Exhibit 4(e)

                               GUARANTEE AGREEMENT


                                     BETWEEN

                               AVISTA CORPORATION
                                 (AS GUARANTOR)


                                       AND

                         UNION BANK OF CALIFORNIA, N.A.
                                  (AS TRUSTEE)


                                   DATED AS OF


                                ___________, 2004


                             (AVA CAPITAL TRUST III)

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                             CROSS-REFERENCE TABLE(1)

Section of Trust Indenture Act                                       Section of
of 1939, as amended                                         Guarantee Agreement
------------------------------------                        -------------------
310(a)..................................................................4.01(a)
310(b)............................................................4.01(c), 2.08
310(c).............................................................Inapplicable
311(a)..................................................................2.02(b)
311(b)..................................................................2.02(b)
311(c).............................................................Inapplicable
312(a)..................................................................2.02(a)
312(b)..................................................................2.02(b)
313........................................................................2.03
314(a).....................................................................2.04
314(b).............................................................Inapplicable
314(c).....................................................................2.05
314(d).............................................................Inapplicable
314(e).........................................................1.01, 2.05, 3.02
314(f)...............................................................2.01, 3.02
315(a)..................................................................3.01(d)
315(b).....................................................................2.07
315(c).....................................................................3.01
315(d)..................................................................3.01(d)
315(e).............................................................Inapplicable
316(a)............................................................5.04(i), 2.06
316(b).....................................................................5.03
316(c).....................................................................2.02
317(a) ............................................................Inapplicable
317(b).............................................................Inapplicable
318(a)..................................................................2.01(b)
318(b).....................................................................2.01
318(c)..................................................................2.01(a)

----------
(1)    This  Cross-Reference  Table does not  constitute  part of the  Guarantee
       Agreement and shall not affect the  interpretation of any of its terms or
       provisions.

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                                TABLE OF CONTENTS

                                                                            PAGE


                                    ARTICLE I

                                   DEFINITIONS

SECTION 1.01.    Definitions...................................................1

                                   ARTICLE II

                               TRUST INDENTURE ACT

SECTION 2.01.    Trust Indenture Act; Application..............................3

SECTION 2.02.    Lists of Holders of Securities................................4

SECTION 2.03.    Reports by the Trustee........................................4

SECTION 2.04.    Periodic Reports to Trustee...................................4

SECTION 2.05.    Evidence of Compliance with Conditions Precedent..............4

SECTION 2.06.    Events of Default; Waiver.....................................4

SECTION 2.07.    Event of Default; Notice......................................5

SECTION 2.08.    Conflicting Interests.........................................5

                                   ARTICLE III

                      POWERS, DUTIES AND RIGHTS OF TRUSTEE

SECTION 3.01.    Powers and Duties of the Trustee..............................5

SECTION 3.02.    Certain Rights of Trustee.....................................6

SECTION 3.03.    Compensation; Fees; Indemnity.................................8

                                   ARTICLE IV

                                     TRUSTEE

SECTION 4.01.    Trustee; Eligibility..........................................8

SECTION 4.02.    Appointment, Removal and Resignation of Trustee...............9

                                       ii
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                           TABLE OF CONTENTS (CONT'D)

                                                                            PAGE

                                    ARTICLE V

                                    GUARANTEE

SECTION 5.01.    Guarantee.....................................................9

SECTION 5.02.    Waiver of Notice and Demand..................................10

SECTION 5.03.    Obligations Not Affected.....................................10

SECTION 5.04.    Rights of Holders............................................10

SECTION 5.05.    Guarantee of Payment.........................................11

SECTION 5.06.    Subrogation..................................................11

SECTION 5.07.    Independent Obligations......................................11

                                   ARTICLE VI

                                  SUBORDINATION

SECTION 6.01.    Subordination................................................11

                                   ARTICLE VII

                                   TERMINATION

SECTION 7.01.    Termination..................................................12

                                  ARTICLE VIII

                                  MISCELLANEOUS

SECTION 8.01.    Successors and Assigns.......................................12

SECTION 8.02.    Amendments...................................................12

SECTION 8.03.    Notices......................................................12

SECTION 8.04.    Benefit......................................................13

SECTION 8.05.    Interpretation...............................................13

SECTION 8.06.    Governing Law................................................14

                                      iii
<PAGE>


                               GUARANTEE AGREEMENT

       This  GUARANTEE  AGREEMENT  ("Guarantee  Agreement"),  dated as of _____,
2004, between AVISTA  CORPORATION,  a Washington  corporation (the "Guarantor"),
and Union Bank of California, N.A., a California banking corporation, as trustee
(the "Trustee"), for the benefit of the Holders (as defined herein) from time to
time of the Preferred  Securities (as defined herein) and the Common  Securities
(as defined  herein) of AVA CAPITAL TRUST III, a Delaware  statutory  trust (the
"Trust").

       WHEREAS,  pursuant to an Amended and Restated  Declaration  of Trust (the
"Declaration"),  dated as of _____, 2004, among the Trustee,  the other Trustees
named  therein,  Avista  Corporation,  as Sponsor,  and the holders of undivided
beneficial  interests  in the  assets of the  Trust,  the Trust is issuing as of
_____, 2004, $_____ aggregate liquidation amount of its Flexible Trust Preferred
Securities  (the  "Preferred   Securities")   representing  preferred  undivided
beneficial  interests  in the assets of the Trust and having the terms set forth
in the Declaration;

       WHEREAS,  the  Preferred  Securities  will be issued by the Trust and the
proceeds thereof will be used to purchase the  Subordinated  Debt Securities (as
defined in the Declaration) of the Guarantor, which will be held by the Trust as
trust assets; and

       WHEREAS,   as  incentive  for  the  Holders  to  purchase  the  Preferred
Securities,  the Guarantor desires to irrevocably and unconditionally  agree, to
the extent set forth herein,  to pay to the Holders the  Guarantee  Payments (as
defined  herein) and to make certain other  payments on the terms and conditions
set forth herein.

