20051027final order no 29902.pdf

Office of the Secretary
Service Date
October 27, 2005
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF A VISTA UTILITIES FOR AN ORDER
APPROVING A CHANGE IN NATURAL GAS
RATES AND CHARGES (2005 PURCHASEDGAS COST ADJUSTMENT)
CASE NO. A VU-05-
ORDER NO. 29902
On September 12, 2005, Avista Utilities (Avista, Company) filed its annual
Purchased Gas Cost Adjustment (PGA) Application with the Idaho Public Utilities Commission
(Commission) requesting authority to place new rate schedules in effect as of November 2005
that will increase its annualized revenues by $15.7 million (23.80/0). The PGA mechanism is
used to adjust rates to reflect changes in the costs for the purchase of gas from wholesale
suppliers including transportation, storage, and other related costs of acquiring natural gas. The
Company contends that its earnings will not be increased as a result of the proposed changes in
prices and revenues.
The Commission issued a Notice of Application and Modified Procedure on
September 29, 2005. Order No. 29876. Pursuant to Rule 125 IDAPA 31.01.01.125
Commission Staff conducted a public workshop in Coeur d' Alene on October 2005. The
Commission received written comments from Commission Staff and approximately 40
individual customers. After reviewing the comments and record in this case the Commission
approves the Company s Application as more fully set forth below.
THE APPLICATION
A vista states that it purchases natural gas for customer usage and transports this gas
over various pipelines for delivery to customers. The Company defers the effect of timing
differences due to implementation of rate changes and differences between the Company s actual
Weighted Average Cost of Gas (W ACOG) purchased and the W ACOG embedded in rates.
A vista also defers the revenue received from the release of its storage capacity as well as various
pipeline refunds or charges and miscellaneous revenue received from gas-related transactions.
The Company requests an increase in the prospective natural gas cost component
included in the rates charged to customers of 21.443 cents per thermo This consists of an
increase of 21.047 cents per therm related to the commodity cost of purchasing and transporting
gas for customer usage and an increase of .396 cents per therm related to fixed pipeline costs.
ORDER NO. 29902
The Application requests an increase in the Company s annual revenue of approximately $15.
million or about 23.8%. If approved, the average residential customer using 70 therms per
month would see an estimated increase of $16.36 per month.
Avista requests an increase in the present W ACOG from 55.739 cents per therm to
76.786 cents per therm, an increase of 21.047 cents. This reflects first-of-the-month (FOM)
forward gas prices as of August 4, 2005 , and the Company s hedges executed to date. The
Company executes hedges to fix the price of gas on approximately 50% of its estimated annual
gas sales for the year, and uses a dollar-cost averaging approach for executing hedges, with those
volumes divided into 45-day execution windows between February 15 and November 15. The
Company states that it has completed approximately 80% of its scheduled hedges for the
upcoming PGA year, November through October.
The Company is also proposing a change in the present amortization rate, which 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. Avista proposes to increase the amortization
rate from the present surcharge of 3.093 cents per therm to 5.027 cents per thermo The Company
states it has a deferred gas cost balance of approximately $3.5 million as of June 30, 2005
reflecting higher gas costs than projected during the past year. The proposed increase in the
amortization rate is expected to recover this balance over 12 months.
The Company states that notice of its proposed increase in price has been
accomplished by posting a notice at each of the Company s district offices in Idaho, a press
release distributed to various informational agencies, and a separate notice to each of its Idaho
gas customers included in their billing. A vista attached copies of these notices to its Application.
ST AFF COMMENTS
Staff has reviewed the Application, performed an audit of gas purchases and
reviewed additional information supplied by the Company and third parties. In analyzing
Avista s proposal , Staff discussed: (1) market prices and factors affecting the W ACOG; (2) the
deferred expenses from the previous PGA year; (3) the termination of the deferral due to the
Northwest Pipeline error; (4) the cost of hedges purchased for price stability; (5) the cessation of
the Benchmark Mechanism for gas purchases; (6) Avista gas procurement and risk
management policies and procedures; and (7) consumer issues. Staff recommended that the
requested increase in the W ACOG, and the 12-month amortization of deferred expenses be
ORDER NO. 29902
approved. Staff also recommended that the Company be directed to continue its monthly
reporting of the changes to and balances in the deferral accounts, continue reporting the
ACOG quarterly, and enhance its documentation of gas hedging.
Staff reviewed the Company s proposed W ACOG against other forecasts, including
those published weekly by the US Energy Information Administration. Staff noted that this
requested increase, reflecting the Company s belief that the cost of gas will continue to rise, is
consistent with the forecasted northwest regional cost of natural gas.
Staff stated that the increase in the Company s cost of purchasing natural gas and the
price risk that natural gas market volatility poses to consumers in Idaho is driven by factors that
have been previously recognized and evaluated by the Commission and Staff. Growing demand
combined with long lead times to deliver new production to consumers contributes to the
continuing upward price trends. In addition, construction of pipelines that can now deliver
natural gas from the Company s natural gas sources to the eastern United States and California
markets in larger volumes than a few years ago contributes to the upward price trends. This
increased market access for gas producers creates for the Company the same volatility and price
increases as those experienced by other national and world market supplies.
Staff noted that the forward looking W ACOG set in last year s PGA was fairly
reflective of the market rate until late summer of this year. However, in the past three months
the market indexes for natural gas have been extremely volatile and prices have increased
significantly. In August and September the effects on natural gas production of two major
hurricanes in the Gulf of Mexico contributed to the volatility. The NYMX price for natural gas
peaked recently at $1.48 per therm and is currently in the $1.38 range. These weather factors
have exacerbated what was already a volatile market with increasing prices.
Staff also noted that A vista uses an amortization rate set forth under Schedule 155 to
refund or surcharge customers the difference between actual gas costs and the projected costs
allowed in the previous PGA filing. In previous PGA filings, A vista has voluntarily amortized
the deferred balance over periods longer than one year to mitigate the effects of price increases
on customers. A vista has, in the past, been the only utility company in Idaho to amortize this
deferred balance over periods exceeding one year. However, in this current filing, A vista
proposes to use a 12-month amortization period because of uncertainty and volatility in the
ORDER NO. 29902
natural gas markets. Staff believes that the 12-month amortization period for deferred balances
is appropriate for this case, and recommends accepting the proposed surcharge increase.
Given that natural gas market prices have actually increased since the Company
filing in September, Staff recommended that the requested increase in the W ACOG and the 12-
month amortization of deferred expenses be approved. Any reduction in the W ACOG requested
by the Company could expose customers to greater W ACOG increases and larger deferred
balances next year.
Staff reported that the final payment for gas replacement to correct the Northwest
Pipeline meter error, discussed by Staff in last year s PGA See Order No. 29590, will be made
this month. The additional deferral balance caused by the re-allocation of costs between Idaho
and Washington due to the error will be completely removed.
A vista discontinued the use of the Benchmark Mechanism, previously used to
purchase gas from its affiliate, Avista Energy, after the Washington Utilities and Transportation
Commission ordered it to do so for its Washington customers. Rather than attempting to
maintain the Benchmark Mechanism in Oregon and Idaho while eliminating the mechanism in
Washington, A vista discontinued using the mechanism in all of its service territories. Staff
stated that because the system is so intertwined, it could impose an undue burden on A vista
Utilities to continue purchasing gas from A vista Energy under the Benchmark Mechanism in
Idaho while simultaneously undertaking the tasks of managing the procurement and delivery of
gas solely within A vista Utilities for its Washington customers. A backcast analysis using the
Benchmark Mechanism will be evaluated to determine if eliminating the Benchmark Mechanism
has harmed customers. This analysis will also be used as an evaluation tool for prospective
procurement and risk management programs. Management fees were paid and passed through
to customers under the Benchmark Mechanism. A vista Utilities will now incur additional
salaries and other costs for gas procurement. Staff stated that these costs will be fully examined
for reasonableness in the next rate case.
Staff believes a risk management program is very important for A vista Utilities and
its customers. Staff recognized that a common approach to gas procurement throughout all of
Avista Utilities' jurisdictions may provide efficiencies that could also benefit customers
significantly. Without A vista Energy to make gas purchases under the Benchmark Mechanism
agreement for A vista Utilities, A vista Utilities was forced to rapidly implement a new Natural
ORDER NO. 29902
Gas Supply, Procurement and Hedging Policy. At this time, especially with high gas prices and
volatility, it is critical for A vista Utilities to expand and formalize its risk management practices.
Staff will work with the Company to formalize an acceptable program. Staff has reviewed the
initial drafts of the policy and believes the policy takes the first steps to provide for disciplined
purchases and hedges without speculation or causing undue risk to customers. However, Staff
found little written documentation illustrating that the Company was following its written
policies. To avoid second-guessing the reasonableness and prudence of the Company
purchases, adequate documentation surrounding such purchases is required. Enhancing the
minutes of the Strategic Oversight Group to include details and surrounding circumstances of
large natural gas purchases is a simple improvement that can be implemented immediately
without causing an undue burden on the Company.
Staff reported that Avista Utilities ' shareholders give more to fuel funds on a per-
customer basis than any of the other regulated utilities in Idaho. In the past five years, A vista
shareholders have given a total of $565 000 to Project Share. In addition to the donations to fuel
funds, an agreement was reached last year with Community Action Partnership of Idaho in
which A vista agreed to increase its funding for low-income weatherization purposes from
$108 000 per year to $350 000 per year.
In summary, Staff recommended that the requested increase in the W ACOG, and the
12-month amortization of deferred expenses, be approved. Staff also recommended that the
Company be directed to continue its monthly reporting of the changes to and balances in the
deferral accounts, continue reporting the W ACOG quarterly, and enhance its documentation of
gas hedging.
PUBLI C COMMENTS
The Commission received comments from approximately 40 customers of A vista, all
of whom opposed the rate increase. In general, customers' comments focused on continued
increases in the cost of natural gas and other necessities without commensurate cost of living
increases for those on fixed incomes. Many of those who commented voiced concerns that those
who are unable to afford higher heating bills will be forced to go without medications or other
necessities. Several references were made to the historical representation that natural gas was an
abundant and cheap source of fuel and to utilities' efforts to encourage customers to convert to
natural gas for space and water heating. Several comments also questioned the Company
ORDER NO. 29902
earnings and profits and suggested that the shareholders and CEO reduce salaries, expenses, use
of the corporate jet, etc. ... to absorb the increase in gas supply costs.
DISCUSSION AND FINDINGS
We have reviewed the record for this case, including the Application and comments.
No protests to the Commission s use of Modified Procedure were filed. We continue to find that
the public interest does not require a hearing to consider the issues presented in this case and that
Modified Procedure is appropriate. IDAPA 31.01.01.204. The Commission has jurisdiction
over A vista Utilities, its Application for authority to change gas rates, and the issues involved in
this case by virtue of Title 61 , Idaho Code, specifically Idaho Code ~~ 61-129, 61-117, 61-307
and 61-501 , and the Commission s Rules of Procedure, IDAPA 31.01.01.000 et seq.
The Commission is required to establish just, reasonable, and sufficient rates for
utilities subject to our jurisdiction. Idaho Code ~ 61-502. The PGA mechanism is used to adjust
rates to reflect changes in the costs for the purchase of gas from suppliers, including
transportation, storage, and other related costs of acquiring natural gas. The Company s earnings
are not to be increased from changes in prices and revenues resulting from the annual PGA. The
PGA mechanism is designed to pass through prudently incurred commodity costs in a timely
fashion.
Wholesale natural gas prices have continued to fluctuate dramatically.
Unfortunately, the Idaho Public Utilities Commission has no authority over the wholesale price
of natural gas, as it is an unregulated commodity subject to regular market forces. Additionally
unfortunate is the volatility that this market has been experiencing over the last several years.
The volatile natural gas market has seen forecasts of future costs at record levels and resulted in
increased uncertainty about when and where prices will stabilize. A public utility such as A vista
is obligated to serve all those in its territory who demand service. It cannot, like a non-regulated
business, cut back on purchases when the price is too high. It must meet the demand of its
system, its customers. As a result, the law requires that the Company be allowed to recover the
costs that are prudently incurred in serving its customers.
While we understand and are sympathetic to the economic difficulties faced by
customers, especially those of low or fixed incomes, resulting from the dramatic increases in the
cost of natural gas, we note that the PGA is a limited gas tracker and not a general rate case. As
this Commission in prior Orders has previously observed, the nature of costs included in the
ORDER NO. 29902
Company s PGA Applications are generally external costs over which the Company has little or
no control. Although we recognize the Company maintains an element of control in its
contracting practices, the Commission has confidence that should the Company s actions appear
out of the ordinary or imprudent the review process would reveal the same. We continue to find
the PGA mechanism to be a useful regulatory vehicle for tracking and adjusting for gas-related
costs.
Given the specific customer concerns, we wish to make clear that no portion of this
increase is to pay executive officers of A vista; to pay debts arising from poor investments or
imprudent purchases; or to pay advertising costs or the sponsorship of sports teams/arenas. The
rate increase in this case is solely related to the recovery of costs from the increased price of
natural gas. A vista will receive no additional profits from the increased rates as any adjustment
is offset by the cost of gas purchased. That being said, we still recognize that the rate increase is
substantial. Unfortunately, there is little choice but to approve the Application. Should forward
commodity prices decrease by 5% or more below the W ACOG approved in this Order, the
Commission directs Avista to promptly seek a rate adjustment.
The Company s proposed ACOG was compared to other forecasts and is
consistent with the forecasted northwest regional cost of natural gas. Both A vista and Staff
believe the proposed W ACOG of $0.76786 per therm to be appropriate. Given the considerable
market uncertainty, forward prices since the Company s filing indicate the possibility of an even
higher W ACOG. Setting a lower W ACOG would ignore the price increases that have occurred
since the Company s filing and could potentially result in a significantly higher deferral balance
subject to recovery next year. For the foregoing reasons, we find it reasonable to increase the
WACOG from $0.55739 per therm to $0.76786 per therm and approve the 12-month
amortization of deferred expenses.
2005.
The rate increase approved in this Order shall become effective on November 1
The Commission orders A vista to adjust . its billing and file new tariffs prior to
implementing the new rate. Idaho Code ~ 61-618.
A vista s abandonment of the Benchmark Mechanism formerly used to purchase gas
from its affiliate, Avista Energy, at the direction of the Washington Utilities and Transportation
Commission has forced the Company to implement its own Natural Gas Supply, Procurement
and Hedging Policy. A competent and effective risk management program is very important for
ORDER NO. 29902
Avista Utilities and its customers. We are satisfied, based upon Staffs review, that the Company
has taken the first steps in providing for disciplined purchases and hedges without speculation or
causing undue risk to customers. However, the Company is directed to continue to work with
Staff in order to formalize an acceptable program. At a minimum, the Company must enhance
the documentation of its gas hedging and large gas purchases to facilitate the Commission
review of those purchases for reasonableness and prudence.
ORDER
IT IS HEREBY ORDERED that Avista Utilities' Application in Case No. A VU-
05-2 is approved. The Company shall file tariffs in conformance with a W ACOG of $0.76786 to
be effective November 2005. Avista shall promptly seek a rate adjustment if forward
commodity prices decrease by 5% or more below this W ACOG.
IT IS FURTHER ORDERED that the 12-month amortization of deferred expenses be
approved as filed.
IT IS FURTHER ORDERED that Avista Utilities continue to file quarterly W ACOG
projections and monthly deferred cost reports with the Commission. Additionally, the Company
is directed to continue to work with Staff to enhance its risk management and documentation of
gas purchases.
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 with regard to any
matter decided in this Order. Within seven (7) days after any person has petitioned for
reconsideration, any other person may cross-petition for reconsideration. See Idaho Code 9 61-
626.
ORDER NO. 29902
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this ~ 1 fA
day of October 2005.
ARSHA H. SMITH, COMMISSIONER
ATTEST:
le D. Jewell
Commission Secretary
O:A VU-O5-02 dw2
ORDER NO. 29902