

The Centralia deal closed earlier than expected, says Steven Fischer, manager of wholesale marketing for TransAlta Energy Marketing, the international company that bought Avista's share of Centralia.

Fischer, a founder of Avista Energy and Avista Power, left Spokane in March for his new job in Portland.

"It was iffy that the deal would go through. We were holding our breath to close it. It was a very good transaction for us, but it was an element in compounding Avista's problems," Fischer says. "We got the benefit of the bargain."

Avista wanted to unload Centralia because it is an old coal-fired plant that must be retrofitted to meet stricter new air quality limits, Avista's Becker says.

"It was a tremendous liability for us going forward. But TransAlta was willing to make that investment," Becker says.

Avista replaced the Centralia power on July 1 with a new, short-term power contract with TransAlta through Dec. 31, 2003.

In January, Avista had told the Washington Utilities and Transportation Commission that buying replacement power would be significantly cheaper than continuing to own its share of Centralia.

The Washington Attorney General's Office of Public Counsel, which represents ratepayers before the WUTC, objected to the sale because industry analysts were already predicting higher long-term power costs.

Ratepayers were hurt by the Centralia sale, says Assistant Attorney General Simon ffitch.

"It is hard not to conclude that (Avista) wanted to sell the plant, flow a significant portion of the gain to shareholders, and then let the market take its course on power costs, even if it were to the detriment of ratepayers," ffitch says in his WUTC brief.

Avista is trying to recover $4.1 million of its Centralia-related power supply costs from ratepayers. The Public Counsel opposes the request.

In his brief for Avista on the Centralia sale, Spokane attorney Gary Dahlke says the cost to customers would increase "whether Centralia is sold or not."

One of the two managers who recently left Avista questions whether the company is paying adequate attention to its regulated utility business.

Avista's utility is regulated, but CEO Matthews has also transformed the company with unregulated subsidiaries that trade energy futures, make fuel cells and manage utility costs for private businesses.

"Since Tom Matthews arrived, nearly all the attention has been on Avista's nonregulated side. Very little attention has been paid to the regulated side. It's just not as glamorous," he says.

"The core of our business is our utility. We remain committed to providing reliable service to our electricity and gas customers," Becker says.