       NOW, THEREFORE, in consideration of the payment for Common Securities and
for  Preferred  Securities  by each Holder (as defined  herein)  thereof,  which
payment the Guarantor  hereby agrees shall benefit the Guarantor,  the Guarantor
executes and delivers  this  Guarantee  Agreement for the benefit of the Holders
from time to time of the Common Securities (as defined herein) and the Preferred
Securities.

                                   ARTICLE I

                                   DEFINITIONS

       SECTION 1.01. DEFINITIONS. As used in this Guarantee Agreement, the terms
set forth below shall, unless the context otherwise requires, have the following
meanings.  Capitalized or otherwise defined terms used but not otherwise defined
herein shall have the meanings  assigned to such terms in the  Declaration as in
effect on the date hereof.

       "Affiliate"  of any specified  Person means any other Person  directly or
indirectly  controlling  or  controlled  by or under  direct or indirect  common
control  with  such  specified  Person.  For the  purposes  of this  definition,
"control"  when used with  respect to any  specified  Person  means the power to
direct the  management  and  policies of such  Person,  directly or  indirectly,
whether  through the ownership of voting  securities,  by contract or otherwise;
and the terms  "controlling" and "controlled"  have meanings  correlative to the
foregoing.

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       "Common  Securities" means the securities  representing  common undivided
beneficial interests in the assets of the Trust.

       "Distributions"  means amounts payable in respect of the Trust Securities
as provided in the Declaration.

       "Event of Default" means a failure by the Guarantor to perform any of its
payment  obligations  under this  Guarantee  Agreement  or to perform  any other
obligations  under this Guarantee  Agreement if such default remains  unremedied
for 30 days.

       "Guarantee  Payments" shall mean the following payments or distributions,
without  duplication,  with respect to the Common  Securities  and the Preferred
Securities, to the extent not paid or made by or on behalf of the Trust: (i) any
accrued  and unpaid  distributions  that are  required to be paid on such Common
Securities  and  Preferred  Securities to the extent the Trust has funds on hand
available  therefor to make such payment;  (ii) the redemption price,  including
all accrued and unpaid  distributions to the date of redemption (the "Redemption
Price"),  with respect to the Common Securities and Preferred  Securities called
for  redemption  by the  Trust to the  extent  that the  Trust has funds on hand
available therefor  sufficient to make such payment;  and (iii) upon a voluntary
or involuntary  dissolution,  winding-up or liquidation of the Trust (other than
in connection  with the  distribution  of  Subordinated  Debt  Securities to the
holders  of  Trust  Securities  or  the  redemption  of  all  of  the  Preferred
Securities),  the lesser of (a) the aggregate of the liquidation  amount and all
accumulated and unpaid  distributions on the Common Securities and the Preferred
Securities  to the date of  payment,  to the  extent the Trust has funds on hand
available  therefor,  and  (b) the  amount  of  assets  of the  Trust  remaining
available for  distribution  to Holders in  liquidation  of the Trust (in either
case, the "Liquidation Distribution").

       "Holder" shall mean any holder, as registered on the books and records of
the Trust, of any Common Securities and Preferred Securities; provided, however,
that in determining whether the holders of the requisite percentage of Preferred
Securities have given any request, notice, consent or waiver hereunder, "Holder"
shall not include the Guarantor or any Affiliate of the Guarantor.

       "Indenture"  means the  Indenture  dated as of _____,  2004,  between the
Guarantor,  as issuer of the  Subordinated  Debt  Securities,  and Union Bank of
California,  N.A.,  as  trustee,  as  the  same  may  be  modified,  amended  or
supplemented in accordance with the applicable provisions thereof.

       "Majority in liquidation amount of Preferred  Securities" means a vote by
Holder(s) of Preferred  Securities,  voting  separately as a class, of more than
50% of the  liquidation  amount of all Preferred  Securities  outstanding at the
time of determination.

       "Officers' Certificate" means a certificate signed by the Chairman of the
Board,  the President or a Vice  President,  and by the Treasurer,  an Assistant
Treasurer,  the  Secretary  or an Assistant  Secretary,  of the  Guarantor,  and
delivered to the Trustee.  Any Officers'  Certificate  delivered with respect to
compliance with a condition or covenant provided for in this Guarantee Agreement
shall include:

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<PAGE>


              (a)    a  statement  that  each  officer   signing  the  Officers'
       Certificate  has read  the  covenant  or  condition  and the  definitions
       relating thereto;

              (b)    a  brief   statement   of  the  nature  and  scope  of  the
       examination or investigation  undertaken by each officer in rendering the
       Officers' Certificate;

              (c)    a   statement   that  each  such   officer  has  made  such
       examination or investigation as, in such officer's opinion,  is necessary
       to enable such  officer to express an  informed  opinion as to whether or
       not such covenant or condition has been complied with; and

              (d)    a  statement  as to  whether,  in the  opinion of each such
       officer, such condition or covenant has been complied with.

       "Person"  means  any  individual,   corporation,   partnership,   limited
liability  company,  joint  venture,  trust,   unincorporated   organization  or
government or any agency or political subdivision thereof.

