20010126avug005-swahnhmf.doc

SCOTT WOODBURY
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 1895

Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5983

Attorney for the Commission Staff

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF THE APPLICATION
OF AVISTA CORPORATION DBA AVISTA UTILITIES - WASHINGTON WATER POWER DIVISION (IDAHO) FOR AN ORDER APPROVING A CHANGE IN NATURAL GAS RATES AND CHARGES. )
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CASE NO. AVU-G-00-5

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 in response to the Notice of Application, Notice of Public Workshops and Hearing, Notice of Modified Procedure, Notice of Comment Deadline and Order No. 28602 issued on December 21, 2000, submits the following comments.
On December 8, 2000, Avista Corporation dba Avista Utilities (Avista; Company) applied to the Idaho Public Utilities Commission (Commission; IPUC) for authority to implement new rates and charges for natural gas service in the state of Idaho. As computed by the Company, the total requested net annual revenue increase in Idaho is $14,106,437 (29.19%).
Staff has reviewed the filing made by the Company in this case and reviewed the information provided. Staff’s limited audit revealed no irregularities. The Company’s earnings will not be changed by this increase. Staff recommends that the Company’s Application be approved. Below are the average monthly increases and the tariff rates proposed by the Company:

Average Increase per Customer Avista Idaho Gas Customers Estimated Estimated Present Proposed Monthly Increase Schedule Description Rate Rate Increase 101 General 0.62036 0.80685 $ 14.92 28.20% 111 Large General $ 342.02 First 200 Therms 0.63674 0.82323 Next 800 Therms 0.62036 0.80685 Over 1,000 Therms 0.52814 0.71463 112 Large General $ 514.71 35.11% First 200 Therms 0.60520 0.79169 Next 800 Therms 0.58882 0.77531 Over 1,000 Therms 0.49660 0.68309 121 Commercial $ 6,063.35 35.91% First 500 Therms 0.62691 0.81340 Next 500 Therms 0.62036 0.80685 Next 9,000 Therms 0.52814 0.71463 Over 10,000 Therms 0.51123 0.69772 122 Commercial $36,256.83 38.77% First 500 Therms 0.59537 0.78186 Next 500 Therms 0.58883 0.77531 Next 9,000 Therms 0.49660 0.68309 Over 10,000 Therms 0.47969 0.66618 131 Interruptible 0.40235 0.58779 $ 5,913.31 46.09% 146 Firm Transportation 0.10574 0.10574 $ 0.00 0.00%
AVISTA FIRM NATURAL GAS TARIFF COMPONENTS
Avista firm service rates as described in Schedules 101-General Service, 111-Large General Service, 112-Large General Service, 121-High Annual Load Factor Large General Service, and 122-High Annual Load Factor Large General Service are subject to three adjustments that affect the actual rate customers pay. Those three adjustments are described in Schedules 150-Purchase Gas Cost Addition, 155-Gas Rate Adjustment, and 158-Tax Adjustment.
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 Addition (also known as Permanent Gas Cost Changes) is a forward looking cost adjustment to reflect anticipated changes in the variable cost of transportation and cost of gas. Schedule 155-Gas Rate Adjustment (also known as Temporary Adjustment) is a true-up for over- or under-collected costs of gas. Schedule 158-Tax Adjustment is a rate adjustment mechanism that adds the local franchise fee taxes to the rates and is adjusted as the franchise fees are changed. The sum of the tariff rate plus or minus (+/-) the Permanent Gas Cost Changes plus or minus (+/-) the Temporary Adjustments plus (+) the Tax 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. For this filing, the Company proposes no change to the $.03154/therm rates currently contained in this schedule. The current rate will generate approximately $2,363,000 over one year towards the estimated December 31, 2000 balance of $12,900,000 in deferred gas costs. Because of the rising cost of gas, the balance of the deferred gas cost account continues to climb. Staff is concerned that the deferral balance could grow to an estimated $25,000,000 by the end of the year 2001 even with the requested permanent increase. Twenty-five million dollars represents an increase in one-year rates of over 50% just to collect the deferred costs. The Company has recommended a continued deferral of unrecovered gas costs until the next PGA request anticipated to take place during the Fall of 2001. At that time, the Company may make other recommendations regarding the recovery of the deferred balance.
At this time, Staff believes there are three reasons Schedule 155 costs should continue to be deferred. First, the proposed commodity Weighted Average Cost of Gas (WACOG) of $.48044/therm together with the present amortization charge of $.03154/therm from Schedule 155 means that gas prices going forward average $.51198/therm, a significant increase without changing the deferred recovery. Second, there is the possibility that the proposed WACOG will be high enough to start paying down the deferral account later this year. While the WACOG is lower than current prices, it is very close to forecasted gas prices later in the year. Finally, with the increase authorized in September 2000 (29.04%) combined with the one proposed here (29.19%), customers will experience a tremendous increase in rates. Staff shares the Company’s concern regarding its customers’ ability to manage such an increase. Therefore, we find the Company’s proposal to defer recovery of purchase gas costs until a later date to be reasonable.
SCHEDULE 150 – PERMANENT GAS COST CHANGES
Schedule 150 is used by the Company to reflect continuing changes in the cost of purchasing and transporting gas for customers. These costs are increasing in Idaho and throughout North America. Demand for gas continues to push supply to the limits. One of the major factors causing the price to rise is the increased demand for gas to generate electricity. Increased demand is also caused by cold weather in the Northwest and throughout the country, late storage injections and the purchase of Western Canadian gas by customers in the Midwest. Limited drilling and exploration for new gas supplies has not kept up with demand. Finally, Northwest Pipeline operating requirements mandate purchases from the more expensive Sumas Citygate. This requirement in the form of an “Operational Flow Order” has limited access to supply options at lower prices.
Not only is gas expensive, but also the market continues to be extremely volatile. Prices continue to change ten to twenty percent or more in a single day. This makes forecasting extremely difficult. Staff was able to compare gas futures prices for the coming year with the Company’s proposed WACOG. Here are some selected futures prices based on Benchmark proportions (AECO, 50%; Sumas, 25%; and Rockies, 25%) on January 8, 2001:

February 2001 $.8990/therm
April 2001 $.5770/therm
July 2001 $.5770/therm
October 2001 $.5490/therm
December 2001 $.6310/therm

Compared to these prices, Avista’s commodity WACOG of $.48044/therm is below current market levels for every month. The Company is hoping to secure cheaper gas in the future than is currently available on the market. Because of the high prices we have seen lately and the $12,900,000 currently estimated to be in the deferral account, Staff believes it is important to grant the entire amount requested by the Company in the permanent adjustment schedule as soon as possible. The increase will send the correct price signal to the Company’s customers regarding the need to adjust their gas usage and conserve where possible.

AVISTA’S NATURAL GAS PURCHASES AND THE BENCHMARKING MECHANISM
Mechanism
Avista, like the other natural gas utilities in Idaho, relies primarily on spot market purchases for the supply of gas. Avista, however, is different than other natural gas utilities, because it has a gas purchase benchmark. The benchmark mechanism establishes the monthly purchase price for gas on the first of each month based on two publicly available published prices. The first of the month pricing as reported in Inside FERC Gas Market Report for US purchases and the Canadian Gas Price Reporter for Canadian gas purchases. These two monthly published listings establish the price Avista books and will charge customers for gas during that month. Consumers are not affected by price changes throughout the month since Avista can only charge the published price. The benchmark mechanism provides a single monthly price on which to determine deferrals and a known and auditable price for spot market natural gas.
Consumers typically are not subject to the once-a-month price changes in their bills because of the Purchase Gas Cost Adjustment Account (Schedule 150). The Company has an established tariff rate for gas service that it is allowed to charge customers. If the price it pays for gas on the monthly index is greater or less than the rate established in the tariff, the difference is held in the Purchase Gas Cost Adjustment Account. If the account becomes too large in either direction, positive or negative, then the Company may request an adjustment before the IPUC.

Structure and History
In February 1999, the Company, with Commission approval, began the benchmarking mechanism for an approximately three-year trial period ending March 31, 2002. Avista chose to use its unregulated arm, Avista Energy, to manage the natural gas purchases through the benchmark mechanism. The agreement for Avista Energy to purchase gas for Avista Utilities through the benchmark mechanism was finalized with an effective benchmark beginning date of September 1, 1999. The benchmark mechanism sets the price customers will pay for gas at the monthly index prices.

