950517.docx

SCOTT WOODBURY
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
472 WEST WASHINGTON STREET
PO BOX 83720
BOISE,  IDAHO  83720-0074
[phone]
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 STAR VALLEY ENERGY, INC. FOR A CERTIFICATE OF PUBLIC CONVENIENCE AND NECESSITY TO PROVIDE NATURAL GAS SERVICE TO SALMON, IDAHO.
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CASE NO. SVE-G-95-1
COMMENTS OF THE
COMMISSION STAFF
COMES  NOW the Staff of the Idaho Public Utilities Commission, by and through its Attorney of record, Scott Woodbury, Deputy Attorney General, and submits these comments as provided for in the Notice of Application issued in this case on March 14, 1995.
On February 24, 1995 Star Valley Energy, Inc. (SVE; Company; Star Valley) an Idaho corporation, filed an Application with the Idaho Public Utilities Commission (Commission) requesting a Certificate of Public Convenience and Necessity to operate as a natural gas corporation and public utility in the State of Idaho, and authority to construct facilities required to provide natural gas service to the community of Salmon, Idaho.  Reference Idaho Code § 61-526; IDAPA 31-01-01.111.
General Comments
Commission Staff believes the Application of Star Valley Energy, Inc. for a Certificate of Public Convenience and Necessity (Certificate) is deficient based upon a review of the Company's Application and its responses to Staff's subsequent production requests.  Reference Rule 111, Commission Rules of Procedure.  More detailed discussions of specific identified deficiencies follow in subsequent sections of these comments.
It appears to Staff that the Certificate Application of SVE has been submitted prematurely.  The Company has not performed a market study.  The Company has not obtained letters of commitment for gas, transportation or capital.  The Company has not obtained local permits.  The Company has not completed final engineering designs.  The Company states that  it intends to first obtain a Certificate before proceeding to make firm commitments or initiate detailed studies.  The Commission, Staff contends, should not grant Certificates based on speculative plans and cursory analysis.  To do so would put potential customers at risk.  The Commission should be provided with assurance by SVE that the Company has minimized the risk to itself and ratepayers.  One way of providing that assurance is for the Company to demonstrate a record of satisfactory service in other areas.  Star Valley is unable to do that.  A second means of providing assurance is to conduct thorough research and analysis, and subsequently, to prepare detailed plans for the system design and operation.  Star Valley has also failed to do this.  This, Staff contends, is particularly crucial for new utilities who have no track record of service.  Finally, whatever financial and operational risk that cannot be avoided should be borne as much as possible by the Company  — not the customers.
A Certificate should not be considered the "first stop" on the way toward formation of a new utility.  To the contrary, it should more likely be closer to the "last stop."  The Commission should expect applicants to demonstrate their commitment to proposed projects, both financially and by preparing thorough, sound plans.  The Commission should be unwilling to grant a Certificate that potentially could be used by SVE to provide false security to potential new customers, the city of Salmon, or lending institutions.
Because of risks, unanswered questions and lack of an operating record, Staff believes an informed decision on SVE’s operations cannot be made.  A Certificate of Public Convenience and Necessity to operate as a natural gas corporation and public utility in the State of Idaho should not be issued until SVE can demonstrate that they are a viable company that can deliver a reliable, economical product capable of competing in the Salmon market.  While the Company's proposal may indeed ultimately satisfy the public convenience and necessity criteria, there simply is too little information available at this time to support such a finding.  The Application is lacking several critical items, some of which are described on the following pages.
Market Study
A market study is needed to evaluate the viability of the proposed project.  Both costs and revenues are dependent on the number of customers who connect to the system.  If fewer than the 800 anticipated customers connect to the system, the system may be oversized and it may be difficult to recover fixed costs at rates attractive to customers.  If a market study indicates fewer customers will hook up, perhaps a smaller, less costly system could be constructed.
Based on preliminary analysis, Staff believes the Company's revised estimate of 800 customers is too high.  According to the 1990 census figures for Salmon, the 1260 housing units in the city are heated as shown in Table 1.
Table 1. Heating System Types in
           Salmon, Idaho
Type of System
No. of Systems
Wood
621
Electric
357
Propane
150
Oil
117
Coal
7
Other/Combination
8
Staff believes that SVE's estimated 90 percent penetration rate is unrealistic.  SVE will face risk associated with competition from other energy sources.  The Company's comparison of fuel costs for natural gas, electricity, propane, fuel oil, coal, and wood shows that natural gas is cheaper than all other fuels except coal.  However, the analysis does not go far enough since it does not consider the cost customers will incur in converting their heating system to gas.  Convenience, comfort, reliability, cleanliness and other factors will likely be considered also.  In some cases, non-cost factors may be sufficient to persuade customers to convert to gas even if it is more costly.  However, in most cases cost will probably be the biggest factor considered.