       "Responsible  Officer"  means,  with  respect  to the  Trustee,  any vice
president, any assistant vice president, the secretary, any assistant secretary,
the treasurer,  any assistant treasurer, any senior trust officer, trust officer
or  assistant  trust  officer  or  any  other  officer  of the  Corporate  Trust
Department  of the Trustee  customarily  performing  functions  similar to those
performed by any of the above designated  officers and also means,  with respect
to a particular corporate trust matter, any other officer to whom such matter is
referred  because  of that  officer's  knowledge  of and  familiarity  with  the
particular subject.

       "Successor   Trustee"   means  a   successor   Trustee   possessing   the
qualifications to act as Trustee under Section 4.01.

       "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.

       "Trust Security" means any one of the Common  Securities or the Preferred
Securities.

       "Trustee" means Union Bank of California,  N.A. until a Successor Trustee
has been  appointed and has accepted such  appointment  pursuant to the terms of
this Guarantee Agreement and thereafter means each such Successor Trustee.

                                   ARTICLE II

                               TRUST INDENTURE ACT

       SECTION 2.01. TRUST INDENTURE ACT; APPLICATION.

       (a)    This Guarantee Agreement is subject to the provisions of the Trust
Indenture  Act that are  required  to be part of this  Guarantee  Agreement  and
shall, to the extent applicable, be governed by such provisions; and

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<PAGE>


       (b)    If and  to  the  extent  that  any  provision  of  this  Guarantee
Agreement limits, qualifies or conflicts with the duties imposed by Sections 310
to 317,  inclusive,  of the Trust  Indenture  Act,  such  imposed  duties  shall
control.

       SECTION 2.02. LISTS OF HOLDERS OF SECURITIES.

       (a)    The  Guarantor  shall  furnish  or  cause to be  furnished  to the
Trustee (a)  semiannually,  not later than _____ and _____ in each year, a list,
in such form as the Trustee may reasonably  require,  of the names and addresses
of the Holders  ("List of  Holders") as of a date not more than 15 days prior to
the time such list is furnished,  and (b) at such other times as the Trustee may
request in  writing,  within 30 days after the receipt by the  Guarantor  of any
such request,  a List of Holders as of a date not more than 15 days prior to the
time such list is furnished; provided that, the Guarantor shall not be obligated
to provide  such List of Holders at any time the List of Holders does not differ
from the most recent List of Holders given to the Trustee by the Guarantor or at
any time the Trustee is the  Securities  Registrar  under the  Declaration.  The
Trustee may destroy any List of Holders  previously  given to it on receipt of a
new List of Holders.

       (b)    The Trustee  shall  comply  with its  obligations  under  Sections
311(a), 311(b) and 312(b) of the Trust Indenture Act.

       SECTION 2.03. REPORTS BY THE TRUSTEE.  Within 60 days after _____ of each
year  commencing  _____,  2004,  the Trustee shall provide to the Holders of the
Preferred Securities such reports as are required by Section 313(a) of the Trust
Indenture Act, if any, in the form and in the manner  provided by Section 313 of
the  Trust  Indenture  Act.  The  Trustee  shall  also  comply  with  the  other
requirements of Section 313 of the Trust Indenture Act.

       SECTION 2.04. PERIODIC REPORTS TO TRUSTEE. The Guarantor shall provide to
the Trustee such  documents,  reports and information as required by Section 314
of the Trust  Indenture Act (if any) in the form, in the manner and at the times
required by Section 314 of the Trust  Indenture Act, and shall  provide,  within
120 days after the end of each of its fiscal years,  the compliance  certificate
required by Section  314(a)(4) of the Trust Indenture Act in the form and in the
manner  required by such  Section.  Delivery of such  reports,  information  and
documents to the Trustee is for  informational  purposes  only and the Trustee's
receipt  of  such  reports,  information  and  documents  shall  not  constitute
constructive  notice of any information  contained  therein or determinable from
information contained therein.

       SECTION  2.05.  EVIDENCE OF COMPLIANCE  WITH  CONDITIONS  PRECEDENT.  The
Guarantor  shall  provide to the Trustee such  evidence of  compliance  with any
conditions  precedent,  if  any,  provided  for  in  this  Guarantee  Agreement,
including an Officers'  Certificate and an opinion of counsel that relate to any
of the  matters  set forth in Section  314(c) of the Trust  Indenture  Act.  Any
certificate  or opinion  required to be given by an officer  pursuant to Section
314(c)(1) may be given in the form of an Officers' Certificate.

       SECTION  2.06.  EVENTS OF DEFAULT;  WAIVER.  The Holders of a Majority in
liquidation amount of Preferred Securities may, by vote, on behalf of all of the
Holders, waive any past Event of Default and its consequences. Upon such waiver,
any such Event of Default shall cease

                                       4
<PAGE>


to exist,  and any Event of Default  arising  therefrom  shall be deemed to have
been cured,  for every purpose of this Guarantee  Agreement,  but no such waiver
shall extend to any  subsequent  or other  default or Event of Default or impair
any right consequent thereon.

       SECTION 2.07. EVENT OF DEFAULT; NOTICE.

       (a)    The Trustee shall, within 90 days after the occurrence of an Event
of Default,  transmit by mail,  first class  postage  prepaid,  to the  Holders,
notices of all Events of Default  actually  known to the  Trustee,  unless  such
defaults  have been cured  before the giving of such notice,  provided  that the
Trustee  shall be  protected  in  withholding  such notice if and so long as the
board of directors,  the executive committee,  or a trust committee of directors
and/or  Responsible  Officers of the Trustee in good faith  determines  that the
withholding of such notice is in the interests of the Holders.