Results
The gas benchmark mechanism required quarterly reports be submitted to the IPUC over the test period to allow the Commission to observe the progress of the program. Just over one year has passed and the benchmark through the month of November 2000 has provided natural gas cost savings to Idaho customers in the amount of approximately $1.7 million.

Other Benefits and Costs
Other benefits were secured for the customers with the benchmark mechanism. Natural gas utilities have fixed long-term capacity contracts with pipeline and natural gas production companies to assure adequate delivery capacity. Since the usage of natural gas is quite variable from month-to-month or even day-to-day, there are many occasions when all of the capacity is not needed. The IPUC requires that the utility attempt to lease the unused capacity to others when it is not needed to help offset the cost of these fixed contracts. In order to be able to implement the benchmark mechanism, the Commission required the Company to provide a guaranteed level of benefits. The value of the capacity releases and off-system sales are fixed over the experimental period with $2,019,000 each year as the amount returned to customers. The actual and fixed values of the leases/sales are reported quarterly for review by the IPUC. Through October 2000, the fixed benefits to customers for the capacity releases and off-system sales revenue totaled $200,000 in excess of actual lease/sales revenue. However, by November 2000 due to significant price run-ups, the actual price received from capacity releases and off-system sales was greater than the fixed benefit amount thereby allowing Avista Energy to keep approximately $1.4 million. The benchmark mechanism provides for the review of the amount provided to customers from such releases and sales on a yearly basis. Staff is working with the Company to review those amounts so they accurately reflect the benefit to customers.
The fee charged by Avista Energy to cap price risk at first-of-the-month market prices and to manage the purchase and storage of gas, capacity releases, and off-system sales is $.005 per therm. Since Avista Utilities is not performing these activities any longer, the Company provides a credit to customers for the administrative and overhead expenses saved in the amount of $35,300 annually. The $.005 is $.001 less than originally requested by the Company in 1999 at the establishment of the mechanism.

Summary
The Avista Utility Benchmark Mechanism has provided Avista’s Idaho natural gas customers 1) a set monthly price with a price discount during months that prices increase,
2) revenue from capacity releases and off-system sales and 3) administrative savings. The benefits to customers through November 2000 amount to the following:

$ 1,700,000 Estimated Gas Purchase Savings
(-$ 1,460,000) Net Capacity Releases and Off-system Sales
$38,000 Administrative and Overhead Savings since September 1999 (13 months)
$278,000 Total Savings through November 2000.

Staff has identified several attributes of Avista's PGA mechanism that have provided modest cost reductions to customers over what could have otherwise occurred. However, the identified cost savings seem almost insignificant when compared to customer exposure to rapidly increasing market prices. This is particularly true when the fees paid to Avista Energy are loaded into the cost of gas. Staff proposes to conduct further review of the benchmark mechanism and hedging practices to question whether the Company and its customers are receiving adequate services for the fees paid to Avista Energy for its expertise in gas acquisition and transport rather that receiving full exposure to a high cost market. This may require changes to the benchmark mechanism.
Moreover, the Company has apparently determined that full reliance on market purchases may not be reasonable and has therefore requested approval to recover costs associated with hedging designed to reduce market price exposure. Staff believes its continued review should question whether services that include risk assessment and development of a gas purchase strategy are a function for the distribution company or a service that should be included in the current contract with Avista Energy. The current PGA and benchmark mechanism simply track market prices to demonstrate customer costs and benefits. Sufficient information has not been provided on risk assessment/planning services provided by Avista Energy or that there are sufficient incentives to undertake such services to secure gas at the lowest possible cost for customers.
Staff intends to work with the Company to determine what services should appropriately be provided by Avista Energy in its acquisition of gas for Idaho customers. Staff will also continue to review all purchase decisions with respect to:

Current market conditions
Current and future prices
Information available to the affiliate marketer
Any other information useful in establishing purchase strategies
OTHER ALTERNATIVE PRICING MEASURES
Price Hedge
Avista recently requested approval of measures it believes will address the currently unprecedented rising gas costs. Avista is purchasing financial hedges to secure the price on a portion of the gas supply. The hedge will fix the cost of a portion of the supply and reduce customer exposure to today’s wildly fluctuating natural gas spot market. The final volume and cost of the financial hedges are still under investigation. The use of financial hedges is one example of a way to provide some price stability to Idaho customers in this chaotic natural gas market.

