avug01.2jhahmfussdg.doc

JOHN R. HAMMOND
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 5470

Street Address for Express Mail:
472 W WASHINGTON
BOISE ID 83702-5983

Attorney for the Commission Staff

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF THE APPLICATION
OF AVISTA UTILITIES FOR AN ORDER APPROVING A CHANGE IN NATURAL GAS RATES AND CHARGES. )
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CASE NO. AVU-G-01-2

COMMENTS OF THE
COMMISSION STAFF

COMES NOW the Staff of the Idaho Public Utilities Commission, by and through its Attorney of record, John R. Hammond, Deputy Attorney General, in response to Order No. 28785, the Notice of Application and Notice of Modified Procedure in Case No. AVU-G-01-2 issued on July 13, 2001, submits the following comments.
On July 9, 2001, Avista Utilities (“Avista”, “Company”), a subsidiary of Avista Corporation filed an Application with the Idaho Public Utilities Commission for authority to place into effect revised Schedule 155, containing rates and charges for natural gas service in the state of Idaho. If approved, Avista states, the Company’s annual revenue will increase by approximately $6.9 million or about 11.5%. However, the proposed change in rates and charges to customers will vary according to customer class and usage. Avista requested an effective date for revised Schedule 155 of August 9, 2001. Finally, Avista requested that the Commission process its Application using Modified Procedure under the Commission’s Rules of Procedure.
In Order No. 28785 the Commission suspended the effective date of the Avista’s revised Schedule 155 until September 1, 2001 and elected to process the Company’s Application by Modified Procedure.
Staff has reviewed the Application, performed a limited audit and reviewed additional information supplied by the Company and third parties. Below are the present and proposed rates as presented by the Company:

Present Proposed Proposed Average Schedule Tariff Tariff Percentage Monthly Number Description Rate Rate Increase Increase 101 General Service $0.81111 $0.89753 10.65% $6.91 111 Large General Service $167.66 First 200 Therms $0.82696 $0.91338 10.45% Next 800 Therms $0.81058 $0.89700 10.66% Over 1,000 Therms $0.71836 $0.80478 12.03% 121 Commercial Customers $4,118.34 First 500 Therms $0.81694 $0.90336 10.58% Next 500 Therms $0.81039 $0.89681 10.66% Next 9,000 Therms $0.71817 $0.80459 12.03% Over 10,000 Therms $0.70126 $0.78768 12.32% 131 Interruptible Customers $0.59073 $0.72509 22.74% $4,044.77 146 Transportation Customers $0.10574 $0.10574 0.00% $0
AUDIT FINDINGS
Staff performed a limited audit of the gas purchased by the Company from September 1999 through March 2001. During the course of the audit, Staff discovered the following:
Avista Utilities continues to purchase gas from its affiliate, Avista Energy under the Benchmark Mechanism approved by this Commission. The Commission Staff and Avista will review the Benchmark Mechanism in a formal case to be filed by the Company by the end of September 2001.
The Company deferred approximately $892,000 of additional costs due to fixed-gas-price financial transactions (hedges) entered into last December for the January 2001 through March 2001 period.
A lack of storage contributed significantly to the deferred account balance, and
Customers have accrued interest charges of approximately $838,000 on $22,340,517 of deferred costs that will be recovered by the Company if the Commission determines the costs to be prudent.

