20001208_ln.doc

DECISION MEMORANDUM

TO: COMMISSIONER HANSEN
COMMISSIONER SMITH
COMMISSIONER KJELLANDER
JEAN JEWELL
RON LAW
LOU ANN WESTERFIELD
DON HOWELL
TONYA CLARK
RANDY LOBB
TERRI CARLOCK
ALDEN HOLM
MICHAEL FUSS
NANCY HARMAN
DAVE SCHUNKE
BEV BARKER
WORKING FILE

FROM: LISA NORDSTROM

DATE: DECEMBER 8, 2000

RE: IN THE MATTER OF THE APPLICATION OF INTERMOUNTAIN GAS COMPANY FOR AUTHORITY TO INCREASE ITS RATES FOR SERVICE. CASE NO. INT-G-00-2.

On October 27, 2000, Intermountain Gas Company filed an Application requesting that the Commission authorize new rate schedules that would result in an overall increase of approximately $35.8 million (27%) in revenues. Although the Company requested an effective date of December 1, 2000, the Commission suspended the Application for 15 days to allow examination of the proposal and to conduct public hearings. On November 20, November 21, November 28, and December 4, 2000, the Commission convened public workshops and hearings in Boise, Caldwell, Twin Falls, Pocatello and Rexburg. Pursuant to the Commission’s Notice of Modified Procedure, persons interested in submitting comments were requested to do so no later than December 6, 2000. Order No. 28561

THE APPLICATION
Energy prices for natural gas have risen dramatically over the last ten (10) months, resulting in higher natural gas costs nationally and in Idaho. Prior to the summer of 2000, the price per therm of natural gas was generally flat and ranged between $0.63 per therm and $0.66 per therm. Given the increased commodity prices that Intermountain Gas had to pay its suppliers during the first half of this year, the Commission approved a 28% rate increase that became effective July 1, 2000. Case No. INT-G-00-1, Order No. 28426.
Gas commodity prices have continued to rise since the new rates took effect in July. Therefore, the Company now seeks to increase its natural gas rates by $0.18434 per therm. In its Application, Intermountain Gas Company seeks to increase the Company’s Weighted Average Cost of Gas (WACOG), and impose a temporary surcharge for seven months related to deferred gas costs. The proposed increase is in addition to all credits and surcharges relating to Case No. INT-G-00-1. The combination of the two PGA requests would result in an average overall price increase since last winter to Intermountain’s RS-1, RS-2, GS-1, and Large Volume customers of approximately 56%. Intermountain Gas Company’s earnings will not change as a result of the proposed changes in prices and revenues.
Intermountain Gas proposes to recover deferred gas costs from its Purchased Gas Cost Adjustment (“PGA”) balance (Account No. 186) from its customers through a temporary price adjustment effective during the seven month period beginning December 1, 2000 and ending June 30, 2001. The PGA Account is a deferral mechanism for over- and under-collections and for realized price changes on spot market gas purchases. As of November 30, 2000, Intermountain has deferred approximately $9,300,000 of variable gas costs in its PGA Account. Intermountain Gas proposes to collect this amount via a per therm surcharge of $0.04811.
The overall effect of the Company’s proposed changes in this case would be an increase in Idaho revenues of $35,818,646 (26.84%). The net increase is made up of:

Permanent WACOG Adjustment $26,476,341
Temporary Variable Cost Collection Surcharge $ 9,342,305
Net Adjustment $35,818,646

Intermountain Gas proposes to recover the change in rates from each of its customer classes in accordance with its Purchased Gas Cost Adjustment tariff and approved cost-of-service methodology. See Case Nos. INT-G-95-1, INT-G-88-2, and U-1034-137. To this end, the Company proposes to uniformly raise customer rates by $.18434 per therm. Intermountain Gas recommended the following annualized change in rates per customer class:

Customer class
Proposed Incremental Revenue
Proposed Incremental Increase
$ /Therm
Proposed
Average Increase
% Change
Proposed Average
Price
$/Therm
Monthly Increase
Per Customer
RS-1 Residential
$ 5,815,945
$ 0.18434
22.61%
$0.99968
$ 8.87
RS-2 Residential
$ 16,678,713
$ 0.18434
26.97%
$0.86775
$ 11.19
GS-1
General Service
$ 12,842,089
$ 0.18434
28.61%
$0.82876
$ 48.66
LV-1
Firm Service
$ 481,899
$ 0.18434
48.70%
$0.56286
$ 3,346.52
Total
$ 35,818,646