DEMAND SIDE MANAGEMENT
Avista currently has no gas demand side management (DSM) program in place. However, the Company has submitted a tariff to generate funds in support of such a DSM program. Avista’s proposed Tariff 190 would generate funding for demand side management programs in energy improvement assistance and market transformation. Funding of up to 50% can be provided for projects that show positive benefit to cost ratios. Avista would approve DSM projects, Avista External Energy Efficiency Board (Triple-E) would provide program oversight, and the IPUC would review for cost recovery. The Company has proposed Idaho funding of slightly over $300,000 annually. Staff believes that energy improvement assistance and market transformation could assist residential, low income, commercial and industrial customers in reducing the impact of rising gas prices. Staff is currently reviewing the proposed tariffs.

STAFF ANALYSIS - CONSUMER
The Application that Avista filed on December 8, 2000, in Case No. AVU-G-00-5 contained both a customer notice and press release. Both met the requirements of Rule 102, Notices to Customers of Proposed changes in Rates in the Utility Customer Information Rules (IDAPA 31.21.02). Avista began sending the notice to customers with the December 11 billing and continuing through the entire billing cycle, which ended near the middle of January due to the holidays.
Between December 13, 2000, and January 26, 2001, the Consumer Assistance Staff took comments via telephone from eight customers, all opposed to the increase. The Commission has received and placed in its case file written comments from 109 customers and four petitions, one from Bonner County containing 100 signatures, and three petitions from customers in Boundary County containing 158 signatures. All oppose the increase. One of the petitions from Boundary County states in part, "If the proposed rate increase is truly needed, then we as citizens look to the Idaho Utilities Commission as the primary force in addressing inequities being perpetrated by natural gas suppliers. Citizens and the Utilities Commission need collectively to ask the government to support massive change in meeting our nation's energy needs thereby avoiding the economic chaos we are now experiencing."
Several of the customers filing comments expressed a belief that Avista's poor management practices resulted in the need for a rate increase. Several of the comments recommended that Avista cut its own costs before asking for another rate increase. Other comments indicated a belief that the rate increase was to recover Avista's cost for advertising. Customers expressed concern over the differences in the increases granted to Avista by the Idaho and Washington Commissions. Customers also mentioned increased costs in other commodities, such as gasoline, prescriptions and Medicare health insurance, all of which make it more difficult to accommodate higher energy bills. A few of the comments addressed the low wages in northern Idaho and the inability of those that either have a low income or are on a fixed income to pay the requested increase. The city of Bonners Ferry also sent written comments to the Commission requesting that the proposed increase in rates be denied. The city offered information concerning low wages, unemployment, and the percentage of people at the poverty level in Boundary County.
Staff analysis of customer concerns show that these are not generally matters considered in a PGA filing. Only the increasing price of gas is included in this increase. The matters raised by customers are usually dealt with in a general rate case. The nature of the concerns raised by customers however seems to indicate that the Company has not been very successful at explaining to customers the reason for its requested increase in this case or distinguishing the differences in its Washington and Idaho filings.
Avista is aware that the requested increase will add to the burden that many of its customers are already experiencing with high bills. The early and extended cold weather has caused a significant increase in usage. To help customers more easily budget, Avista offers Comfort Level Billing, which is a levelized payment plan that averages a customer's annual bill into equal monthly payments. Customers can sign up at any time for a 12-month plan that is renewed in the anniversary month each year. Avista evaluates the level payment amounts quarterly and may adjust the payment, depending on usage, up to two times in a year. Approximately 12% of Idaho customers take advantage of Comfort Level Billing. Most of the 13,731 customers that participate are residential customers. Avista can also work out special payment arrangements if a customer is having difficulties paying. For example, a customer can pay a set amount plus the current bill to catch up a past-due amount, or establish a payment plan for a set amount each month (other than the Comfort Level billing). Customers may contact Avista concerning payment arrangements at 1-800-227-9187.