AVISTA FIRM NATURAL GAS TARIFF COMPONENTS
Avista’s firm service rates as described in Schedules 101 – General Service, 111 – Large General Service, 121 – High Annual Load Factor Large General Service are subject to four adjustments that affect the actual rate customers pay. Those four adjustments are described in Schedules 150 – Purchase Gas Cost Adjustment, 155 – Gas Rate Adjustment, 158 – Tax Adjustment, and 191 – Energy Efficiency Rider.
The underlying fixed tariff rate for customers is the rate established in the last rate case and includes the cost of gas, overhead, operations, transportation, other fixed costs and the allowed rate of return. Schedule 150 – Purchase Gas Cost Adjustment (also known as Permanent Gas Cost Changes) is a forward looking cost adjustment that reflects anticipated changes in the variable cost of transportation and cost of gas. Schedule 155 – Gas Rate Adjustment (also known as the Temporary Adjustment) is a true up for over- or under-collected costs of gas. Schedule 158 – Tax Adjustment is a rate adjustment that adds the local franchise fee taxes to the rates and is adjusted as the franchise fees are changed. Schedule 191 – Energy Efficiency Rider Adjustment is used to fund authorized Demand Side Management programs. The sum of the tariff rate plus or minus (+/-) the Permanent Gas Cost Changes plus or minus (+/-) the Temporary Adjustment plus (+) the Tax Adjustment and the Energy Efficiency Rider Adjustment make up the total rate the customers pay per therm each month.

SCHEDULE 155 – TEMPORARY ADJUSTMENTS
Schedule 155 is used by Avista to pass through any over- or under-collections of accrued gas costs since the last tracker adjustment. All of the increase proposed in this Application is made up of items in this schedule. There are three major items in the deferred gas costs that need to be addressed; deferred gas costs, interest expenses and hedges purchased for price stability.
Deferred Gas Costs
The major component of the requested increase is the recovery of the deferred gas costs. Avista did not ask to recover these costs in the last two trackers. Because the WACOG was lower than the amount the Company paid for gas, these costs continued to build up through May of 2001. The Company seeks to recover deferred costs of $22,340,517 that have accrued through March 2001. The amount of deferred costs per customer for Avista is much higher than the amount per customer in the recently reviewed case for Intermountain Gas. The difference is due mainly to the fact that Avista does not have nearly as much storage for winter gas as Intermountain does. Thus, Avista was exposed almost completely to the unprecedented run-up of prices last winter and as a result, the deferral account increased dramatically.
Avista has requested that the deferred gas costs incurred through March 2001 be recovered in this case. The additional costs that have accrued since that time will be reviewed for prudency in the next tracker case. Because the deferred costs are so high, the Company recommends an extended collection period of approximately two-and-a-half years.
Interest Expenses
Because of the large balance in the deferral account, $837,735 in interest charges have accrued through June 2001, and interest continues to accrue at approximately $110,000 per month. If allowed by the Commission, these charges will be recovered from ratepayers. Accordingly, Staff recommends that the Company be allowed to recover the deferral as requested so that additional interest charges can be avoided. This will help to reduce the potential impact of these interest charges on Avista’s customers’ rates.
Hedges Purchased for Price Stability
In December 2000, the Company purchased financial instruments to fix the price of gas for customers. Later in that month, the Company came to the Commission and requested an order allowing it to defer the costs associated with those instruments. The Commission granted the accounting order in February 2001. In that order, the Commission ordered the Staff and the Company to make sure the purchases were prudent at the time they were made. The prudency would be based on information that the Company could have or should have known at the time of the purchase. Staff has reviewed the purchases based on the criteria set out in that order.
At the time of the forward purchase, spot gas costs had soared to previously unimaginable levels. The Company was concerned about further exposure of customers to the spot market and decided to act to reduce that exposure. Because the Company has limited gas storage, exposure to the high-priced spot market is increased. By the end of November 2000, prices at Sumas had risen from approximately $0.200/therm in November 1999 to over $0.900/therm. At the time the purchases were made, the day-ahead price was $1.427/therm and there were indications that the price would rise. On December 4, 2000, the Avista entered into financial transactions that fixed a portion of the gas the Company would purchase during January 2001 through March 2001 at prices ranging from $0.720/therm to $1.265/therm. During the weeks that followed, the price at Sumas rose as high as $4.230/therm.
Staff has reviewed the materials provided by the Company and a significant amount of published data that was available at the time these purchases were made. All information reviewed by Staff indicates that these forward purchases were more cost effective than anticipated spot purchases and therefore were prudent at the time they were made. The Company reviewed all the market factors that were available and it purchased the financial instruments from non-affiliated companies. Even though the instruments turned out to be higher priced than market during two of the three months, Staff believes the Company did make a prudent decision to fix the price of gas for customers, based on the information available at the time. Staff recommends that the Company be allowed to recover the $22,340,517 that has accrued in the deferral account through March of 2001, including the $891,609 relating to the financial instruments transactions, as the Company has requested. Staff also recommends that the recovery of these amounts occur over a two-and-a-half year period as the Company proposes. Staff will review the status of the deferral account during the next PGA filing anticipated to take place in one year to verify that the recovery rate is still prudent. Staff encourages the Company to continue to look for ways to reduce gas costs for customers and provide price stability. Company efforts to balance these goals should be thoroughly documented.