To analyze the cost-effectiveness of heating system conversions, Staff has calculated simple payback periods using the Company's fuel cost savings estimates and conversion cost estimates obtained from the Department of Water Resources, Energy Division as shown in Table 2.
Table 3 shows that electric and propane conversions would be the most cost-effective, with payback periods of 34 and 50 months respectively.  However, since electricity and propane are both clean, reliable, convenient fuels, the cost advantage of gas may alone not be sufficient to persuade homeowners to convert.
Conversions from wood or oil to gas have payback periods too long to convince customers to convert based on economics alone.  Furthermore, wood users, who represent nearly half of the households in Salmon, are probably not as likely to convert since the economics are not favorable assuming wood costs of $100/cord, and are even less favorable for people who pay little or nothing for their wood.
Oil or coal users, while they may not convert based on cost factors, are probably the most likely to convert based on non-cost factors.
Data from the 1990 census for Salmon also indicate that of 1057 housing units reporting, 644 are owner occupied and 413 are rented.  Furthermore, 30 percent of Salmon's urban population is below the poverty level.  Staff believes rental units are less likely to convert their heating systems because landlords typically pass utility costs through to renters, or in cases where renters pay utility costs directly, renters infrequently make improvements to the housing unit.  Low income residents typically have difficulty financing high cost improvements to their housing units, even if the improvements are economical in the long run.  
The uncertainty of cost and non-cost factors and how they influence customers further underscores the need for a market study to more accurately estimate the number of potential customers.  In any event, Staff's cost analysis alone indicates to Staff that acquiring 800 customers is a very optimistic assumption.
Economic Analysis
Staff believes that a more refined economic analysis is also needed.  SVE has made comparisons of the average cost of various fuels used for space and water heating.  While Staff does not dispute the unit fuel costs used in the analysis, Staff believes SVE's estimate of 1560 therms per month is too high.  Historical data for Intermountain Gas and Washington Water Power indicate that the annual per customer consumption for residential customers is about 750-800 therms.  Data for Mountain Fuel Supply Co., which serves the communities of Preston and Franklin in Idaho, show average annual consumption for residential and commercial customers combined to be 1073 therms from 1990-1994.
Gas consumption will, of course, vary depending upon the climate of a particular area.  However, the long-term average annual heating degree days for Salmon and Preston are very close (Salmon-7620, Preston-7325, NOAA 1941-1970 data).  The climatic comparison of these two cities is, in fact, much closer than the cities SVE has used in its analysis, and probably provides a much better means of estimating consumption.  Staff believes therefore, that a liberal but more accurate estimate of annual consumption would be approximately 1100 therms per customer.
Staff also believes SVE's estimate of an average monthly cost for households using electric heat of $152.31 is too high.  Staff has obtained the average annual kwh usage and dollar amounts billed by Idaho Power in Salmon.  In 1994 the average residential usage for all users, both electrically and non-electrically heated households, was 13,070 kwh and the average residential cost was $633 or $0.048 per kwh.  These figures indicate less consumption than the earlier survey results, but this may be explained by the fact that 1994 was a comparatively mild winter.
Per customer consumption estimates of gas or electricity are important because estimates that are too high will make conversion to gas appear more cost effective than is actually the case.  Staff believes SVE's estimate of per customer gas consumption is at least 30 percent too high.  The estimated savings to convert to gas will correspondingly be 30 percent too high.  This distorts the analysis and provides further evidence to support Staff's belief that 800 customers cannot be acquired.
LNG Storage
Staff reviewed SVE's proposal to install a storage tank capable of holding 50,000 gallons of LNG.  SVE states that they expect the peak day requirement to be 18,500 gal/day.  If the peak day requirement was needed for several consecutive days, then 2.7 days of storage is available.  However, it is unlikely that the peak demand would occur on several consecutive days.  Based on temperatures in Salmon during a very cold period in late December, 1990, Staff estimates that five days of storage is available.  This estimate is also based on an assumption of a peak daily requirement of approximately 10,500 therms, which more closely matches peak consumption estimates for customers served by other gas utilities in Idaho.  Staff believes the storage tank capacity is adequate, but not oversized.
Staff also investigated the probability that a transport company would be unable to deliver LNG due to inclement weather.  While there have been closures of highways leading to Salmon in recent years lasting up to five days, Idaho Transportation Department road closure reports indicate that Salmon has never been isolated due to weather.  It is possible that deliveries of LNG may have to be re-routed due to road closures, but the expected delay should never exceed one day.  Consequently, Staff does not believe additional storage is needed because of delays in delivery, provided however, that the contract with the transport company is firm enough to insure consistent deliveries and the source of supply is uninterrupted.