$ 0.18434
26.84%

$0.87109

Since Intermountain’s Application was filed, wholesale gas costs continue to surge in excess of the proposed WACOG amount ($0.42296 per therm). One reason is due to the tightening of supply available to meet the growing demand for gas. This will result in additional amounts accruing in the deferral account for a future PGA case.
PUBLIC HEARINGS
On November 20, November 21, November 28, and December 4, 2000, the Commission convened public workshops and hearings in Boise, Caldwell, Twin Falls, Pocatello and Rexburg. Thirty-four (34) individuals testified at these hearings – all in opposition to the proposed rate increase.
Many residents, both retired and employed, feared that they could not pay a higher gas bill. Those who testified expressed particular concern for the health of senior citizens who cannot pay increased heating bills or who will refuse to heat their homes in an effort to keep their bill within their budget. Five Community Action Agency representatives described the strain a rate increase would place on their clients and the limited community resources available to meet the needs of households seeking assistance. Several witnesses testified that Intermountain Gas should donate money, or at least its advertising budget, to help low-income customers pay their bills.
Four business owners expressed concern for the economic viability of their businesses. Moreover, these businessmen feared the negative effect the rate increase would have on their customers, who will be forced to pay higher prices for the goods they sell. One business owner and one employee testified that a rate increase would likely result in layoffs in their respective companies. Several witnesses blamed Intermountain Gas for inadequate planning, faulty management, and excessive profit taking in light of the financial hardship their customers face. A sizable number of witnesses felt that it was more equitable for Intermountain Gas and its shareholders to absorb a loss in lieu of another rate increase.
WRITTEN COMMENTS
Public Comments
As of December 6, 2000, the Commission received 299 written comments. All of the comments oppose the proposed rate increase. A few of the comments indicated that although some increase might be justified, the entire requested increase should not be granted. Many of the earlier comments contained the misunderstanding that rates were rising 60%. Some went on to add the 60% to the earlier increase, arriving at a total increase of 90%.
Numerous concerns were expressed in the written comments received by the Commission. Many thought that price gouging by the suppliers was the cause of the increase in rates, and that excess profits were being reaped at the expense of Intermountain Gas customers. Other comments stated that the shareholders of Intermountain Gas should absorb the increase rather than the customers. Many comments included the fact that this will be the second large increase for the Company in one year. Still other consumers felt they had been misled by advertisements that promoted switching to gas appliances as a way to save money because natural gas was more cost effective than electricity. Since commodity prices have increased after they switched to natural gas, customers feel that the advertisements were made in bad faith. Many of the comments mentioned only getting a 3% cost-of-living raise, and the sometimes double-digit rise in costs in other areas such as gasoline, groceries, health insurance, prescription drugs and other utilities that have been granted increases this year.
Staff Comments
Staff recommends that the Commission grant the proposed WACOG increase, continue to defer accrued costs in Account No. 186, deny future interest accrual in the deferral account, review the PGA process, and modify the Company’s Level Pay program.
(1) WACOG Increase
Staff supports the proposed WACOG increase in this case. Natural gas commodity prices continue to rise and are currently at a level that is higher than the rate requested by the Company. Staff believes it is important to send a correct price signal to customers now so they can adjust their use accordingly. Furthermore, Staff is concerned that if the WACOG increase is not granted, significant increases will be needed next year. If the WACOG is not increased now, and gas prices remain at the $6.00/MMBTU level, customers could face an estimated increase of $90,000,000 in July 2001.
(2) Deferral of Current Costs in Account No. 186
Staff recommends that the Commission require the Company to continue deferring the amounts already accrued in Account No. 186 until the next PGA Tracker. If the Commission decides to continue deferring these costs, the average increase in this case for gas costs to customers will be less than 20%. By continuing to defer these costs, Staff feels the Commission will still be able to send a price signal to customers with the gas cost increase, but the impact will be smaller at this time. Although it recognizes that the market gas prices have continued to rise to higher levels than those projected by the Company, Staff believes it is reasonable and prudent to delay this portion of the request given the magnitude of the recommended increase and the increase already approved.
(3) Interest on Deferrals
Staff proposes that the Company accrue no interest on the amounts in the deferral accounts from November 30, 2000 through the next PGA Tracker expected in July 2001. Even though elimination of interest for this period will be a change from current practice, Staff believes it is reasonable as a prospective interim measure until the PGA process can be re-evaluated. Staff is concerned that the Company currently has little incentive under the existing PGA mechanism to assure least cost acquisition of natural gas. The elimination of interest on the deferral account provides an interim incentive, until a more formal PGA review is undertaken, for Intermountain Gas to explore innovative means to obtain the most cost effective gas acquisition and document these activities. Staff maintains that the Commission is not required to allow this interest accrual. Based on the Company’s projections, the interest foregone will total approximately $314,819 through June 2001.
(4) Review of the PGA Process
Given the current conditions in the market place and the impact on natural gas customers, Staff believes it is time to conduct a formal review of the PGA mechanism. More specifically, Staff feels a review is warranted to evaluate the need for incentives to ensure that the Company secures gas at the lowest possible cost for its customers. Furthermore, a formal review could result in rewards for both the customers and the Company through profit sharing and administrative savings.
5) Level Pay Modifications (Customer Deferral Option)
Approximately 20% of the Company’s customers are enrolled in the current Level Pay Program. Staff recommends that an anniversary date Level Pay Program be put in place allowing customers the opportunity to join the Level Pay Program and defer or level out their natural gas bills over the next 12-month period. Staff recognizes that customers starting a level pay plan at times other than the spring or early summer will not build up a credit balance to carry them through the heating season. A change in cash flow may be experienced by the Company; however, Staff believes the overall annual impact will be minimal and only occur in the first year.
Company Comments
In light of Staff’s recommendations, Intermountain Gas requested additional time to respond to Staff’s comments. It is the Company’s intent to file reply comments with the Commission on the morning of Monday, December 11, 2000.

COMMISSION DECISION:
According to Idaho law, utilities cannot increase their rates for service without a finding by the Commission that the increase is justified. Idaho Code § 61-622. After reviewing the utility’s proposed rate increase, the Commission is required to establish “just and reasonable” rates. Id.

Should the Application of Intermountain Gas Company for authority to increase its rates for service be approved as proposed?
Should the Commission adopt Staff recommendations to:
Grant the proposed WACOG increase?
Continue to defer accrued costs in Account No. 186?
Deny future interest accrual in the deferral account?
Open a separate case to review the PGA process?
Modify the Company’s Level Pay program?

Lisa D. Nordstrom

Staff: Alden Holm
Dave Schunke
Michael Fuss
Nancy Harman
Terri Carlock
Randy Lobb

M:intg002_ln
This account was estimated to contain $9,348,974 as of November 30, 2000.

DECISION MEMORANDUM 7