SCHEDULE 150 – PURCHASE GAS COST ADJUSTMENT
Schedule 150 passes through changes in costs resulting from rate adjustments imposed by the Company’s suppliers. The adjustments typically include changes in pipeline charges, transportation, storage cost adjustments, and projected commodity prices. Avista does not request an increase in the rates contained in this Schedule with this Application.
The majority of the Schedule 150 adjustments last year were due to changes in the Company’s WACOG. The Company increased its WACOG from $0.19308/therm to $0.2950/therm in September 2000 and from $0.2950/therm to $0.48044/therm in February 2001. These changes constitute a 149% increase in the Company’s WACOG in the last year.
Staff and the Company agree that these adjustments were extremely large and caused by unprecedented increases in natural gas prices on the wholesale market. Market fundamentals and pipeline constraints drove average weekly wholesale market prices to as high as $2.99/therm at the Sumas Gate in December of 2000.
Hedges
In response to a winter of unprecedented natural gas prices on the wholesale market, Avista reevaluated its natural gas purchasing practices. It determined that it was necessary to provide consumers some price protection from future wholesale market upward volatility and extreme high prices. Since Avista has limited storage resources to use as a physical hedge, it chose to use financial hedges to provide wholesale market price stability for the 2001-2002 heating season.
Avista reviewed historical trends for natural gas futures contracts and found that the spring traditionally represented the lowest priced natural gas futures. In the months of March through May of 2001 Avista secured financial contracts for approximately 50% of its natural gas

needs for the period of April 2001 to October 2002 at prices between $0.422/therm to $0.690/therm. Avista’s remaining +/-50% of wholesale natural gas purchases continued under the traditional monthly benchmark purchase and contracted storage mechanism. Maintaining the existing purchasing program on approximately 50% of its needs, allowed the remaining gas purchases to move with the market and the Company to adjust purchases to reflect changes in usage. Upon completing purchases of the financial hedges in May, Avista estimated a WACOG of slightly over $0.50/therm.
Coincident with the Company’s proactive efforts to mitigate the effects of higher market prices for gas that it anticipated, the wholesale market prices have consistently decreased since May of 2001. The current wholesale market price for natural gas is approximately $0.250/therm and as of August 6, 2001 the price is anticipated to be $0.33-$0.47/therm for the winter peak season of November 2001 through March of 2002. None-the-less, Avista’s hedges will provide price stability for 50% of its supply, at an average hedge cost of gas of $0.52736/therm. Avista will continue to purchase the other 50% of its gas through its traditional market benchmark that will allow it to take advantage of today’s projected lower market prices.
WACOG & Schedule 150
Avista’s hedging actions have provided wholesale market price stability to ratepayers at a price that may be higher than currently anticipated market prices. Consequently, Avista estimates a WACOG of $0.4701/therm going forward and does not request a change from its existing WACOG of $0.48044/therm. Since the difference is minimal and the chances that the non-fixed portion of the WACOG can go up or down, Staff does not object to maintaining the WACOG at $0.48044/therm. Staff has further reviewed the other components of Avista’s Tariff Schedule 150 and found no significant changes and therefore does not object to Avista’s request to maintain current Tariff Schedule 150 rates.
Demand Side Management
On February 16 of 2001 Avista re-implemented its Schedule 191 to collect approximately $300,000 in funding for natural gas demand side management (DSM) programs to provide assistance to ratepayers in reducing their gas bills. The re-instituted programs have exceeded the first-year therm savings goal of 240,000 therms; to date over 266,000 therms were saved as part of Avista’s Schedule 190 and 191 DSM programs.
Because of the DSM programs, the rate increases, and other factors, Avista’s natural gas usage has decreased from previous projections. Staff has reviewed the Company’s weather normalized therms and found a reduction in usage as compared to the usage included in the deferral recovery estimate. Avista reviewed the discrepancy and found that upon updating the deferral recovery estimate usage information to match the updated weather normalized usage, the anticipated revenues would decline by approximately 1%. Since weather can easily cause a 10-15% change in usage the discrepancy was determined to be immaterial and would not effect the filing. Based on this and the previously discussed issues, Staff recommends acceptance of the Application as filed with regard to Tariff Schedule 150 - Purchase Gas Cost Adjustment.

