20011130_ln.doc

DECISION MEMORANDUM

TO: COMMISSIONER KJELLANDER
COMMISSIONER SMITH
COMMISSIONER HANSEN
JEAN JEWELL
RON LAW
LOU ANN WESTERFIELD
BILL EASTLAKE
RANDY LOBB
ALDEN HOLM
MICHAEL FUSS
DAVE SCHUNKE
TERRI CARLOCK
GENE FADNESS
TONYA CLARK
BEV BARKER
WORKING FILE

FROM: LISA NORDSTROM

DATE: NOVEMBER 30, 2001

RE: IN THE MATTER OF THE PETITION OF AVISTA UTILITIES FOR APPROVAL OF MODIFICATIONS TO ITS NATURAL GAS BENCHMARK MECHANISM. Case No. AVU-G-01-3.

On November 8, 2001, Avista Utilities petitioned for Commission approval to continue its current Natural Gas Benchmark Incentive Mechanism with proposed modifications. The Company is not proposing a change in rates or annual revenue in this filing.
The Company proposes that the Gas Benchmark remain in effect for a three-year period, until March 31, 2005. The Mechanism would then continue in effect year-to-year thereafter subject to modification or termination upon six-month prior notice by the Company, Avista Energy, or any state commission. Avista requests that the Commission approve the accompanying tariff sheets on or before February 1, 2002 to become effective April 1, 2002.

The Current Benchmark Mechanism
The Mechanism was originally approved by Order No. 27908 in February 1999 and works in conjunction with the existing Purchased Gas Adjustment (PGA) mechanism. Deferrals for the PGA are calculated each month based on the costs and revenues from the Benchmark Components, as well as other costs normally included in the PGA. According to Avista’s petition, the Benchmark Mechanism provides: 1) a relatively simple and objective determination of the gas costs to be charged to customers, 2) additional gas cost savings to customers, and 3) a significant shift of risk to Avista Energy associated with gas procurement and management.
The current Benchmark Mechanism is comprised of three major components. The Commodity Component consists of a calculated Weighted Average Index Price for natural gas based on published index prices for three supply basins, plus an Index Adder of $0.05 per dekatherm. Avista’s Petition states that the JP Storage Component provides additional savings to customers from the operation of the JP Storage Project. Finally, the Capacity Release/Off-System Sales Component provides a guaranteed level of savings to customers related to the release of pipeline capacity and off-system sales.
The Company asserts that the Benchmark Mechanism provided a $4,038,000 benefit to Idaho customers for the 24-month period ending August 31, 2001 due to capacity releases and off-system sales. Avista’s petition notes that these savings are in addition to the $35,300 in annual administrative cost savings passed on to Idaho customers that Avista Energy has absorbed in managing the gas procurement operation for the Utility.
A Summary of Proposed Changes to the Benchmark Mechanism
The Petition asserts that Avista Energy’s costs and risks of managing gas procurement for the utility have increased significantly during the past year. Under a proposed modification, Avista Energy would shift some of the risk of significant price fluctuations (both increases and decreases) from the affiliate to the Utility by using day-of prices for purchases and sales instead of the first-of-month price for very warm or very cold days.
Avista Energy would implement a hedging program for the Utility that would reduce the level of gas cost volatility and risk under the present mechanism.
Avista Energy would use the Utility’s storage facilities for price protection in addition to taking advantage of the summer/winter price differential.
Avista Energy would implement a sharing mechanism in addition to the current fixed credit for the Utility’s off-system sales and capacity releases.
Staff Recommendation
Staff recommends that the Commission process this case under Modified Procedure with a 21-day comment period.
Commission Decision
Does the Commission wish to process this case under Modified Procedure with a 21-day comment period?

__________________________
Lisa Nordstrom
M: AVUG013_ln

DECISION MEMORANDUM 3