       (b)    The Trustee shall not be deemed to have  knowledge of any Event of
Default unless the Trustee shall have received written notice,  or a Responsible
Officer charged with the  administration  of the Declaration shall have obtained
written notice, of such Event of Default.

       SECTION 2.08. CONFLICTING  INTERESTS.  The Declaration shall be deemed to
be specifically described in this Guarantee Agreement for the purposes of clause
(i) of the first proviso contained in Section 310(b) of the Trust Indenture Act.

                                  ARTICLE III

                      POWERS, DUTIES AND RIGHTS OF TRUSTEE

       SECTION 3.01. POWERS AND DUTIES OF THE TRUSTEE.

       (a)    This  Guarantee  Agreement  shall be held by the  Trustee  for the
benefit of the  Holders,  and the  Trustee  shall not  transfer  this  Guarantee
Agreement to any Person,  except the Trustee shall assign rights  hereunder to a
Holder to the extent such  assignment  is  necessary to exercise  such  Holder's
rights  pursuant to Section 5.04 or to a Successor  Trustee upon  acceptance  by
such  Successor  Trustee of its  appointment  to act as Successor  Trustee.  The
right,  title  and  interest  of the  Trustee  shall  automatically  vest in any
Successor  Trustee,  and such vesting and  cessation of title shall be effective
whether or not conveyancing  documents have been executed and delivered pursuant
to the appointment of such Successor Trustee.

       (b)    If an Event of Default has occurred and is continuing, the Trustee
shall enforce this Guarantee Agreement for the benefit of the Holders.

       (c)    The  Trustee,  before the  occurrence  of any Event of Default and
after the curing or waiving  of all  Events of Default  that may have  occurred,
shall  undertake  to perform only such duties as are  specifically  set forth in
this  Guarantee  Agreement,  and no  implied  covenants  shall be read into this
Guarantee  Agreement  against  the  Trustee.  In case an  Event of  Default  has
occurred  (that has not been  cured or waived  pursuant  to Section  2.06),  the
Trustee  shall  exercise  such of the  rights  and  powers  vested in it by this
Guarantee  Agreement,  and use the same degree of care and skill in its exercise
thereof,  as a prudent person would exercise or use under the  circumstances  in
the conduct of his or her own affairs.

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<PAGE>


       (d)    No provision  of this  Guarantee  Agreement  shall be construed to
relieve  the  Trustee  from  liability  for its own  negligent  action,  its own
negligent failure to act, or its own willful misconduct, except that:

              (i)    prior to the  occurrence  of any Event of Default and after
       the  curing  or  waiving  of all such  Events  of  Default  that may have
       occurred:

                     (A)    the duties and  obligations  of the Trustee shall be
              determined  solely by the  express  provisions  of this  Guarantee
              Agreement,  and the  Trustee  shall not be liable  except  for the
              performance of such duties and obligations as are specifically set
              forth in this Guarantee Agreement; and

                     (B)    in the  absence  of bad  faith  on the  part  of the
              Trustee, the Trustee may conclusively rely, as to the truth of the
              statements and the correctness of the opinions  expressed therein,
              upon any  certificates  or opinions  furnished  to the Trustee and
              conforming to the requirements of this Guarantee Agreement; but in
              the  case  of  any  such  certificates  or  opinions  that  by any
              provision hereof are specifically  required to be furnished to the
              Trustee,  the Trustee shall be under a duty to examine the same to
              determine  whether or not they conform to the requirements of this
              Guarantee Agreement;

              (ii)   the  Trustee  shall not be liable for any error of judgment
       made in good faith by a  Responsible  Officer of the  Trustee,  unless it
       shall be proved  that the  Trustee  was  negligent  in  ascertaining  the
       pertinent facts upon which such judgment was made;

              (iii)  the Trustee  shall not be liable with respect to any action
       taken or omitted to be taken by it in good faith in  accordance  with the
       direction  of the  Holders of a  Majority  in  liquidation  amount of the
       Preferred Securities relating to the time, method and place of conducting
       any proceeding for any remedy available to the Trustee, or exercising any
       trust or power conferred upon the Trustee under this Guarantee Agreement;
       and

              (iv)   no provision of this Guarantee  Agreement shall require the
       Trustee  to  expend  or risk its own funds or  otherwise  incur  personal
       financial  liability  in the  performance  of any of its duties or in the
       exercise  of any of its  rights or  powers,  if the  Trustee  shall  have
       reasonable  grounds for  believing  that the  repayment  of such funds or
       liability  is not  reasonably  assured  to it  under  the  terms  of this
       Guarantee  Agreement or adequate indemnity against such risk or liability
       is not reasonably assured to it.

       SECTION 3.02. CERTAIN RIGHTS OF TRUSTEE.