CONSUMER EVALUATION
When Avista Corporation filed its Application on July 6, 2001, the press release
was included in the filing. The customer notice was not submitted with the Application but was faxed to the Commission on July 7, 2001, for Staff review. The customer notice was presented to customers in the form of a bill stuffer, and was mailed out in the normal billing cycles beginning July 9 and ending August 6, 2001. Both documents met the requirements of Rule 102 of the Commission’s Utility Customer Information Rules. IDAPA 31.21.02.102.
As of August 3, 2001, the Commission received four (7) written comments from customers opposed to the rate increase. In addition, the Consumer Assistance Staff registered two (2) informal complaints directed at Avista Corporation and opposing the request to increase their rates.
Customer comments in this case reveal a general concern for the impact utility cost increases have on the general state of the economy for northern Idaho. One customer commented that the unemployment rate in Shoshone County was the highest in the state, and stated, “[a]s for Avista, I think they should take the hit this time not the consumer.” Another customer expressed concern that consumers were made to suffer for the poor management decisions made by Avista leadership and suggested that the Commission hold public hearings before granting the requested increase. One elderly customer on a fixed income expressed concern about his ability to absorb another increase stating “[m]y Social Security check can’t stretch any further. I’m 78 years of age and trying desperately to stay off the welfare role. I’m hoping you will vote against it.”
During this past unseasonably cold winter, 2,359 Avista gas customers in Idaho received a total of $472,122.00 in financial assistance through programs such as LIHEAP and Project Share. This is a significant increase over the same period last year, when 1,815 customers received financial assistance totaling $303,291.00. The LIHEAP energy assistance program requires that customers qualify under federal income guidelines. Assistance amounts to a one-time payment made directly to Avista. The Project Share program is funded by donations and is available on a case by case basis in emergency situations. In addition, county welfare benefits are often available, but recipients may be asked to pay back a portion or all of the assistance they receive.
Even with this financial assistance, Avista mailed 25,421 disconnection notices and 20,306 twenty-four hour notices during the months of March, April and May following the winter Moratorium. Some customers received more than one notice during this time frame. As
a result, 2,129 customers were disconnected between March and May 2001. During the same period last year, the Company mailed 32,241 disconnection notices and 26,386 twenty-four hour notices that resulted in 2,079 customers being disconnected. The numbers for mailed notices decreased because in July 2000, Avista increased the threshold amount that triggers the sending of a notice to $100.00, up from $50.00, the threshold amount specified in the Commission’s Rule 310.01 the Utility Customer Relations Rules.
Other programs supported by Avista include a program called “CARES” which assists elderly and disabled customers and the Company’s level pay program, referred to as “Comfort Level Billing” or “CLB”. In the CARES program the Company uses two full-time employees to help customers obtain information on energy assistance funds and help provide special payment arrangements. Currently, there are 531 customers in Idaho listed as “CARES” accounts.
Last year, many of Avista’s Idaho customers chose to take advantage of the CLB program. The CLB payment amount is computed based on the average of the most recent twelve months of billing history for the customer’s address. This year, due to the close proximity of the filing for the PGA and the electric Surcharge Avista plans on making only one adjustment. This will minimize the number of times a customer on CLB has their plan amount changed. The adjustment is planned for a date following the Commission’s decision on both the proposed PGA and electric Surcharge increases.
Avista has demonstrated their concern for how the recent PGA increases and unseasonably cold winter have impacted low-income customers. The Company has re-instituted DSM programs, increased the disconnect notice threshold, and continued the CARES program for the elderly and the CLB program in an effort to mitigate the high energy bills their customers are experiencing. In addition, this year at the Commission’s request, Avista agreed to extend the winter Moratorium through March for some Avista customers who had made an effort to pay at least a portion of their bill during the winter and did not have a balance of over $400.00 as of March 31, 2001. Avista also contributed a total of $75,000.00 to twenty-nine different agencies throughout their service territory with the stipulation that the recipient must be an Avista customer and meet the federal low-income guidelines. As a direct result of these programs, there was a relatively small increase in the actual number of customers being disconnected this year over last year. Staff believes that Avista has made a substantive effort to provide assistance to its customers and anticipates that the Company will continue to do so in the future.