LNG Supply
SVE has not secured contracts for the supply of LNG.  They have apparently had discussions with several suppliers, and do have approximate ideas about the expected costs.  Staff contends that signed contracts or letters of commitment are necessary in order to accurately evaluate the proposal's economics and to assess risk and reliability.  Information critical to this evaluation includes the following:
1.Companies who will provide LNG,
2.Pricing structure and annual cost adjustment provisions,
3.Where the LNG will be provided for pick-up,
4.Minimum and maximum supply or purchase provisions,
5.Term of the supply agreements,
6.Back-up agreements,
7.Force majeure provisions,
8.Demand Charges
LNG Transport
No contracts have been signed for transport of the LNG to Salmon.  SVE has named a transporter and quoted costs but has asked that the information be treated as confidential.  Staff has checked into the named firm and finds it is registered in the State of Idaho and has the trucks capable of carrying hazardous material, including LNG.  SVE has not signed any letters of intent with this trucker so Staff cannot determine the accuracy of SVE's quoted costs or if this transporter will be the actual one to deliver the LNG.
Financing
SVE has not signed any letters of intent with lending institutions, nor do they give Staff assurance that they will be able to borrow 80 percent of capital in a high risk, start-up company.  Lending institutions, like Staff, need to know more about the financial stability of the Company.  They will be interested in the financing of company operations which will be based on the perceptions of the financial outlook.  They will need to know if SVE can get customers to hook-up fast enough to cover expenses and if there are really the number of hook-ups estimated.  They will need the commitment letters Staff has referred to and an accurate survey that has not been slanted by embellishing the benefits and savings in gas heat.  SVE has also not shown proper cash flow analysis that a lending institution or Staff can use to determine how the everyday business will sustain itself.  This cash flow should at a minimum show receivables, payables, bad debts, salaries, interest and overheads.  The cash flow should take into consideration the time lag between purchasing and delivering the product to burner tip and collection of accounts receivable.  
Staff cannot determine if SVE has or will have enough capital and or credit lines to sustain the company if problems occur.  Staff is concerned about whether SVE can handle cash flow considering large seasonal swings in sales.  Between 1984 through 1993 the peak months of consumption nationally were six times higher on average than the months of minimum consumption for natural gas.  SVE has not considered the price swing for LNG between a high price generally in peak months and the low price in summer months when less gas is used.  Without large storage facilities they cannot smooth the price curve as most local distribution systems do, by buying in the summer when prices are down and using this supply in the winter.  The price of $1.05 mmbtu SVE has quoted for the natural gas is that of a low shoulder month.  Due to warm weather the Rocky Mountain area average for 1994 was $1.53.  If the price goes much lower than $1.05 wells will shut down production rather then selling gas at a loss.  In February 1994 the price was $2.07.  This volatility in commodity price would mean that SVE will incur a loss if rates used contain the $1.05 they suggest without some kind of purchased gas adjustment or the Company will need to apply for frequent rate cases.   
Customer Incentive Programs
SVE indicates that it intends to offer incentives to encourage customers to convert to gas.  They imply that funds are also available from other sources such as BPA.  However, Staff is not aware of any programs offered through BPA to encourage conversions from electric systems to gas.  Furthermore, the city of Salmon is served by Idaho Power Company, not BPA or Salmon River Electric.  Idaho Power also does not have any program in place or planned to offer incentives for conversions from electricity to gas.  It appears much work needs to be done to design an incentive program.  The results of a market study would be useful in designing such a program, and may, in fact, be a prerequisite.
Detailed Engineering Designs and Cost Estimates
More detailed engineering work needs to be done before the cost, reliability and safety of the proposed system can be evaluated.  The Company needs to finalize the design of the system and provide maps showing locations of main lines, distribution piping, valves, and the storage and vaporization facilities.  Once final designs have been prepared, the Company needs to prepare detailed budgets for construction, itemizing such things as materials, labor, meters, engineering, inspection, storage and vaporization facilities, asphalt replacement, and other services.  To date, the Company's cost estimate coincidentally matches the estimate used for a similar system proposed for Afton.
Permits, Easements, Land Acquisition
SVE has not yet acquired land upon which the storage and vaporization facilities will be sited, nor have they secured an option to purchase property.  Since the site for these facilities is still unknown, the Company is unable to apply for a conditional use permit from Lemhi County or acquire easements needed for placing mains and distribution piping.
Tariffs
The Company has not provided tariffs.  Given the early stages of planning for this proposal, it will likely be several months before the Company has enough information to develop tariffs that can be submitted for approval.
DATED at Boise, Idaho, this             day of May, 1995.
__________________________________________
Scott Woodbury
Deputy Attorney General
__________________________________________
Madonna Faunce
__________________________________________
Rick Sterling
SW:umisc\comment\sveg951.com