       (a)    Subject to the provisions of Section 3.01:

              (i)    the  Trustee  may  conclusively  rely  and  shall  be fully
       protected  in acting  or  refraining  from  acting  upon any  resolution,
       certificate,  statement,  instrument,  opinion,  report, notice, request,
       direction,  consent,  order,  bond,  debenture,  note,  other evidence of
       indebtedness or other paper or document  believed by it to be genuine and
       to have been signed, sent or presented by the proper party or parties;

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<PAGE>


              (ii)   any direction or act of the Guarantor  contemplated by this
       Guarantee  Agreement  shall be  sufficiently  evidenced  by an  Officers'
       Certificate;

              (iii)  whenever,   in  the   administration   of  this   Guarantee
       Agreement, the Trustee shall deem it desirable that a matter be proved or
       established  before taking,  suffering or omitting any action  hereunder,
       the Trustee  (unless other  evidence is herein  specifically  prescribed)
       may,  in the  absence of bad faith on its part,  request and rely upon an
       Officers'  Certificate  which,  upon  receipt of such  request,  shall be
       promptly delivered by the Guarantor;

              (iv)   the Trustee may consult  with  counsel or other  experts of
       its choice,  and the written  advice or opinion of such  counsel or other
       experts  shall be full  and  complete  authorization  and  protection  in
       respect of any action taken,  suffered or omitted by it hereunder in good
       faith and in accordance with such advice or opinion;  such counsel may be
       counsel to the Guarantor or any of its  Affiliates and may include any of
       its  employees;  the  Trustee  shall  have the  right at any time to seek
       instructions  concerning the  administration of this Guarantee  Agreement
       from any court of competent jurisdiction;

              (v)    the Trustee shall be under no obligation to exercise any of
       the  rights or powers  vested in it by this  Guarantee  Agreement  at the
       request  or  direction  of any  Holder,  unless  such  Holder  shall have
       provided to the Trustee such  adequate  security  and  indemnity as would
       satisfy a reasonable  person in the  position of the Trustee  against the
       costs,  expenses (including attorneys' fees and expenses) and liabilities
       that might be incurred by it in complying with such request or direction,
       including  such  reasonable  advances as may be requested by the Trustee;
       provided that nothing contained in this Section 3.02(a)(v) shall be taken
       to relieve the Trustee,  upon the  occurrence of an Event of Default,  of
       its  obligation  to exercise  the rights and powers  vested in it by this
       Guarantee Agreement;

              (vi)   the  Trustee  shall not be bound to make any  investigation
       into  the  facts  or  matters  stated  in  any  resolution,  certificate,
       statement,  instrument,  opinion,  report,  notice,  request,  direction,
       consent, order, bond, debenture,  note, other evidence of indebtedness or
       other paper or document,  but the Trustee,  in its  discretion,  may make
       such further  inquiry or  investigation  into such facts or matters as it
       may see fit;

              (vii)  the  Trustee  may  execute  any of  the  trusts  or  powers
       hereunder  or  perform  any duties  hereunder  either  directly  or by or
       through agents or attorneys, and the Trustee shall not be responsible for
       any  misconduct  or  negligence  on the  part of any  agent  or  attorney
       appointed with due care by it hereunder;

              (viii) whenever in the administration of this Guarantee  Agreement
       the Trustee shall deem it desirable to receive  instructions with respect
       to enforcing  any remedy or right or taking any other  action  hereunder,
       the Trustee  (i) may  request  instructions  from the  Holders,  (ii) may
       refrain from  enforcing  such remedy or right or taking such other action
       until such  instructions  are  received,  and (iii) shall be protected in
       acting in accordance with such instructions; and

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<PAGE>


              (ix)   the  rights,   privileges,   protections,   immunities  and
       benefits given to the Trustee, including , without limitation, its rights
       to be  indemnified,  are  extended to, and shall be  enforceable  by, the
       Trustee  in  each of its  respective  capacities  hereunder,  and to each
       agent, custodian and other Person employed to act hereunder.

       (b)    No provision of this Guarantee Agreement shall be deemed to impose
any duty or obligation on the Trustee to perform any act or acts or exercise any
right, power, duty or obligation  conferred or imposed on it in any jurisdiction
in which it shall be illegal,  or in which the Trustee shall be  unqualified  or
incompetent in accordance  with  applicable law, to perform any such act or acts
or to exercise any such right, power, duty or obligation. No permissive power or
authority available to the Trustee shall be construed to be a duty.

       SECTION 3.03. COMPENSATION; FEES; INDEMNITY. The Guarantor agrees:

       (a)    to pay to the Trustee  from time to time  reasonable  compensation
for all services rendered by the Trustee hereunder (which compensation shall not
be limited by any provision of law in regard to the compensation of a trustee of
an express trust);

       (b)    except as otherwise  expressly  provided herein,  to reimburse the
Trustee upon request for all  reasonable  expenses,  disbursements  and advances
incurred  or made by the  Trustee  in  accordance  with  any  provision  of this
Guarantee Agreement (including the reasonable  compensation and the expenses and
disbursements of its agents and counsel), except any such expense,  disbursement
or advance as may be attributable to its negligence or bad faith; and

       (c)    to indemnify  the Trustee  for,  and to hold the Trustee  harmless
against, any and all loss, damage, claims, liability or expense incurred without
negligence or bad faith on its part,  arising out of or in  connection  with the
acceptance or  administration of this Guarantee  Agreement,  including the costs
and expenses of defending  itself  against any claim or liability in  connection
with the exercise or performance of any of its powers or duties hereunder.

       The provisions of this Section 3.03 shall survive the termination of this
Guarantee Agreement.

                                   ARTICLE IV

                                     TRUSTEE

       SECTION 4.01. TRUSTEE; ELIGIBILITY.

       (a)    There shall at all times be a Trustee which shall:

              (i)    not be an Affiliate of the Guarantor; and

              (ii)   be a  corporation  organized and doing  business  under the
       laws of the United States of America or any State or Territory thereof or
       of the District of Columbia,  or a corporation or Person permitted by the
       Securities  and Exchange  Commission to act as an  institutional  trustee
       under the Trust  Indenture  Act,  authorized  under such laws to exercise
       corporate trust powers, having a combined capital and surplus of at least
       50 million U.S.