RECOMMENDATION
Staff finds that Avista made a prudent decision to purchase hedges to fix the price of gas based on the information that was available at the time. Staff also finds that the Company has complied with the Commission’s Utility Customer Information Rules by providing sufficient notice to its customers regarding this proposed increase. Accordingly, Staff recommends that the Commission grant Avista’s Application and authorize it to recover, over a two-and-a-half-year period, $22,340,517 that has accrued in its deferral account from September 1999 to March 2001 and $891,609 relating to purchased hedges. This would raise Avista’s annual revenue by $6.9 million or 11.5%. Finally, Staff recommends that the Commission approve Avista’s request to not alter its Schedule 150, thus keeping its WACOG at the same level.

DATED at Boise, Idaho, this day of August 2001.

________________________
John R. Hammond
Deputy Attorney General

Technical Staff: Alden Holm
Michael Fuss
Dan Graves

JH:AH:MFUSS:DG:i:umisc/comments/avug01.2jhahmfussdg
Avista Utilities is a public utility engaged in the distribution of natural gas in certain portions of Eastern and Central Washington, Northern Idaho, Southwestern and Northeastern Oregon and Northern California.
The WACOG (Weighted Average Cost of Gas) is the amount included in the tariff to reimburse the Company for the gas purchased. This amount is reviewed and adjusted as necessary during each PGA review.
In Case No. INT-G-01-2, the Commission reviewed the deferred gas costs of Intermountain Gas. See Order No. 28783 for the results of that case. As of March 2001, Intermountain had deferred approximately $227 per customer compared to Avista that had deferred approximately $380 per customer.
See Order Nos. 28639 and 28654 for details regarding the case and the Commission requirements for prudency.
Sumas, Washington is a major delivery point for Canadian gas entering the United States. Avista secures a significant portion of its gas from Sumas.
The Company purchased instruments to fix the price of gas at $1.265 per therm at Sumas for 70,000 therms per day for the period of January 2001 through March 2001. The Company also purchased instruments to fix the price of gas at $0.720 per therm for 140,000 therms at AECO (a Canadian gas hub) and 70,000 therms per day for $0.740 from the gas producing fields in the Rockies.
Avista Energy, Publication Index Prices, December 2000.
Order No. 28496, Case No. AVU-G-00-3.
Order No. 28641, Case No. AVU-G-00-5.
Natural Gas Weekly, December 11, 2000.
Natural Gas Weekly, July 16, 2001.
Avista Energy Price Information Sheet, Aug. 6, 2001.
Order No. 28646, Case No. AVU-G-01-1.
24.5% of Avista’s customers in Idaho or 13,731 customers chose to participate.

STAFF COMMENTS 9 AUGUST 13, 2001