HomeMy WebLinkAbout20020118_ln.docDECISION MEMORANDUM
TO: COMMISSIONER KJELLANDER
COMMISSIONER SMITH
COMMISSIONER HANSEN
JEAN JEWELL
RON LAW
LOU ANN WESTERFIELD
BILL EASTLAKE
DON HOWELL
RANDY LOBB
ALDEN HOLM
MICHAEL FUSS
DAVE SCHUNKE
TERRI CARLOCK
BEV BARKER
TONYA CLARK
GENE FADNESS
WORKING FILE
FROM: LISA NORDSTROM
DATE: JANUARY 18, 2002
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 relative 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 gas procurement and management risk to Avista Energy.
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. According to Avista, the JP Storage Component provides additional savings to customers from the operation of the JP Storage Project. The final component is the Capacity Release/Off-System Sales Component, which 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.
AVISTA’S 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 should reduce the level of gas cost volatility and risk under the present mechanism.
Avista Energy would more effectively use the Utility’s storage facilities for price protection in addition to the advantage of the summer/winter price differential.
Avista Energy would implement a sharing mechanism along with the fixed credit for the Utility’s off-system sales and capacity releases where there is now only a fixed credit.
STAFF COMMENTS
Commodity Component. Staff comments summarize the current Benchmark Mechanism and Avista’s proposed changes. Staff generally agrees with Avista’s proposal to divide the Benchmark Mechanism’s Commodity Component into four tiers. Tier 1 would represent hedging and storage that comprises approximately one-half of customers’ gas. Staff recommends implementation of Avista’s proposed Tier 1 storage injection/withdrawal schedule to take greater advantage of Avista’s storage peaking capabilities. With regard to the proposed hedging program, Staff recommends adopting the proposed hedging volume and that “the purchases be systematic to take advantage of dollar cost averaging yet allow sufficient flexibility to preclude competitors from timing Avista’s hedge purchases and raising prices.” Staff Comments at 7.
Tier 2 would encompass the normal purchase of gas necessary to meet daily loads beyond Tier 1’s fixed volumes. According to Avista, it comprises approximately 48.4% of the total customer gas and its pricing methodology would remain unchanged.
When usage is lower than normal (i.e., less the minimum Tier 2 volume that ensures reliability), the Company proposes to charge customers the first-of-the-month price for this “Excess Tier 2 Gas” and credit customers for any excess gas sold at daily market prices. Staff agrees with this methodology because it would have minimal customer impact since “usage rarely falls below the Tier 2 level and only small amounts of gas are likely to be resold.” Id. at 8.
Tier 3 would provide spot market prices for daily gas purchases when usage is greater than normal and thus shift price risk to customers for purchases made on abnormally cold days. Staff recommends approval of the Tier 3 methodology because Avista Energy’s risk exposure to customers’ variable gas usage is disproportionate to its modest management fee. Id. at 9. Moreover, customer exposure to spot prices higher than first-of-the-month prices is anticipated to be small relative to all gas purchases. Id. at 8.
During high-use periods on extremely cold days, Tier 4 would allow the use of stored gas to “shave” peak spot market prices. Staff recommends approval of Tier 4 pricing methodology with the additional requirement that storage gas should be withdrawn for peak shaving only when it is economically reasonable, i.e., the lowest cost gas, be it from market or storage, must be used. Id. at 9.
Capacity Release and Off-System Sales. Because the Company maintains sufficient transportation capacity to meet its peak daily requirements, the Company has excess transportation on most days. Although the Company is proposing to lower the guaranteed benefit from its capacity releases and off-system sales from approximately $2 million to $1 million, it offers to share (80% customers, 20% Avista Energy) the remaining capacity releases and off-system sales once the fixed benefit is fulfilled. With this proposal, Avista Energy would have an incentive to find the best off-system sales opportunities for customers. Staff recommends approval of these proposed changes to encourage Avista Energy to find the best off-system sales opportunities and increase customers’ potential for higher revenues. Id. at 10.
