2. Background

Avista, with headquarters in Spokane, Washington, serves a total of 325,000 electric and 298,000 natural gas customers in the states of Washington, Idaho, Oregon and California. The company's only gas distribution service in California is in its South Lake Tahoe District, where it serves 18,600 customers. Avista has been serving South Lake Tahoe since 1991, when it acquired certain Oregon and California natural gas assets from CP National Corporation.

Southwest, a California corporation, serves 1.6 million customers in the southwestern United States. It currently serves more than 22,000 natural gas customers in its Northern California Division, which is concentrated in the Lake Tahoe Basin, and another 118,000 customers in its Southern California Division, which is in San Bernardino County.

On July 21, 2004, Southwest and Avista entered into a purchase and sale agreement, subject to regulatory approval, by which Southwest would acquire Avista's South Lake Tahoe natural gas assets for approximately $15 million. The assets include 654,000 feet of steel mains, 576,000 feet of plastic mains and 19,000 meters.

In prepared testimony, Kelly O. Norwood, Avista's vice president of state and federal regulation, explained the reasons for the sale:

The South Lake Tahoe service territory is isolated from Avista's other service territories in Washington, Idaho and Oregon, and is the only area served by Avista in California. The sale of the properties is consistent with Avista's strategy to focus on its utility business in the Northwest. Furthermore, Southwest has been serving much of the Lake Tahoe Basin for 40 years, and the South Lake Tahoe community is contiguous to existing Southwest service territories. The South Lake Tahoe properties would be complementary to the existing areas already served by Southwest. (Norwood testimony, Exhibit 4, at 5.)

Roger C. Montgomery, vice president of pricing for Southwest, stated that the acquisition will provide a number of advantages for current Avista customers in South Lake Tahoe. First, Southwest has a greater number of employees in closer proximity to South Lake Tahoe than Avista (24 as compared to 7 in the South Lake Tahoe/Truckee area) and, as a result, customer service and emergency response should be augmented. Second, Southwest has equipped meters in its Northern California District with electronic reading technology that permits one meter reader to read all meters in the district "with virtually 100 percent accuracy." Southwest intends to employ the same technology in South Lake Tahoe. Third, Southwest offers a number of customer options that are not currently offered by Avista, including appointment window scheduling, natural gas outdoor lighting and more generous credit terms, and Southwest intends to make these services available over time to South Lake Tahoe. (Montgomery testimony, Exhibit 3, at 5-6.)