5. Discussion

As applicants point out, Southwest's acquisition of Avista's South Lake Tahoe gas facilities makes sense from a corporate point of view. Avista divests itself of a geographically remote service district and concentrates on its major gas distribution operations in the states of Washington, Idaho and Oregon. Southwest acquires 18,600 new customers in a service area contiguous to its northern California service area that already has 22,000 natural gas customers.

The acquisition also makes sense from a customer point of view. Avista's customers will be served by a much larger local staff and this is likely to improve customer service and emergency response. Moreover, Southwest has more than 50 years of experience in operating natural gas distribution systems that serve 1.6 million customers in the southwestern United States, including 140,000 in California. With its larger presence in California, Southwest should be able to save ratepayers money through economies of scale and greater bargaining power in the purchase of natural gas.

ORA has done a thorough analysis of this transaction and, together with the other parties, has negotiated a settlement agreement that freezes base service gas rates for Avista customers through the year 2008. The settlement agreement also guarantees that the acquisition premium paid by Southwest will not be passed on to customers in this or any future proceeding.

We agree with ORA that it is in ratepayers' interest to permit Southwest to consolidate its natural gas purchases for the South Lake Tahoe customers with its existing northern California gas purchases, and to include the Avista service territory in Southwest's monthly purchased gas adjustment mechanism. Similarly, in the interest of uniformity, Southwest will be authorized to substitute its tariff rules for those of Avista, except for the base margin rates.

Southwest states that it will initially fund the acquisition of the South Lake Tahoe properties with working capital. The permanent financing of the acquisition will be obtained in the same manner as the funding for Southwest's utility plant capital expenditures, that is, through internally generated funds (retained earnings and depreciation) and external sources of funds (debt and equity).

Avista and Southwest issued separate press releases announcing the transaction in July 2004 and distributed to their 14 local news outlets. In addition, Avista advised all of its South Lake Tahoe customers of the proposed sale in a bill insert approved by our Public Advisor's office. No customer has objected to the proposed sale.