20040831Decision Memo.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
COMMISSIONER SMITH
CO MMISSI 0 NER HANSEN
COMMISSION SECRETARY
COMMISSION STAFF
LEGAL
FROM:LISA NORDSTROM
DATE:AUGUST 27, 2004
RE:IN THE MATTER OF THE APPLICATION OF AVISTA UTILITIES FOR
AUTHORITY TO INCREASE ITS PURCHASED GAS COST ADJUSTMENT
(PGA) RATE. CASE NO. AVU-04-
On July 23, 2004, A vista Utilities filed its annual Purchased Gas Cost Adjustment
(PGA) Application with the Commission for authority to place into effect new rate schedules that
will increase its annualized revenues by $7.8 million. Avista states that any increases resulting
from this PGA filing directly results from the cost of gas purchased in the marketplace; A vista
Utilities makes no additional profits from the PGA rate change. If this Application is approved
Avista states that Company revenues will increase by approximately 14.2%. When combined
with the base rate increase requested in pending Case No. A VU-04-Company revenues
could increase by approximately 22%.1 A vista requests that the proposed PGA rates become
effective on September 9 2004 to coincide with the effective date of the base rates being
considered in their general rate case.
The Commission issued a Notice of Application, Modified Procedure, and Comment
Deadline on July 29, 2004. Order No. 29554. As of the August 26 comment deadline, the
Commission had received comments from Staff and six A vista customers.
THE APPLICATION
A vista believes this Application should be approved because it purchases natural gas
from a subsidiary of A vista Corporation, A vista Energy, under the provisions of Tariff Schedule
163 (the Natural Gas Benchmark Mechanism). Avista transports this gas over Williams Pipeline
1 The 22% combined increase is comprised of a 14.2% PGA revenue increase in this case and the 7.82% base rate
increase requested in the Company s rebuttal testimony filed in Case No. A VU-O4-
DECISION MEMORANDUM
West (d.a. Northwest Pipeline Corporation) and Westcoast Pipeline systems and defers the
effect of timing differences due to implementation of rate changes and differences between
Avista s actual weighted average cost of gas (W ACOG) purchased and the W ACOG embedded
in rates. Avista also defers the revenue received from Cascade Natural Gas for the release
storage capacity at the Jackson Prairie Storage Facility, various pipeline refunds or charges, and
miscellaneous revenue received from gas-related transactions.
A vista filed proposed tariff sheet 150, which increases the prospective natural gas
cost component included in the rates charged to customers by 11.730 cents per thermo This
requested rate change consists of a 10.750 cents per therm increase related to the (variable)
commodity cost of purchasing and transporting gas for customer usage and a .980 cents per
therm increase related to fixed pipeline costs.
The commodity cost increase is based on a proposed increase in the present W ACOG
included in the Company s gas service schedules. Gas prices have increased markedly since the
fall of2003. The Company s present WACOG included in its gas sales rates is 44.989 cents per
therm, which was approved by Commission Order No. 29342. The W ACOG proposed in this
requested increase is 55.739 cents per therm, reflecting the first-of-the-month (FOM) forward
gas prices as of July 13 , and hedges executed to date. FOM forward prices, weighted by basin
are multiplied by the monthly projected load requirements, less volumes hedged to date. The
Company has executed three hedges to date for the coming winter (November-March) at an
average price of 58.4 cents per thermo Additional hedges will be executed prior to this winter
with total hedged volumes representing approximately 50% of the total annual projected load
requirements for the July 2004-June 2005 period. Should future FOM or hedged prices
substantially change the W ACOG requested in this filing, A vista committed to revise this filing
or submit an additional PGA filing to reflect those changes.
In this filing, A vista is not proposing to change the present amortization rate( s) set
forth under Schedule 155. This amortization rate is used to refund or surcharge customers the
difference between actual gas costs and projected gas costs (from the last PGA filing) over the
past year. The Company has a deferred gas cost balance of approximately $3.3 million, as of
June 30, 2004, reflecting higher gas costs than projected during the past year.However, the
present amortization rate is a surcharge of 3.093 cents per therm, which would recover the
present deferral balance over an approximate 18-month period. The Company believes this
DECISION MEMORANDUM
estimated recovery period is reasonable and, given the substantial increase proposed in the
WACOG, is not proposing a change to the amortization rate.
If the Commission approves the proposed increase, firm sales customers on Schedules
101 , 111 112 121 and 122 will see a rate increase of 11.730 cents per thermo Interruptible sales
customers on Schedules 131 and 132 will see a rate increase of 10.750 cents per thermo The
Application presumes that upon completion of this PGA tracker case, the Company s Tariff
Schedule 150 will be changed to appropriately address both base rate and PGA tracker changes.
A vista is proposing that the large transportation and interruptible customers be given
the option of receiving/paying their portion of the deferred gas costs either through a lump sum
credit/charge or through an amortization rate. If these customers choose the lump sum method
Avista proposes to adjust these billings credits/charges by the amount of interest that
accumulates from the end of the test period used in this filing to the date of actual settlement.
This proposal would clear out the small residual balances related to interest charges that are
carried forward between PGA filings for large customers.
If the Application is approved, Avista states that the Company s estimated annual
natural gas revenue will increase by approximately $7.8 million (14.2%). Avista estimates that
the average residential customer using 70 therms per month would see their monthly bill increase
by approximately $8.21 (14.2%). Larger commercial customers would experience an average
increase between 15.9% and 17.2%, with the higher increase percentages due to lower base rates.
Incorporating its proposed changes to Rate Schedule 150, Avista recommends the following
annualized change in PGA rates per customer class:
Customer Class Schedule Proposed Estimated Proposed
Average Increase Average Increase Average Price
$ /Therm % Change $/Therm
General 101 $0.11730 14.23%$0.89446
Large General 111 $0.11730 15.92%$0.85418
Commercial 121 $0.11730 17.24%$0.79758
Large General 112 $0.11730 17.51 %$0.78702
Interruptible 131 $0.10750 18.06%$0.70268
Interruptible 132 $0.10750 19.19%$0.66768
Transportation 146 none none $0.10574
DECISION MEMORANDUM
STAFF COMMENTS
Staff has reviewed the Application, performed an audit of the gas purchases from
August 2003 through July 2004, and examined additional information supplied by the Company
and third parties.
Staff believes that failure to increase rates to reflect market prices that have been
volatile over the past five years would send an inappropriate price signal to customers. It may
also cause significant deferred gas costs to be recovered through increases next year. Even with
the increase proposed by the Company, gas cost deferrals could still occur. If the Company were
to file based on August 13, 2004 forward prices, the W ACOG would be about 2.5 cents higher
than the proposed W ACOG. Therefore, Staff recommends approving the Company s W ACOG
as requested. Considering market volatility and the possibility for price softening, Staff
recommends that the Company be directed to file for an out-of-period rate decrease if the
projected W ACOG decreases 5% or more from the requested level.
In analyzing A vista s proposal, Staff noted that during the prior PGA period, the
Company followed its price stabilization practice of systematically fixing portions of gas costs
using financial instruments. These hedges provided substantial price protection and provided
Idaho customers a benefit of $43 252 for the period.
Staff also discussed the ramifications of a Northwest Pipeline metering error. During
a review of gas purchased from suppliers and sold to customers, A vista determined that it sold
more gas to customers in the Lewiston area than it had purchased. Upon further investigation, it
was determined that one of the Northwest Pipeline (Northwest) meters in the Lewiston area was
set at a fixed-flow rate during September 2002 through February 2004. As a result, the deliveries
to Lewiston from Northwest were significantly under-recorded and A vista owed the difference to
Northwest. Northwest's tariff states that the gas must be replaced, and Avista was faced with
purchasing significant amounts of gas from the current high-priced market. Because the gas is
currently more expensive than during the time of the incorrectly set meter and the meter error was
Northwest's fault, the Company was able to negotiate a settlement with Northwest to return less
gas than was undercounted.Staff attached an analysis of the settlement agreement
Confidential Attachment A and the confidential settlement agreement between A vista and
Northwest that details the amounts in question as Confidential Attachment B to its comments.
DECISION MEMORANDUM
Because the allocation of pipeline and gas costs between Washington and Idaho is
based on pipeline meter readings, the costs recorded during the meter error time period were
incorrectly allocated.Staff has reviewed Avista s reallocation of costs between Idaho and
Washington and believes it accurately represents actual conditions. Because the error occurred
in Idaho, Idaho customers will be required to pay the majority of the costs associated with the
meter error. The Company has appropriately reallocated some of the costs originally assigned to
Washington back to the Idaho deferral account. The approximately $3.5 million will be paid
back through a $2.4 million increase in the Idaho deferral account and a $1.1 million increase in
future gas costs.
In sum, Staff recommends that the Commission: 1) approve the Company s request to
leave Schedule 155 at $.03093 per therm to recover the deferred balance in approximately
months, 2) approve the Company-requested W ACOG of $0.55739 per therm, and 3) require the
Company to file for an out-of-period rate decrease if the projected W ACOG decreases 5% or
more.
PUBLIC COMMENTS
As of August 26, 2004, the Commission had received six comments from customers
regarding the proposed 14.2% purchased gas cost adjustment. All opposed the increase.
Comments from the fixed-income customers stated it would be nearly impossible to pay higher
rates for natural gas. As one customer stated
, "
I implore the Utilities Commission to reduce, if
not deny outright, Avista s most recent request for rate increases." Several commenters cited the
history of sizable rate increases over the past several years and insisted that the previously-
approved rate increases should be sufficient for A vista s needs.
COMMISSION DECISION
Does the Commission wish to approve Avista Utilities' PGA Application as filed?
M: A VUGO402 In2
DECISION MEMORANDUM