20061030_1714.pdf

DECISION MEMORANDUM
TO:CO MMISSI 0 NER KJELLAND ER
COMMISSIONER SMITH
COMMISSIONER HANSEN
COMMISSION SECRETARY
COMMISSION STAFF
LEGAL
FROM:DONOVAN E. WALKER
DATE:OCTOBER 25, 2006
SUBJECT:A VISTA'S 2006 PURCHASED GAS COST ADJUSTMENT (PGA),
CASE NO. A VU-06-
On September 14, 2006, A vista Utilities filed its annual Purchased Gas Cost
Adjustment (PGA) Application with the Commission requesting authority to place new rate
schedules in effect as of November 1 , 2006 that would increase its annual natural gas revenues
by approximately $2.7 million (3.2%). On September 29, 2006, Avista filed a revised PGA
Application and tariff sheets to revise the Company s proposed weighted average cost of gas
(W ACOG) to reflect a further reduction in wholesale natural gas prices. The revised Application
proposes to reduce the Company s estimated annual natural gas revenues by approximately $2.
million (3.4%).
The Commission issued a Notice of Application and Modified Procedure on October
, 2006 , establishing a comment/protest deadline of October 24, 2006. Order No. 30141. The
Commission received comments from seven customers of Avista as well as Commission Staff.
THE REVISED APPLICATION
According to Avista s Application if the requested price decrease is approved the
Company s annual revenue will decrease by approximately $2.8 million or about 3.4%. The
average residential or small commercial customer using 65 therms per month would see an
estimated decrease of$2.70 per month (3.4%).
A vista states that it purchases natural gas for customer usage and transports this gas
over various pipelines for delivery to customers. The Company defers the effect of timing
differences due to implementation of rate changes and differences between the Company s actual
DECISION MEMORANDUM
W ACOG purchased and the W ACOG embedded in rates.A vista also defers the revenue
received from the release of its storage capacity as well as various pipeline refunds or charges
and miscellaneous revenue received from gas related transactions.
A vista s original Application requested an increase in the W ACOG from its present
78.600 cents per therm to 84.712 cents per thermo The revised Application requests a decrease in
the W ACOG from its present 78.600 cents per therm to 76.244 cents per thermo The proposed
W ACOG is based on a weighting of forward natural gas prices on September 21 , 2006, for
unhedged volumes, and the Company s hedges executed to date. The Company generally
executes hedges to fix the price of gas on approximately 66% of its estimated annual gas sales
for the year, and uses a dollar-cost averaging approach for volumes to be hedged, with those
volumes divided into 45-day execution windows between February 15 and November 15. The
Company states that it has hedged approximately 60% of its estimated annual gas sales for the
forthcoming year. It states it will hedge an additional 20% of the estimated sales within days of
the revised Application filing, in order to take advantage of the recent sharp drop in forward gas
prIces.
This past year the Company began incorporating an amount of longer-term hedges
into its purchase portfolio to provide an additional degree of rate stability. Approximately 11
of the total purchases for the next year have been hedged at a three-year fixed price. The
Company s plan is to keep layering-in three-year fixed price hedges until these hedges represent
one-third of the portfolio going forward. This plan has been incorporated into the Company
Risk Management Policy and provided to Commission Staff.
The Company s proposed rates in this filing also incorporate the proposed rate
increases filed by the Company s two main pipeline suppliers, Northwest Pipeline and Gas
Transmission Northwest. The proposed pipeline rates, while not yet approved, are set to begin
being billed to A vista on January 1 , 2007. The Company states that while these pipeline rate
increases are substantial, the effect on the Company s proposed rates in this filing is completely
mitigated by an increase in the estimated revenue to be received from pipeline capacity releases.
The Company is also proposing a change in the present amortization rate, which is
used to refund or surcharge customers the difference between actual gas costs and projected gas
costs from the last PGA filing over the past year. A vista proposes to decrease the amortization
rate from the present surcharge of 5.027 cents per therm to 3.420 cents per thermo The Company
DECISION MEMORANDUM
states it has an estimated deferred gas cost balance of approximately $2.8 million as of October
, 2006, reflecting higher gas costs than projected during the past year. The proposed
amortization rate of 3.420 cents per therm is expected to recover this balance over 12 months.
The Company states that notice of its proposed increase in price has been
accomplished by posting a notice at each of the Company s district offices in Idaho, a press
release distributed to various informational agencies, and a separate notice to each of its Idaho
gas customers included in their billing. A vista attached copies of these notices to its Application.
ST AFF COMMENTS
Staff has reviewed the Application, performed an audit of gas purchases and hedging,
and reviewed additional information supplied by the Company and third parties. In analyzing
Avista s Application, Staff discussed: (1) the effects of the 2005 hurricane season; (2) the
pipeline transportation rate cases pending before the Federal Energy Regulatory Commission
(FERC); (3) the Company s proposed WACOG and its hedging policies; (4) the cessation ofthe
Benchmark Mechanism for gas purchases; and (5) customer issues.
Staff recommends that the Commission approve the Company s revised Application
and filed tariffs reducing Avista s annual revenue by approximately $2.8 million. Staff also
recommends that the Company be directed to file further tariff decreases if the forecasted
W ACOG decreases materially or if the result of the pending FERC pipeline rate cases result in
transportation expenses significantly less than what the Company has included in its proposed
tariffs.
