HomeMy WebLinkAbout2002020128941.docBEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF AVISTA UTILITIES’ APPLICATION FOR APPROVAL OF MODIFICATIONS TO ITS NATURAL GAS BENCHMARK MECHANISM )
)
)
)
)
CASE NO. AVU-G-01-3
ORDER NO. 28941
On November 8, 2001, Avista Utilities (Avista, Utility) petitioned for Commission approval to continue its current Natural Gas Benchmark Incentive Mechanism (Benchmark Mechanism) with proposed modifications. Avista supplies natural gas to approximately 55,000 customers in northern Idaho. The Utility did not propose a change in rates or annual revenue in this filing. In Order No. 28916, the Commission ordered that this case be processed under Modified Procedure and established a January 11, 2001 comment deadline. After reviewing the comments and record in this case, the Commission approves the: 1) Application with qualifications; 2) proposed tariff Schedule 163 revisions; and 3) Staff recommendations to be effective April 1, 2002 as set out in greater detail below.
I. THE CURRENT BENCHMARK MECHANISM
The Benchmark 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 current 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 gas procurement and management risk to Avista Energy. Petition at 2.
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 Utility 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. Id. 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. Id.
II. AVISTA’S PROPOSED BENCHMARK MODIFICATIONS
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 the first 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. Id. at 3.
Second, 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. Id. Third, 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. Id. at 12. Finally, 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. Id. at 13-14.
The Utility proposes that the gas benchmark remain in effect for a three-year period, until March 31, 2005. Id. at 1. The Benchmark Mechanism would then continue in effect year-to-year thereafter subject to modification or termination upon six-month prior notice by the Utility, Avista Energy, or any state commission. Id. Avista requests that the Commission approve the accompanying tariff sheets on or before February 1, 2002 to become effective April 1, 2002. Id.
III. COMMENTS
A. Commission Staff Comments
Staff recommends approval of the changes to the Benchmark Mechanism requested by Avista with several additions and modifications.
1. Commodity Component: Staff generally agrees with Avista’s proposal to divide the Benchmark Mechanism’s Commodity Component into four tiers. Tier 1 represents the 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 prices 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 Utility 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. According to Staff, this methodology would have minimal customer impact “because 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 the 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.
2. Capacity Release and Off-System Sales: Because the Utility maintains sufficient transportation capacity to meet its peak daily requirements, the Utility has excess transportation on most days. Although the Utility 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.
3. Termination and Renewal of the Benchmark: Seven months prior to the contract’s termination on March 31, 2005, Staff recommends that Avista file an analysis of the Benchmark Mechanism detailing the costs and benefits to customers, to the Utility and to Avista Energy. Id. The report would also include any recommended changes or modifications that the Utility may have to the Benchmark Mechanism. 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. Id. Although it does not endorse the proposed automatic benchmark renewal provision, 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. Id.
4. RMC and Commission Oversight: Staff proposes that Avista create a Risk Management Committee (RMC) to plan and execute a gas procurement program that will benefit customers. Id. at 11. Staff also makes specific recommendations regarding the documentation that Avista should retain to allow the Commission to verify that Avista is using all available expertise to optimally minimize natural gas procurement costs. Id. at 12.
To facilitate Commission oversight, 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 also advocates the Utility continuing to file quarterly reports that provide details of gas purchases, off-system sales, hedging activities and other benchmark-related items. Id.
With regard to Avista’s hedging program, Staff recommends that the Utility be required to file a hedging schedule in accordance with Staff recommendations prior to securing hedges. Id. Staff urges the Utility and Avista Energy to continue abiding by the Standards for Competitive Practices. Id. Finally, Staff recommends that the Utility continue to make nominations for transportation customers to ensure that market sensitive information is not passed on to its affiliate, Avista Energy. Id.
B. 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.”
C. Avista’s Reply Comments
Avista’s reply comments focused on the Staff’s recommendation that a “Risk Management Committee” (RMC) be formed 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 Utility 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. Id.
IV. COMMISSION FINDINGS
The Commission has reviewed and considered Avista’s Application in Case No. AVU-G-01-3. The Commission has also considered Staff’s analysis and recommendation in this matter, Staff’s proposed changes and modifications, the public comment filed by John T. Penberthy, and the Company’s reply comments. The Commission continues to find that the issues presented are suitable for processing under Modified Procedure, i.e., by written submission rather than by hearing. IDAPA 31.01.01.204.