                                       8
<PAGE>


       dollars  ($50,000,000),  and subject to  supervision  or  examination  by
       Federal,  State,  Territorial or District of Columbia authority.  If such
       corporation publishes reports of condition at least annually, pursuant to
       law or to the  requirements  of the  supervising  or examining  authority
       referred to above,  then,  for the purposes of this Section  4.01(a)(ii),
       the combined capital and surplus of such  corporation  shall be deemed to
       be its  combined  capital  and  surplus  as set forth in its most  recent
       report of condition so published.

       (b)    If at any time the  Trustee  shall  cease to be eligible to so act
under Section 4.01(a),  the Trustee shall  immediately  resign in the manner and
with the effect set out in Section 4.02(c).

       (c)    If the Trustee has or shall  acquire  any  "conflicting  interest"
within the meaning of Section 310(b) of the Trust Indenture Act, the Trustee and
Guarantor  shall in all respects comply with the provisions of Section 310(b) of
the  Trust  Indenture  Act,  subject  to the  rights  of the  Trustee  under the
penultimate paragraph thereof.

       SECTION 4.02. APPOINTMENT, REMOVAL AND RESIGNATION OF TRUSTEE.

       (a)    Subject  to Section  4.02(b),  the  Trustee  may be  appointed  or
removed without cause at any time by the Guarantor.

       (b)    The Trustee  shall not be removed  until a  Successor  Trustee has
been appointed and has accepted such appointment by written instrument  executed
by such Successor Trustee and delivered to the Guarantor.

       (c)    The  Trustee  appointed  to  office  shall  hold  office  until  a
Successor Trustee shall have been appointed or until its removal or resignation.
The  Trustee  may  resign  from  office  (without  need for prior or  subsequent
accounting) by an instrument in writing executed by the Trustee and delivered to
the Guarantor, which resignation shall not take effect until a Successor Trustee
has been  appointed and has accepted such  appointment  by instrument in writing
executed  by such  Successor  Trustee and  delivered  to the  Guarantor  and the
resigning Trustee.

       (d)    If no Successor  Trustee  shall have been  appointed  and accepted
appointment  as provided in this Section  4.02 within 60 days after  delivery to
the  Guarantor  of an  instrument  of  resignation,  the  resigning  Trustee may
petition  any court of competent  jurisdiction  for  appointment  of a Successor
Trustee. Such court may thereupon,  after prescribing such notice, if any, as it
may deem proper, appoint a Successor Trustee.

                                   ARTICLE V

                                    GUARANTEE

       SECTION 5.01.  GUARANTEE.  The Guarantor  irrevocably and unconditionally
agrees to pay in full to the Holders the Guarantee Payments (without duplication
of  amounts  theretofore  paid by or on behalf of the  Trust),  as and when due,
regardless of any defense,  right of set-off or counterclaim which the Guarantor
or the Trust may have or assert  against any  Person,  other than the defense of
payment. The Guarantor's obligation to make a Guarantee Payment may be satisfied
by direct payment of the required  amounts by the Guarantor to the Holders or by
causing the Trust to pay such amounts to the Holders.

                                       9
<PAGE>


       SECTION 5.02.  WAIVER OF NOTICE AND DEMAND.  The Guarantor  hereby waives
notice of acceptance of this  Guarantee  Agreement and of any liability to which
it applies or may apply, presentment, demand for payment, any right to require a
proceeding first against the Trust or any other Person before proceeding against
the  Guarantor,  protest,  notice of nonpayment,  notice of dishonor,  notice of
redemption and all other notices and demands.

       SECTION 5.03.  OBLIGATIONS NOT AFFECTED.  The obligation of the Guarantor
to make the Guarantee Payments under this Guarantee Agreement shall in no way be
affected or impaired by reason of the happening  from time to time of any of the
following:

       (a)    the release or waiver,  by operation of law or  otherwise,  of the
performance  or  observance  by the Trust of any  express or implied  agreement,
covenant, term or condition relating to the Preferred Securities to be performed
or observed by the Trust;

       (b)    the  extension  of time for the payment by the Trust of all or any
portion of the Distributions,  Redemption Price, Liquidation Distribution or any
other sums payable under the terms of the Preferred  Securities or the extension
of time for the performance of any other obligation under, arising out of, or in
connection with, the Preferred  Securities  (other than an extension of time for
payment of Distributions,  Redemption Price,  Liquidation  Distribution or other
sum payable that results from the  extension of any interest  payment  period on
the Subordinated Debt Securities permitted by the Indenture);

       (c)    any failure,  omission,  delay or lack of diligence on the part of
the Holders to enforce, assert or exercise any right, privilege, power or remedy
conferred on the Holders pursuant to the terms of the Preferred  Securities,  or
any action on the part of the Trust  granting  indulgence  or  extension  of any
kind;

       (d)    the voluntary or involuntary liquidation, dissolution, sale of any
collateral, receivership,  insolvency, bankruptcy, assignment for the benefit of
creditors, reorganization,  arrangement, composition or readjustment of debt of,
or other similar  proceedings  affecting,  the Trust or any of the assets of the
Trust;

       (e)    any  invalidity  of, or defect or  deficiency  in,  the  Preferred
Securities;

       (f)    the settlement or compromise of any obligation  guaranteed  hereby
or hereby incurred; or

       (g)    any other circumstance  whatsoever that might otherwise constitute
a legal or equitable discharge or defense of a guarantor, it being the intent of
this Section  5.03 that the  obligations  of the  Guarantor  hereunder  shall be
absolute and unconditional under any and all circumstances.