Staff comments that the deferred balance subject to recovery in this case was larger
this year mainly because of the fact that the large price spikes caused by the disruption of gas
supply in the Gulf of Mexico as a result of Hurricane s Rita and Katrina were not anticipated in
the Company s approved W ACOG. The deferral balance was lower than the previous year, and
would have been lower still had it not been for unusual effects of the Hurricanes.
A vista s proposed prices are weighted to account for the January 1 , 2007 effective
date of the proposed price increases of the Northwest Pipeline Corporation (NPC) and Gas
Transmission Northwest (GTN), both of which have pending rate cases before the FERC. Staff
recommends that the methodology used by A vista to determine the annual impact of the pipeline
rate increases on the total cost of service is appropriate, as it aligns transportation increases with
the purchased gas cost adjustment during the PGA year in which the increases will occur.
DECISION MEMORANDUM
Because both pipeline case increases are subject to FERC approval as well as negotiations
between the pipelines and their customers, Staff recommends that, in the event that the FERC
approved rate increases are significantly lower than what Avista has included in its proposed
tariffs that the Company be directed to file for additional decreases.
Staff reviewed the Company s proposed WACOG of $0.76244 per therm against
other forecasts, including those published weekly by the US Energy Information Administration
and recommends that it is consistent with the forecasted northwest cost of natural gas. Staff
states that although use of this forward pricing is aggressive and has the potential, if prices are
higher, to result in a large deferral balance to be recovered next year, that the Company has all
ready been able to take advantage of lower prices and hedged a larger amount of gas for the
2006-2207 season. Recent sharp drops in forward prices have allowed the Company to hedge
approximately an additional 20% of its forecasted load at lower prices. If prices continue to
drop, A vista plans to execute additional hedges beyond the 80% of forecasted demand.
A vista continues to follow its price stabilization practice of systematically fixing
portions of gas costs using physical hedges and financial instruments in a time staggered
purchasing procedure aimed at achieving a diversified portfolio of purchases and hedges. The
Company hedges up to its estimated daily demand each month with a combination of fixed
prices gas purchases and scheduled withdrawals from available storage. Typically, these hedges
total approximately 66% (2/3) of the Company s forecasted loads, although, as mentioned above
for the forthcoming PGA year, the hedges total nearly 80% of forecasted load to take advantage
of recent price drops.
For the period from July 1 , 2005 through September 30 , 2006, the Company
hedging practices, including storage withdrawals, provided a benefit to customers
approximately $2 766 874. This benefit was quantified by comparing the hedged price to the
First of Month (FOM) index price and the difference was multiplied by the hedged volume.
During the past eight months the Company has pursued its revised gas procurement
program whereby 11 % of supply is now purchased at a fixed price three years in advance. Under
this plan the Company will purchase 11 % of its supply on this three-year term to result in a total
of 33% of supply being purchased three years in advance, attempting to achieve more price
stability for customers. Staff continues to work with the Company to evaluate this methodology
DECISION MEMORANDUM
and develop other hedging and purchasing practices with the intent of both stabilizing and
reducing gas costs.
As reported last year by Staff in the Company s PGA case, Case No. A VU-05-
Avista was ordered by the Washington Utilities and Transportation Commission to discontinue
its use of the Natural Gas Benchmark Mechanism. Rather than attempting to maintain the
Benchmark Mechanism in Oregon and Idaho while eliminating the mechanism in Washington
A vista discontinued using the mechanism in all of its service territories. Staff s concern was that
actions prompted by the Washington UTC may harm customers in Avista s Idaho service
territory. Staff worked with the Company to complete a back cast analysis to determine if Idaho
ratepayers would be harmed by the cessation of the mechanism. Based on the analysis
assumptions, Staff believes it is reasonable to conclude that Idaho customers benefited slightly
($25 000) from the cessation of the mechanism.
In summary, Staff recommends that the requested decrease in the W ACOG, and the
12-month amortization of deferred expenses be approved. Staff also recommends that the
Company be directed to file further tariff decreases if the forecasted W ACOG decreases
materially or if the result of the pending FERC pipeline rate cases result in transportation
expenses significantly less that what the Company has included in its proposed tariffs.
PUBLIC COMMENTS
The Commission received seven comments from customers of A vista.The
comments shares a common theme in that they were concerned about any increases in natural
gas rates because of newspaper articles and other media reports that market prices for natural gas
are at two-year lows. All comments addressed the Company s initial request to increase rates.
No comments specifically addressed the revised application requesting a reduction in rates.
COMMISSION DECISION
1. Does the Commission wish to approve Avista s Application, including the
requested W ACOG and amortization of deferred expense as filed by the Company and
recommended by Staff?
2. Does the Commission wish to direct the Company to file further tariff decreases if
the forecasted W ACOG decreases materially or if the result of the pending FERC pipeline rate
cases result in transportation expenses significantly less that what the Company has included in
its proposed tariffs?
DECISION MEMORANDUM
3. Does the Commission wish to direct the Company to continue its monthly
reporting of the changes and balances in the deferral accounts, and to continue reporting the
W ACOG quarterly?
M:A VU-O6-dw3
DECISION MEMORANDUM
Mf t2J;z
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Donovan E. Walker