20040927Summary Report.pdf

Avista Corp.
1411 East Mission POBox3727
Spokane, Washington 99220-3727
Telephone [phone]
Toll Free 800-727-9170
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August 30, 2004
Idaho Public Utilities Commission
472 W. Washington Street
Boise, ill 83702 AVLI- C;'. eJ -3 ~
Attention: Jean D. Jewell
Re: A vista Utilities Natural Gas Benchmark Mechanism Summary Evaluation Report.
Pursuant to Commission Orders No. 28941 and 29557 Avista Corporation (hereafter, Avista
Utilities or the Company) hereby submits an analysis of the Natural Gas Benchmark
Mechanism (Benchmark Mechanism). This report includes infonnation related to the
operation of the Benchmark Mechanism, from its inception through June 30, 2004. This
report also addresses the impact on Idaho customers of the termination of the Benchmark
Mechanism.
Background:
A vista Utilities and A vista Energy have had an agency agreement in place since the fall of
1999, which calls for Avista Energy to provide natural gas supply management services to
A vista Utilities. These services are regulated by the Idaho Public Utilities Commission (IPUC
or Commission) under Tariff Schedule No. 163 "Natural Gas Benchmark Mechanism." The
structure of the Benchmark Mechanism was modified in 2002 and the current tariff is effective
through March 31, 2005.
The Commission s Order No. 28941, dated February 1, 2002, specified the reporting to be
provided to the Commission related to the Benchmark Mechanism:
.. ..
the Company shall file an analysis of the benchmark program detailing the costs
and benefits to customers, to the Company and to A vista 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.(page7)
A vista Utilities Natural Gas Benchmark Summary Evaluation Report Page 2
In addition, in the Commission s Order No. 29557, in Case No. A VU-03-, related to
A vista Utilities' Integrated Resource Plan, the Commission ordered that:
" . . .
the company is directed in its August 31, 2004 Schedule 163 Benchmark Program status
report filing (Case No. A VU-01-3) to address the WUTC Benchmark Incentive Mechanism
order, the Company s transition plan, and the related regulatory consequences and economic
and operational ramifications in Idaho of terminating the Benchmark Program." (page 3)
On February 13 , 2004, in Docket No. UG-021584, the Washington Utilities and
Transportation Commission (WUTC) issued an order terminating the Benchmark Mechanism
in the state of Washington, and requiring A vista Utilities to file a transition plan to move the
natural gas procurement functions from A vista Energy back into A vista Utilities. The
transition plan filed by A vista Utilities, and approved by the WUTC, calls for the gas
procurement functions to be moved back to the Utility by March 31 , 2005. This date
coincides with the tenn of the Benchmark Mechanism approved by the IPUC and the Oregon
Public Utilities Commission (OPUC) of March 31 2005.
During the transition period there will be no additional costs to Idaho customers. The attached
analysis indicates that moving the procurement functions back to the utility will result in
increase in annual costs of approximately $200 000 to $400 000 for Idaho customers. This
increase in costs is related primarily to an increase in labor costs at the Utility, an increase in
credit (collateral) costs, and the loss of benefits currently being provided by A vista Energy
under the Benchmark Mechanism.
Please direct any questions related to this filing to Liz Andrews at [phone].
Sincerely
Kelly Norwood
Vice President, State and Federal Regulation
Encl.
Idaho Benchmark Mechanism Report
I. Summary of Costs and Benefits
The costs and benefits to Idaho customers have been reported quarterly since the
Natural Gas Benchmark Mechanism (Benchmark Mechanism) began in September 1999.
While the precise difference in total benefits between the Utility managing the portfolio and
A vista Energy managing it is difficult to quantify, an estimate of the cost to return the
Benchmark Mechanism back to the Utility is included later in this report under the section
entitled ID. Impact of Benchmark Mechanism Termination." That analysis, which includes
estimated costs for such expenses as employee labor, credit, load volatility, etc., shows that the
estimated total cost to A vista Utilities ' Idaho customers of returning the gas procurement
functions back to the Utility ranges from $200,000 to $400 000 annually.
copy of the Benchmark Mechanism Quarterly Summary Reports previously
provided to the Idaho Public Utility Commission (IPUC) for the two-year period ending June
2004 is provided as Attachment II
II. Net Loss to Avista Ener2Y During: the Benchmark Mechanism
A vista Energy s actual operation of the Benchmark Mechanism (September 1999
through February 2003) has netted an average annual loss of approximately $428 000. This
average loss was driven primarily by events in 2000 from the unprecedented high prices that
occurred in the market. During this time period, A vista Energy was at risk for the intra-month
volatility in market prices.As intra-month prices rose to unprecedented levels during
November-December 2000, Avista Energy absorbed these costs compared to first-of-the-
month index, and customers benefited significantly.