While we generally endorse Avista’s Tier 1 hedging program as a foundation for market gas acquisition, the Commission believes that Avista must continue to pay close attention to market conditions. If market prices are extremely favorable, Avista should seriously consider acquiring more than 40.37% in hedges to minimize upside price risk and assure reasonable rates for customers. The Commission expects Avista to take advantage of favorable market conditions to prudently lock in low prices for as much of its volumes as possible. If the Strategic Oversight Group determines that market prices are extremely low (relative to historic low levels), Avista should informally brief the Commission and suggest an appropriate amount of gas to acquire beyond the 40.37% based on strategic analysis.
With the exception of the name given the Risk Management Committee/Strategic Oversight Group, we note that Avista has not objected to Staff’s recommended modifications. To minimize confusion, we find it appropriate to identify this supervisory entity as the “Strategic Oversight Group.” In considering the filings of record the Commission finds the changes to Avista’s Benchmark Mechanism Application proposed by Staff, and tacitly agreed to by the Company, to be reasonable. We find it appropriate to approve, as modified by Staff, Avista’s Benchmark Mechanism Application and the related Schedule 163 tariff for a three-year period. We further find the requested April 1, 2002, effective date to be reasonable.
V. CONCLUSION OF LAW
The Idaho Public Utilities Commission has jurisdiction over this matter and Avista Utilities, a natural gas utility, pursuant to the authority and power granted under Title 61 of the Idaho Code and the Commissions Rules of Procedure, IDAPA 31.01.01.000 et seq.
VI. O R D E R
IT IS HEREBY ORDERED that the Application of Avista Utilities for authority to continue its current Natural Gas Benchmark Mechanism with proposed modifications, together with revised natural gas tariff Schedule 163, be approved effective April 1, 2002.
IT IS FURTHER ORDERED that Avista form a Strategic Oversight Group to manage gas procurement and risk in the interest of ratepayers.
IT IS FURTHER ORDERED that if the Strategic Oversight Group determines market prices to be extremely low, Avista shall informally brief the Commission and suggest an appropriate amount of Tier 1 gas to acquire beyond the 40.37% hedging limit.
IT IS FURTHER ORDERED that storage gas be withdrawn for peak shaving under Tier 4 of the Benchmark Mechanism’s Commodity Component only if the storage gas is less costly than that available on the wholesale market.
IT IS FURTHER ORDERED that to facilitate Commission oversight, Avista shall retain the following information: 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 relevant to the decision-making process; summaries of risk management meetings between the Utility and Avista Energy; and written decisions resulting from each risk management meeting signed by an appropriate management representative.
IT IS FURTHER ORDERED that the Benchmark Mechanism shall terminate on March 31, 2005 unless renewed by this Commission.
IT IS FURTHER ORDERED that the Company shall file an analysis of the benchmark program detailing the costs and benefits to customers, to the Company and to Avista Energy seven (7) months prior to the contract’s termination on March 31, 2005. The report shall also include any recommended changes or modifications that the Company may have to the Benchmark Mechanism. The Commission reserves the right to review and modify the Benchmark Mechanism as necessary after reviewing and analyzing the first year’s results and/or issuance of a final ruling by the Washington Commission.
IT IS FURTHER ORDERED that the Commission reserves the right to continue auditing the books, operations and records of Avista Energy as it did with the Benchmark Mechanism approved in Order No. 27908.
IT IS FURTHER ORDERED that Avista continue to file quarterly reports that provide details of gas purchases, off-system sales, hedging activities and other Benchmark-related items.
IT IS FURTHER ORDERED that Avista shall file a systematic yet flexible hedging schedule with the Commission prior to securing hedges.
IT IS FURTHER ORDERED that Avista Utilities and Avista Energy continue to abide by the Standards for Competitive Practices. Avista Utilities shall continue to make nominations for transportation customers to ensure that market sensitive information is not passed on to its affiliate, Avista Energy.
THIS IS A FINAL ORDER. Any person interested in this Order may petition for reconsideration within twenty-one (21) days of the service date of this Order. Within seven (7) days after any person has petitioned for reconsideration, any other person may cross-petition for reconsideration. See Idaho Code 61 626.
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho, this
day of February 2002.
PAUL KJELLANDER, PRESIDENT
MARSHA H. SMITH, COMMISSIONER
DENNIS S. HANSEN, COMMISSIONER
ATTEST:
Jean D. Jewell
Commission Secretary
O:AVUG013_ln2
ORDER NO. 28941 -1-
Office of the Secretary
Service Date
February 1, 2002