       There shall be no  obligation of the Holders to give notice to, or obtain
consent of, the Guarantor with respect to the happening of any of the foregoing.

       SECTION 5.04.  RIGHTS OF HOLDERS.  The Guarantor  expressly  acknowledges
that: (i) this Guarantee Agreement will be deposited with the Trustee to be held
for the benefit of the  Holders;  (ii) the Trustee has the right to enforce this
Guarantee Agreement on behalf of the

                                       10
<PAGE>


Holders;  (iii) the Holders of a Majority in liquidation amount of the Preferred
Securities have the right to direct the time, method and place of conducting any
proceeding for any remedy  available to the Trustee in respect of this Guarantee
Agreement or exercising any trust or power conferred upon the Trustee under this
Guarantee  Agreement;  and (iv) any  Holder  may  institute  a legal  proceeding
directly  against  the  Guarantor  to enforce  its rights  under this  Guarantee
Agreement, without first instituting a legal proceeding against or requesting or
directing  that  action be taken by the  Trustee or any other  Person;  it being
understood and intended that no one or more of such Holders shall have any right
in any manner  whatsoever by virtue of, or by availing of, any provision of this
Guarantee  Agreement to affect,  disturb or prejudice the rights of any other of
such Holders or to obtain or to seek to obtain  priority or preference  over any
other of such  Holders or to enforce any right under this  Guarantee  Agreement,
except in the manner  herein  provided and for the equal and ratable  benefit of
all of such Holders.

       SECTION 5.05.  GUARANTEE OF PAYMENT.  This Guarantee  Agreement creates a
guarantee of payment and not of collection. This Guarantee Agreement will not be
discharged  except  by  payment  of the  Guarantee  Payments  in  full  (without
duplication) or upon the  distribution  of  Subordinated  Debt Securities to the
Holders in exchange for all of the Preferred Securities.

       SECTION 5.06.  SUBROGATION.  The Guarantor shall be subrogated to all (if
any) rights of the Holders  against the Trust in respect of any amounts  paid to
the Holders by the Guarantor under this Guarantee Agreement;  provided, however,
that the  Guarantor  shall not  (except  to the  extent  required  by  mandatory
provisions  of law) be entitled to enforce or exercise  any rights  which it may
acquire  by  way  of  subrogation  or  any  indemnity,  reimbursement  or  other
agreement,  in all cases as a result of payment under this Guarantee  Agreement,
if, at the time of any such payment,  any amounts of Guarantee  Payments are due
and unpaid under this  Guarantee  Agreement.  If any amount shall be paid to the
Guarantor in violation of the preceding  sentence,  the Guarantor agrees to hold
such amount in trust for the Holders and to pay over such amount to the Holders.

       SECTION 5.07.  INDEPENDENT  OBLIGATIONS.  The Guarantor acknowledges that
its  obligations  hereunder are independent of the obligations of the Trust with
respect to the Preferred  Securities  and that the Guarantor  shall be liable as
principal and as debtor  hereunder to make  Guarantee  Payments  pursuant to the
terms of this Guarantee  Agreement  notwithstanding  the occurrence of any event
referred to in subsections (a) through (g), inclusive, of Section 5.03 hereof.

                                   ARTICLE VI

                                  SUBORDINATION

       SECTION 6.01. SUBORDINATION.  This Guarantee Agreement will constitute an
unsecured  obligation of the Guarantor and will rank (i)  subordinate and junior
in right of payment to all other  liabilities  of the  Guarantor,  including the
Subordinated Debt Securities,  except those obligations or liabilities made pari
passu or  subordinate  by their  terms;  (ii) pari  passu  with the most  senior
preferred or preference  stock now or hereafter issued by the Guarantor and with
any guarantee  now or hereafter  entered into by the Guarantor in respect of any
preferred or

                                       11
<PAGE>


preference securities of any Affiliate of the Guarantor; and (iii) senior to all
common stock of the Guarantor.

                                  ARTICLE VII

                                   TERMINATION

       SECTION 7.01.  TERMINATION.  This Guarantee Agreement shall terminate and
be of no further force and effect upon: (i) full payment of the Redemption Price
of  all  Preferred  Securities;  (ii)  the  distribution  of  Subordinated  Debt
Securities  to the Holders in exchange for all of the Preferred  Securities;  or
(iii) full payment of the amounts  payable in  accordance  with the  Declaration
upon  liquidation of the Trust.  Notwithstanding  the foregoing,  this Guarantee
Agreement will continue to be effective or will be  reinstated,  as the case may
be, if at any time any Holder must restore payment of any sums paid with respect
to Preferred Securities or under this Guarantee Agreement.

                                  ARTICLE VIII

                                  MISCELLANEOUS

       SECTION 8.01.  SUCCESSORS  AND ASSIGNS.  All  guarantees  and  agreements
contained  in this  Guarantee  Agreement  shall  bind the  successors,  assigns,
receivers,  trustees and representatives of the Guarantor and shall inure to the
benefit of the Holders of the Preferred  Securities then outstanding.  Except in
connection  with  a  consolidation,   merger,  conveyance,  transfer,  or  lease
involving the Guarantor  that is permitted  under Article Ten of the  Indenture,
the Guarantor shall not assign its obligations hereunder.

       SECTION 8.02. AMENDMENTS. Except with respect to any changes which do not
materially  adversely  affect the rights of Holders (in which case no consent of
Holders will be required), this Guarantee Agreement may only be amended with the
prior  approval  of the  Holders  of a  Majority  in  liquidation  amount of the
Preferred Securities. The provisions of Article VI of the Declaration concerning
meetings of Holders shall apply to the giving of such approval.