A vista Utilities Natural Gas Benclunark Mechanism
Summary Evaluation Report Page 1 of 6
III. !!!!pact of Benchmark Mechanism Termination
With the expiration of the Benchmark Mechanism on March 31 , 2005 , Avista
analysis indicates that moving the gas procurement functions back to the Utility will result in
an increase in costs ranging from $200 000 to $400 000 annually for Idaho customers.
Described below are the components of this analysis.
(1) Employee labor and other related costs - Includes Idaho allocation of the cost of
adding 5 personnel to the Utility: Director, Gas Supply; Gas Buyer, Capacity Release
specialist Scheduler and a resource accountant, plus other costs such as computer
equipment, etc. Idaho s share totals approximately $142.000 annually.
(2) Credit Facility - In May 2004, the Company s line of credit was amended to increase
the available amount from $245 to $350 million in order to accommodate, among
other things, increased credit requirements for additional gas purchases by the Utility.
Idaho s share of the cost to increase the credit facility for the Utility (approximately
$36 600) plus the additional cost of posting $10 Million in LC's ~ 150 basis points
($150 000) for Idaho s volume, totals approximately $186.600 annually.
(3) Premium for Physical Delivery - The calculated premium for physical delivery was
based on an index market analysis of the three basins from November 2002 to October
2005. The weighted average index for the premium was $0.0073 per Dth. Idaho
estimated volume of7.2 million Dth x .0073 totals $52.500 annually.
( 4) Currency risk - Currency Risk has been estimated at $0.01 per Dth. The AECO
market trades almost exclusively in Canadian Dollars. The Utility assumes the risk of
supplying this gas to a US $ market of$O.Ol per Dth x Idaho s volume of 7.2 million
Dth totals $72.000 annually.
(5) Load Volatility Represents Idaho s pro rata share of the estimated cost/benefit to
cover load volatility. The cost of covering load volatility in any gas portfolio is
difficult to quantify. Satisfying load volatility includes several components. Under the
Benchmark Mechanism in Idaho, A vista Energy utilized the benefits of basin
optimization to offset the cost of guaranteeing the load swings (volatility) within tier 2
at First of Month index cost. Historically, this number has ranged from a benefit to
customers, due to the high price period in 2000, to a net cost to customers. The
historical numbers have varied greatly due to the energy crisis in 2000, and changes in
the market including volatility of loads, as well as changes to the mechanics of the
Benchmark Mechanism. Accordingly, the Company has estimated that the
expectation going forward for the Utility to cover load volatility is a net benefit to
customers ranging from $400.000 to $600.000 annually.
A vista Utilities Natural Gas Benclunark Mechanism
Summary Evaluation Report Page 2 of 6
(6) Estimated Loss of Transportation Benefits - This is Idaho s pro rata share of the
estimated loss in Capacity Release/Off System Sales benefits provided by A vista
Energy which totaled approximately $700.000 annually.
(7) Adder component:The $0.05 adder per Dth component, which was paid to Avista
Energy in order to cover a portion of the above listed expenses, totaled approximately
$360.000 annually based on Idaho s estimated volumes. With the return of the gas
procurement functions back to the Utility, this expense for the Utility will terminate
and therefore is a benefit to customers.
Supporting workpapers are provided with this report.
IV. Post Transition Strate2Y:
Following the transition of the natural gas procurement functions back to Avista
Utilities, the Utility will manage its gas portfolio in a structured fonnat similar to the structure
that is in place with the Benchmark Mechanism. Physical purchases will be a mix of first of
month index purchases, fixed price tenn contracts for winter and annual supply and efficient
storage management to capture winter/summer price differentials. Storage will also be
utilized to assist in daily balancing and mitigation of high cost day pricing.
The Utility will continually monitor market trends and review the most effective mix
of fixed and index pricing and storage management to provide the best pricing scenario for
customers, balancing between price stability, supply reliability and current market. The
company believes that the structure established under the Benchmark Mechanism is a
fundamentally sound portfolio management structure. Transition Plan
Because gas purchasing as well as the transportation asset management function for all
three states (ill, W A, OR) is handled as one pooled portfolio it is not practical to separate one
state from the others.To do so results in inefficiencies for all states because of the
A vista Utilities Natural Gas Benclunark Mechanism
Summary Evaluation Report Page 3 of 6
administrative burden and the inability to separate the transportation and storage assets and
still capture the load diversity associated with serving customers across a broad geographic
area. The transition plan approved by the WUTC calls for A vista Energy to continue to
manage the natural gas procurement functions for A vista Utilities until March 31 , 2005 under
the following tenns: 1) there is no sharing of costs and benefits between Avista Energy and
A vista Utilities ' customers during the transition period - 100% of the costs and benefits are
assigned to customers; 2) although A vista Utilities will consult with A vista Energy regarding
natural gas procurement, the decisions will be made by A vista Utilities, and the transactions
executed by Avista Energy; and 3) Avista Energy receives $75 000 per month during the
transition period for the service provided. A vista Utilities is currently in the process of hiring
additional personnel in order to return the gas supply management function to the utility by
April 1, 2005.
V. Transition Documents
The Commission s order in Case No. A VU-GO-03-directed Avista to provide
Commission Staff with copies of all Benchmark Mechanism Transition documents submitted
in the Company s other jurisdictions. All Benchmark Mechanism Transition documents
submitted to other jurisdictions have been previously submitted to Idaho Commission Staff.
An additional copy of the Transition Plan as filed with the WUTC is included with this filing
as Attachment I.
VI. Transition Activities and Goals:
Numerous activities related to the transition have already occurred at the Utility including
those summarized below.
A vista Utilities Natural Gas Benclunark Mechanism
Summary Evaluation Report Page 4 of 6
1) Gas Acquisition During: Transition:
Several meetings have occurred with A vista Energy related to purchasing
strategies for both physical gas and financial hedges for the upcoming year.
The Utility has an employee on the A vista Energy trading floor each morning
to observe and capture the tenns on deals done for the utility.
1) Credit Facility:
In May 2004, the Company s line of credit was amended to increase the
available amount from $245 to $350 million in order to accommodate
increased credit requirements for additional gas purchases by the Utility.
Personnel:
The utility has added a position in Resource Accounting to assist with the
additional workload of the transition and post transition period.
. A search is underway to fill the position of Director of Gas Supply. This will
be an addition to the Utility's gas supply department that will enhance the
level of skill sets with respect to gas acquisitions, portfolio management and
will assist with staffing at the Utility.
Other staffing which is needed to reinforce the scheduling team, gas
purchasing and transportation asset management will be finalized with the
assistance of the new Director.
~ Counterpartv Contracts:
The Utility has been expanding its supplier list by adding master agreements
for gas purchases and sales with numerous third party suppliers.
A vista Utilities Natural Gas Benclunark Mechanism
Summary Evaluation Report Page 5 of 6
Other Transition Activities;
Both the Utility and A vista Energy have been preparing lists of activities that
need to occur prior to transition, for example, notification of all suppliers that
A vista Energy will no longer be acting as agent for the Utility. The list also
includes changing the agency delegation for A vista Energy s nomination and
scheduling on all pipelines that have contracts with the Utility.
Avista Utilities Natural Gas Benclunark Mechanism
Summary Evaluation Report Page 6 of 6
IDAHO BENCHMARK MECHANISM REPORT
A TT ACHMENT I
TRANSITION PLAN
vista Utilities
Washington Transition Plan for Benchmark Mechanism
Introduction:1. Under the proposed Transition Plan, the Natural Gas Benchmark Mechanism
(Benchmark Mechanism) and Schedule 163 would terminate effective April 30
2004. For accounting purposes it will be important to terminate at the end of a
calendar month.
With regard to the Transition Plan, the Commission stated in its Order at paragraph
89 that:
. ..
it acknowledges the Idaho and Oregon arrangements, leaving room for
discussions of parties that develop a transition that coordinates with other
A vista operations and provides the least disruption to the company and its
ratepayers.
In addition, the Commission stated at paragraph 91 and again at paragraph 111:
In developing the schedule for transition, the parties may consider that the
Mechanism as it currently exists in Oregon and Idaho expires in March 2005.
The Commission will consider a further extension of the expiration date, if
necessary, depending on the plan we approve for transition of the
Mechanism. "
3. Recognizing that the Transition Plan should be one that "provides the least disruption
to the company and its ratepayers " the proposed Plan would tenninate the Benchmark
Mechanism in Washington in the near-term, while attempting to avoid the
inefficiencies during the Transition Period associated with having part of the
procurement functions at A vista Energy (Idaho and Oregon) and part of the functions
at A vista Utilities (Washington). To illustrate this point:
With regard to transportation (especially), if the execution of transactions
were to be immediately transferred back to the utility, the utility does not yet
have trained staff in place, nor does the utility have adequate counterparty
contacts to properly optimize available pipeline transportation through
capacity releases and off-system sales. The proposed Transition Period
would provide time to hire additional staff and train them, so that they would
be fully prepared to begin execution at the end of the Transition Period.
The staff positions necessary to perfonn the natural gas procurement
functions require highly trained individuals with respect to the natural gas
commodity markets, pipeline transportation systems, the utility s specific
system, available storage facilities and related requirements, and the utility
retail loads for each season of the year, among other things. It will likely take
a minimum of several months to identify, interview and hire these
individuals, and additional months to train them on A vista s system and load
characteristics. During the Transition Period one or more of the utilities
employees would be located with A vista Energy in order to train them in the
operations and prepare them for the April 1 , 2005 transfer.
The transportation assets and supply portfolio are operated as a pool to gain
efficiencies. If the Washington operations are separated from the
Idaho/Oregon operations, it would result in inefficiencies and increased costs
to customers. For example, the demand diversity across Avista s whole
system allows the Company to project a system peak day that is lower than
the sum of the design peak in each state, because the peak day does not occur
on a coincident basis. As a second example, the pipelines allow the Company
to consolidate system imbalances for all states.
Details of Proposed Transition Plan:
Termination of Schedule 163 and the Benchmark Mechanism:The current
Benchmark Mechanism and Schedule 163 would tenninate effective April 30, 2004.
The proposed Transition Period would be May 1 , 2004 through March 31 , 2005.
During the proposed Transition Period, the Utility would continue to consult with
and draw on the expertise of Avista Energy, however, the management and decision-
making related to the natural gas procurement functions would reside with A vista
Utilities, under the Manager of Gas Supply. The execution of transactions would be
conducted by Avista Energy. There would be no incentive-sharing (i., 80%/20%).
All costs and benefits associated with commodity, Jackson Prairie (JP) Storage
transportation and basin optimization would go to Avista Utilities' customers. Avista
Energy would only receive a management fee to cover a portion of the costs it occurs
in providing this service during the Transition Period, as set forth below.
Incentive Sharing Eliminated:No Sharing of costs or benefits by Avista Energy,
including:
No sharing of benefits associated with:i. Commodity transactions, including basin optimization;ii. Storage summer/winter differential; and
iii. Transportation - Capacity Release/Off-System Sales.
No sharing of costs associated with:i. Intra-month load and price volatility; andii. Miscellaneous risks, e., currency, premium for physical delivery,
nomination errors, counter-party risk, operational flow orders or
en ti t1 em en 1.
Commodity:Under Avista Utilities' direction, Avista Energy would purchase a
portion of the Utilities ' natural gas requirements months in advance , some at first of
month (FOM) index, along with daily purchases and sales (including basin
optimization) and the use of storage to balance load. The decision to use storage to
cover load versus purchasing from the daily market would be made by Avista
Utilities. All costs and benefits associated with the commodity costs to serve the
utility s load, including basin optimization, would be billed or credited to utility
customers.
Storage:Under Avista Utilities' direction , Avista Energy would inject and withdraw
storage providing the winter/summer price differential and reliability of peak day
demand coverage. All costs and benefits associated with the storage transactions
would be billed or credited to utility customers.
Transportation:Under A vista Utilities' direction, A vista Energy would optimize
available pipeline transportation through capacity releases and off-system sales. All
costs and benefits associated with these transactions would be billed or credited to
utility customers.
Management Fee:A vista Utilities would pay A vista Energy a management fee of
$75 000 per month during the Transition Period for the services provided, which
would be included in the PGA costs. The purpose of the fee would be to compensate
Avista Energy for a portion of their costs such as employee labor and associated
support costs and credit and banking costs, as shown in the table on Page 32 of the
Commission s Sixth Supplemental Order.
10. Training/Misc.During the transition period, Avista Utilities would complete the
tasks necessary to bring the gas procurement functions back within the utility, i.
hiring and training of employees, pipeline, storage and third party supplier
notifications of change in contract relationships, development and documentation of
internal administrative procedures, etc.
11. Other Jurisdictions:The Benchmark Mechanism tenninates in Idaho and Oregon
March 31 , 2005. Effective April 1 2005 execution of natural gas procurement
services for all three states (Washington, Idaho and Oregon) would revert to the
utility.
ATTACHED REPORTS IN
CASE FILE
VU O3-
AND ALSO IN
A VU-OI-