In addition to the arrangements that Avista offers, there are several energy assistance programs available to help low-income customers pay their utility bills. The Low Income Home Energy Assistance Program (LIHEAP), a federally funded program, is administered by the Idaho Department of Health and Welfare, which subcontracts with Community Action Agencies located throughout Avista's service territory to deliver the services. Energy Assistance benefits are based on income (133% or less of the federal poverty level) and the number of people in the family. For example, a family of four with a monthly income of no more than $1,890 income or $4,705 for three months would qualify for assistance. The benefit is a one-time award annually. Help is available from LIHEAP from December 1 through May 31. For this heating season, the average estimated benefit for a family is $231. From January 20, 2000 through December 20, 2000, thirty-five gas customers received energy assistance grants totaling $5,727. An additional 904 customers that have both gas and electric service received energy assistance grants of $164,467. The number of recipients is expected to increase this year, primarily because of the increase in utility rates and greater public awareness of the availability of financial assistance to pay for approved and proposed rate increases. The LIHEAP program has also received increased publicity because of media coverage during Intermountain Gas' recently concluded PGA case as well as Avista's pending Power Cost Adjustment (PCA) case. Unfortunately, even though rates rise, the amount of dollars available for energy assistance does not. Avista currently has 9,039 gas-only customers in Idaho. There is a total of 57,033 Idaho customers that have both gas and electricity.
Project Share is also administered by the Community Action Agencies in northern Idaho. The guidelines for Project Share are more lenient because the benefit is based more on need than on income. Project Share may be used once annually and the maximum award is $200. Project Share is funded by donations from utility customers as well as a $20,000 annual donation to Project Share from the Avista Corporation; that donation provides funding for both Washington and Idaho residents. Project Share determines how much each state will receive from the donation. Project Share receives funds periodically throughout the year, not just during the heating season.
Avista has a number of different payment arrangements to help customers manage their utility bills. There are programs, such as LIHEAP and Project Share, to help low income customers and those with emergency needs pay their utility bills. The Avista web site, http://www.avistautilities.com, contains information concerning home energy costs and ways to conserve energy and lower costs. There is an interactive energy audit that many of Avista's customers may find helpful. The Company provided their customers with tips on how to save energy in a billing insert in October 2000.
This is the second large increase in gas rates requested by Avista Gas within a year. To address the increase, the Idaho Public Utilities Commission conducted three workshops and two public hearings in northern Idaho between January 22 and January 24, 2001. Commission Staff and Avista both presented information explaining the reasons and recent events that have led to a need for a second substantial increase in natural gas rates. At the conclusion of the presentations, both the IPUC Staff and Avista answered questions from the public. The hearings in Lewiston and Coeur d'Alene followed the workshops. Approximately 36 area residents attended the workshop in Lewiston on January 22, 2001. Three people offered comments at the public hearing. On January 23, 2001, forty people attended the workshop in Coeur d'Alene. Nine residents offered comments at the hearing that followed the workshop. All of the people offering testimony opposed the proposed increase in gas rates. Eighteen people attended the workshop in Sandpoint on January 24, 2001.

RECOMMENDATIONS
1. Staff recommends approval of rates as filed by the Company to send the proper price signal to customers and reduce additional undercollected gas costs from accruing in the deferral account.
2. The Staff also recommends that Avista be directed to continue their efforts providing customers information regarding energy conservation, available payment methods and resources for financial assistance. Specifically, Staff recommends that within 30 days of the Commission's final Order in this case, Avista provide its customers with a pamphlet similar to the one shown in Attachment 1, which was prepared by Intermountain Gas Company for distribution to its customers. Intermountain Gas's pamphlet contains information in an easily-understandable format and can be readily adapted to Avista's situation as a provider of both gas and electric service. Staff made the same recommendation in the pending Avista PCA case, AVU-E-00-9.

Dated at Boise, Idaho, this day of January 2001.

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Scott Woodbury
Deputy Attorney General

Technical Staff: Michael Fuss
Nancy Harman
Alden Holm

AH:SW:gdk:i:wpfiles/umisc/comments/avug005.swah
STAFF COMMENTS 7 JANUARY 26, 2001