Staff Recommendations. Staff recommends approval of the changes requested by the Company with the following additions and modifications:
1. Staff recommends implementation of a risk management committee (RMC) and better documentation of the decision-making process. Staff believes the RMC should consist of utility and Avista Energy members and act in the best interest of the ratepayers. It should also meet on a regular basis to plan, prepare for and execute a gas procurement program that will benefit customers. Staff recommends that the Company retain the following information to document that the Company is using all available expertise to optimally minimize natural gas procurement costs:
All graphs, visuals and charts used in discussions to make gas procurement and hedging decisions;
Articles, letters, memos, reports, notes, etc. detailing the current gas market and/or projections;
- Summary of risk management meetings between the utility and Avista Energy, and
Written decisions resulting from each risk management meeting that are signed by a corporate officer.
Staff states it will gladly work with the Company and review the initial documentation retained in the coming months to informally discuss the process and make additional recommendations. Id. at 11-12.
Staff recommends that storage be withdrawn for peak shaving only if it is economically reasonable under Tier 4 of the commodity component. Id. at 12.
Staff recommends the following changes to the Benchmark Contract:
A) Seven months prior to the contract’s termination on March 31, 2005, the Company shall file an analysis of the Benchmark program detailing the costs and benefits to customers, to the Company and to Avista Energy. The report should also include any recommended changes or modifications that the Company may have to the Benchmark Mechanism.
B) After analyzing first year results and/or a final ruling by the Washington Commission, the Idaho Public Utilities Commission would have an opportunity to review and modify the Benchmark Mechanism as necessary.
C) Staff does not accept the automatic renewal provision proposed by Avista. However, Staff indicates that Avista may request continuation of the Benchmark Mechanism at the time of the review seven months prior to termination on March 31, 2005.
D) The hedging program shall include provisions to facilitate the three previous recommendations. Id.
Staff recommends that the Commission continue to reserve the right to audit the books, operations and records of Avista Energy as it does with the current Benchmark Mechanism. Id. at 13.
Staff recommends that the Company continue to file quarterly reports that provide details of gas purchases, off-system sales, hedging activities and other Benchmark-related items. Id.
Staff recommends that the Company be required to file a hedging schedule in accordance with Staff recommendations prior to securing hedges. Id.
Staff recommends that the Company and Avista Energy continue to abide by the Standards for Competitive Practices. The Company should continue to make nominations for transportation customers to ensure that market sensitive information is not passed on to its affiliate, Avista Energy. Id.
PUBLIC COMMENT
The Commission received one comment from the public. John T. Penberthy of Lewiston does not support Avista’s Benchmark Mechanism proposal. More specifically, he wrote that “this proposal will give Avista Energy, who is not regulated by the IPUC, the ability to influence the price I pay for natural gas. I don’t feel that they should have that level of influence.”
AVISTA REPLY COMMENTS
Avista’s Reply Comments focused on the Staff’s recommendation for creation of a “Risk Management Committee” (RMC) to provide oversight and documentation that support gas-hedging decisions related to the Benchmark Mechanism. Although it agrees with this concept, Avista recommends that it be called the “Strategic Oversight Group” (SOG) since it already has a group called the “Risk Management Committee.” Unlike the Staff-proposed RMC, Avista’s existing RMC has broad risk oversight that spans both utility and non-utility operations.
The Company recommends that Staff’s concerns be addressed by a SOG operating as a sub-group within the overall structure of its existing RMC, “whose purpose would be to continue to address gas supply strategies specific to the Benchmark Mechanism.” Reply Comments at 2.
Avista is “happy to work with Staff on the types of documentation to be retained, and need not be prescribed by Commission Order.” Id. Avista believes that the information retained should be relevant to the SOG’s decisions and that documented SOG meeting decisions would be signed by the appropriate management representative.
COMMISSION DECISION
Does the Commission wish to approve Avista’s Application to renew and modify the Benchmark Mechanism?
Does the Commission wish to adopt any of Staff’s or Company’s recommendations as outlined above?
__________________________
Lisa Nordstrom
M: AVUG013_ln2
DECISION MEMORANDUM 5