       SECTION  8.03.  NOTICES.  Any  notice,  request  or  other  communication
required or permitted to be given hereunder shall be in writing,  duly signed by
the party giving such notice, and delivered, telecopied or mailed by first class
mail as follows:

       (a)    if given to the Guarantor,  to the address set forth below or such
other  address  as the  Guarantor  may give  notice  of to the  Trustee  and the
Holders:

                  Avista Corporation
                  1411 East Mission Avenue
                  Spokane, Washington 99202
                  Facsimile No.: [(509) 482-4879]
                  Attn:  [Treasurer]

                                       12
<PAGE>


       (b)    if given to the Trust,  in care of the Trustee,  or to the Trustee
at the Trust's (and the Trustee's) address set forth below or such other address
as the Trustee on behalf of the Trust may give notice to the Holders:

                  AVA Capital Trust III c/o Union Bank of California, N.A.
                  --------------------
                  ------, --  -----
                  Facsimile No.:  (___) ___-____
                  Attn:  Corporate Trust Administration

       (c)    if given to any Holder,  at the address set forth on the books and
records of the Trust.

       All notices hereunder shall be deemed to have been given when received in
person,  telecopied  with  receipt  confirmed,  or mailed by first  class  mail,
postage  prepaid,  except that if a notice or other document is refused delivery
or cannot be  delivered  because  of a changed  address  of which no notice  was
given,  such notice or other  document shall be deemed to have been delivered on
the date of such refusal or inability to deliver.

       SECTION 8.04. BENEFIT. This Guarantee Agreement is solely for the benefit
of the Holders and, subject to Section 3.01(a),  is not separately  transferable
from the Common Securities and the Preferred Securities.

       SECTION 8.05.  INTERPRETATION.  In this Guarantee  Agreement,  unless the
context otherwise requires:

       (a)    capitalized terms used in this Guarantee Agreement but not defined
in the preamble hereto have the respective  meanings assigned to them in Section
1.01;

       (b)    a term defined  anywhere in this Guarantee  Agreement has the same
meaning throughout;

       (c)    all  references to "the  Guarantee  Agreement" or "this  Guarantee
Agreement" are to this Guarantee Agreement as modified,  supplemented or amended
from time to time;

       (d)    all  references  in  this  Guarantee  Agreement  to  Articles  and
Sections  are to  Articles  and  Sections  of this  Guarantee  Agreement  unless
otherwise specified;

       (e)    a term  defined in the Trust  Indenture  Act has the same  meaning
when used in this Guarantee Agreement unless otherwise defined in this Guarantee
Agreement or unless the context otherwise requires;

       (f)    a reference  to the  singular  includes the plural and vice versa;
and

       (g)    the  masculine,  feminine  or neuter  genders  used  herein  shall
include the masculine, feminine and neuter genders.

                                       13
<PAGE>


       SECTION 8.06.  GOVERNING LAW. THIS GUARANTEE  AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED  AND  INTERPRETED  IN ACCORDANCE  WITH THE INTERNAL LAWS OF THE
STATE OF NEW YORK. THE GUARANTOR HEREBY IRREVOCABLY  SUBMITS TO THE JURISDICTION
OF THE UNITED STATES  DISTRICT  COURT FOR THE SOUTHERN  DISTRICT OF NEW YORK AND
ANY COURT IN THE STATE OF NEW YORK LOCATED IN THE CITY AND COUNTY OF NEW YORK IN
ANY  ACTION,  SUIT  OR  PROCEEDING  BROUGHT  AGAINST  IT  AND  RELATED  TO OR IN
CONNECTION  WITH  THIS  GUARANTEE  AGREEMENT  OR THE  TRANSACTIONS  CONTEMPLATED
THEREBY,  AND TO THE EXTENT  PERMITTED BY APPLICABLE  LAW, THE GUARANTOR  HEREBY
WAIVES AND AGREES NOT TO ASSERT BY WAY OF MOTION,  AS A DEFENSE OR  OTHERWISE IN
ANY SUCH SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT
TO THE  JURISDICTION  OF SUCH COURTS,  THAT THE SUIT,  ACTION OR  PROCEEDING  IS
BROUGHT  IN AN  INCONVENIENT  FORUM,  THAT THE  VENUE  OF THE  SUIT,  ACTION  OR
PROCEEDING IS IMPROPER,  OR THAT THIS GUARANTEE AGREEMENT OR ANY DOCUMENT OR ANY
INSTRUMENT  REFERRED TO HEREIN OR THE SUBJECT MATTER HEREOF MAY NOT BE LITIGATED
IN OR BY SUCH COURTS.  THE GUARANTOR  AGREES THAT SERVICE OF PROCESS MAY BE MADE
UPON IT BY CERTIFIED OR REGISTERED  MAIL TO THE ADDRESS FOR NOTICES SET FORTH IN
THIS GUARANTEE AGREEMENT OR ANY METHOD AUTHORIZED BY THE LAWS OF NEW YORK.

       This  instrument may be executed in any number of  counterparts,  each of
which so executed shall be deemed to be an original,  but all such  counterparts
shall together constitute but one and the same instrument.

                                       14
<PAGE>


       THIS  GUARANTEE  AGREEMENT is executed as of the day and year first above
written.

                                        AVISTA CORPORATION



                                        By:
                                             -----------------------------------
                                             Name:
                                             Title:



                                        UNION BANK OF CALIFORNIA, N.A.



                                        By:
                                             -----------------------------------
                                             Name:
                                             Title: