20051020Comments.pdf

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DONOVAN E. WALKER
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 5921
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Street Address for Express Mail:
472 W. WASHINGTON
BOISE, ill 83702-5983
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
AVISTA UTILITIES FORAN ORDER
APPROVING A CHANGE IN NATURAL GAS
RATES AND CHARGES (2005 PURCHASED GAS COST ADJUSTMENT).
CASE NO. A VU-05-
COMMENTS OF THE
COMMISSION STAFF
The Staff of the Idaho Public Utilities Commission, by and through its Attorney of
record, Donovan E. Walker, Deputy Attorney General, respectfully submits the following
comments in response to Order No. 29876, issued on September 29 , 2005.
BACKGROUND
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 1 , 2005
that will increase its annual revenues by $15.7 million (23.8%). 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.
STAFF COMMENTS OCTOBER 20, 2005
The Company contends that its earnings will not be increased as a result of the proposed changes
in prices and revenues.
THE APPLICATION
According to A vista s Application, if the requested price increase is approved the
Company s annual revenue will increase by approximately $15.7 million or about 23.8%. The
average residential customer using 70 therms per month would see an estimated increase of
$16.36 per month.
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 impact 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 Cascade 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 of21.047 cents per therm related to the commodity cost of purchasing and transporting
gas for customer usage and an increase of 0.396 cents per therm related to fixed pipeline costs.
Avista requests an increase in the present W ACOG from 55.739 cents per therm to
76.786 cents per therm, an increase of21.047 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. 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 proj ected gas costs
from the last PGA filing over the past year. A vista proposes to increase the amortization rate
from the present surcharge of3.093 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
ST AFF COMMENTS OCTOBER 20, 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.
The rates proposed by the Company, based on base rates currently in place, are shown
below:
Estimated
Proposed Average Proposed
Increase Increase Average Price
Customer Class Schedule $/Therm % Change $/Therm
General 101 23377 24.53%1.18692
Large General 111 23377 26.57%16890*
Large General 112 21443 23.91 %1.11863*
Commercial 121 0.23377 28.91 %1.15779*
Commercial 122 21443 26.88%1.10752*
Interruptible 131 20414 28.69%91560
Interruptible 132 21047 31.11%88693
Transportation 146 00000 00%10976
*Price per therm for initial block of usage
SCHEDULE 150 PURCHASED GAS COST ADJUSTMENT
The purchased gas cost adjustment is a forward-looking cost adjustment that reflects the
anticipated changes in the variable cost to purchase and transport natural gas for customers.
Avista requests a Schedule 150 rate increase of$0.21443/therm for rate Schedules 101 , 111 , 112
121 and 122, and a rate increase of$0.21047/therm for interruptible sales Schedules 131 and
132. The rate is based on an increase in the overall Weighted Average Cost of Gas (WACOG)
proposed by A vista.
Weighted Average Cost of Gas
Avista has requested a W ACOG of$0.76786/therm for the coming PGA year. This is an
increase of37.76 % over the present W ACOG, which was approved in Order No. 29590 and
became effective on September 9 2004. The table below shows the past and the proposed
ACOG along with the resulting total Schedule 101 (residential) tariff and the percent change in
both the W ACOG and the tariff for the most recent 5 years.
STAFF COMMENTS OCTOBER 20, 2005
APPROVED RESUL TING
YEAR T ARIIF WEI GHTED % CHANGE TOTAL % CHANGE
WAS A VG. COST FROM GENERAL FROM
EST ABLISHED OF GAS,PREVIOUS SERVICE PREVIOUS
$/THERM YEAR SCHEDULE 101 YEAR
TARIFF, $/THERM
2000 29500 Base Year 62036 Base Year
2001 0.48044 62.86%89753 44.68 %
2002 34572 28.04%75722 15.63%
2003 0.44989 30. 1 3 %77716 63%
2004 55739 23.89%95315 22.64%
2005 76786 37.76%18692 24.53%
(proposed)
Last year s W ACOG of $0. 55739/therm was based on forward gas prices for the Company
supply sources as of the date of submittal, and while actual gas prices varied throughout the year
the W ACOG 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 exasperated what was already a volatile market with increasing prices.
These increases in the Company s cost of purchasing natural gas and the price risk that
natural gas market volatility poses to consumers in Idaho are 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 in the past ten years 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.
The Company acquires the natural gas it sells to its customers by purchasing
approximately 50 percent of forecast needs in advance of that need on a fixed price basis using a
programmatic system aimed at providing low and stable prices relative to the market. The other
ST AFF COMMENTS OCTOBER 20, 2005
50 percent of the gas is acquired as spot or index priced gas in the market as needed. The
programmatic purchasing is disciplined and is the result of specific company strategic review of
markets and the setting of purchasing goals and triggers for purchase of gas based on needed
volumes, windows of opportunity to purchase, and maximum and minimum purchase price
goals. Fixed price gas volumes for the heating season are purchased months in advance.
Nationally, the levels of gas being placed into storage, for winter withdrawal, have
dropped as the prices have risen in late summer and fall. However, the total national storage that
will be available as the heating season begins is within the average range for the most recent
five-year period. The Company relies on storage for winter demand peaks and has the needed
capacity of the storage it owns available for this coming winter. Storage quantities with hedged
purchases should be sufficient to meet winter peak demand.
The Company proposed W ACOG of $0.76786, a 37.76 % increase over the 2004
approved W ACOG, was reviewed by Staff against other forecasts, including those published
weekly by the US Energy Information Administration. Staff notes 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.
SCHEDULE 155 - DEFERRED EXPENSES
Avista uses an amortization rate set forth under Schedule 155 to refund or surcharge
customers the difference between actual gas costs and the proj ected costs allowed in the previous
PGA filing. In this Application, the Company requests an increase in the Schedule 155
amortization rate of$0.01934 per therm over the current surcharge of$0.03093 per therm or
$0.05027 to recover approximately $3.5 million that has accrued through June 30, 2005. The
proposed surcharge will allow Avista to recover its deferred costs in approximately 12 months.
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
been the only utility company in Idaho to amortize this deferred balance over periods exceeding
one year. However, in this current filing, Avista proposes to use a 12-month amortization period
because of uncertainty and volatility in the 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.
STAFF COMMENTS OCTOBER 20, 2005
The deferred balance consists of the following:
Amount
Accrued Through
Deferred Account Item June 2005
BegInning Deferred Costs Balance 577 077
Wholesale Gas Costs Above the W ACOG 410 333
Fixed Pipeline Charges 373 132
Cascade Natural Capacity Releases (192 172)
Benchmark Deferrals 572 567)
Off-System Capacity Release/Sales (719 010)
Interest on Deferrals 128
Administrative & General Benefit Credit (26,4 75)
Refunds to Industrial Customers/Transfer to Amortization Accounts 577 050)
Under-Collections from Prior PGA Year 180,489
Total Deferred Amount Owed by Customers $3,483,885
Staffhas reviewed the Application, performed an audit of gas purchases and reviewed
additional information supplied by the Company and third parties. In analyzing A vista
proposal, Staff believes there are several issues that need to be addressed: the cost of hedges
purchased for price stability, the cessation of the Benchmark Mechanism for gas purchases, the
return of gas to Northwest Pipeline due to a meter error, and the necessity for sufficient
documentation of gas procurement policies and practices.
Northwest Pipeline Meter Error
During last year s PGA case, Staff commented on a Northwest Pipeline (Northwest)
meter error in Lewiston, Idaho, which allowed A vista to sell more gas to customers than it had
purchased. Northwest's tariff states that the gas had to be replaced. Rather than A vista having
to purchase more expensive gas in the high-priced market to replace the excess gas received, the
companies negotiated a settlement for monthly replacement of the gas. The final payment for
gas replacement to correct the meter error will be made this month and the additional deferral
balance caused by the reallocation of costs between Idaho and Washington due to the error will
have been completely removed.
ST AFF COMMENTS OCTOBER 20, 2005
Hedges and Financial Instruments
During the prior PGA period, the Company followed its price stabilization practice of
systematically fixing portions of gas costs using physical hedges and financial instruments.
A vista hedges up to its estimated minimum daily demand each month with a combination of
fixed price gas purchases and scheduled withdrawals from available storage. Typically, these
hedges total approximately 50 percent of the Company s forecasted loads. To quantify the
benefits of the Company s hedging practices for the previous PGA year, the hedged price was
compared to the First of Month (FOM) index price and the difference was multiplied by the
hedged volume. For the period from July 2004 through June 2005, the Company s hedging cost
approximately an additional $743 227. However, because of the recent spike in natural gas
prices, the hedges executed during the summer months of 2005 should provide an enormous
benefit to customers in next year s PGA filing.
Gas Procurement and Risk Management Policies and Procedures
Since September of 1999, Avista Utilities has purchased gas from its affiliate Avista
Energy at a price based on a formula that factors in the index price of gas at the three basins in
which gas was available to Avista: Alberta (AECO), British Columbia (Sumas) and Rockies.
This benchmark price was paid by A vista Utilities regardless of the actual costs incurred by
A vista Energy to procure the gas. A vista preferred this approach claiming that ratepayers
benefited from A vista Energy s market presence, purchasing power and ability to absorb
counterparty credit and other risks. At the same time, the price paid for gas by A vista Utilities
would closely follow the market. In prior PGA filings, Staff has accepted this benchmark
approach as reasonable.
In February 2004, the Washington Utilities and Transportation Commission ordered
Avista Utilities to discontinue its use of the Natural Gas Benchmark Mechanism, citing among
other things, the inherent risk to ratepayers with affiliate transactions where common
management is incentivised to benefit shareholders at the expense of ratepayers. The WUTC
also expressed concerns about the inability to quantify any benefits to customers under the
mechanism.
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. Because the system is so intertwined, it could impose an undue burden
STAFF COMMENTS OCTOBER 20, 2005
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. These costs will be fully examined
for reasonableness in the next rate case.
Staff believes a risk management program is very important for Avista Utilities and its
customers. Staff recognizes that a common approach to gas procurement throughout all of
A vista 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
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.
CONSUMER ISSUES
Avista s Purchased Gas Cost Adjustment (PGA) Application contained the customer
notice and a press release. Staff reviewed the press release and the notice and determined that
they complied with the requirements of IDAP A 31.21.02.102. The press release was issued on
September 12 2005. The notice was mailed with customers' bills beginning September 13 2005
STAFF COMMENTS OCTOBER 20, 2005
and ending October 2005. Customers had until October 20, 2005 to file comments with the
Commission. As of October 18, 2005, 26 customers filed comments.
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 families 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.
On October 2005 at 7:00 pm, Staff presented a workshop in Coeur d' Alene to discuss
the proposed rate increase. Five community members were present. Their questions concerned
how the proposed rate increase would affect citizens on fixed incomes. There was a request for
information on weatherization programs and the amount of financial assistance contributed by
A vista.
A vista Utilities shareholders give more to fuel funds on a per-customer basis than any of
the other regulated utilities in Idaho. In the past 5 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 the Community Action Partnerships of Idaho in which A vista agreed to
increase its funding for low-income weatherization purposes from $1 08~000 per year to
$350 000 per year.
STAFF RECOMMENDATION
Given that natural gas market prices have actually increased since the Company s filing
in September, Staff recommends that the requested increase in the W ACOG and the twelve-
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 also recommends 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 it's documentation of gas hedging.
ST AFF COMMENTS OCTOBER 20, 2005
Respectfully submitted thi~ day of October 2005.
Donovan E. Walker
Deputy Attorney General
Technical Staff: Donn English
Tammie Estberg
Marilyn Parker
Harry Hall
i :umisc/comments/avugO5 .2dwdemptehh
STAFF COMMENTS OCTOBER 20, 2005
CERTIFICATE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS 20TH DAY OF OCTOBER 2005
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN CASE
NO. AVU-05-, BY MAILING A COpy THEREOF POSTAGE PREPAID TO THE
FOLLOWING:
DA VID J. MEYER
SR VP AND GENERAL COUNSEL
VISTA CORPORATION
PO BOX 3727
SPOKANE W A 99220-3727
E- mail dmeyer(fYavistacorp. com
KELLY NORWOOD
VICE PRESIDENT - S ATE & FED. REG.
AVIS T A UTILITIES
PO BOX 3727
SPOKANE WA 99220-3727
E-mail Kelly .norwood(fYavistacorp. com
CERTIFICATE OF SERVICE