20051021Decision memo.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
COMMISSIONER SMITH
COMMISSIONER HANSEN
COMMISSION SECRETARY
COMMISSION STAFF
FROM:DONOVAN E. WALKER
DA TE:OCTOBER 21, 2005
SUBJECT:A VISTA'S 2005 PGA CASE NO. A VU-05-
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 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 its earnings will not increase 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 , establishing a comment deadline of October 20, 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 11 , 2005. Written comments were received from several customers
as well as from Commission Staff.
THE APPLICATION
According to A vista s Application the Company requests an increase in its annual
revenue of approximately $15.7 million or about 23.80/0. This would result in the average
residential customer who uses 70 therms per month to 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 effect of timing
differences due to implementation of rate changes and differences between the Company s actual
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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 by 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.
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. A vista 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
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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 recommends that the
requested increase in the W ACOG, and the 12-month amortization of deferred expenses be
approved. 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 its documentation of gas hedging.
Staff reviewed the Company s proposed W ACOG against other forecasts, including
those published weekly by the U.S. 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.
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 exasperated 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
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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
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 recommends 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 years 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 states
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 states 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 recognizes that a common approach to gas procurement throughout all of
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A vista Utilities' jurisdictions may provide efficiencies that could also benefit customers
significantly. Without Avista 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.
Staff reported that 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 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 recommends that the requested increase in the W ACOG, and the
12-month amortization of deferred expenses be approved. 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 W ACOG quarterly, and enhance its documentation of
gas hedging.
PUBLIC COMMENTS
The Commission received comments from approximately 26 customers of A vista as
of October 18, 2005. 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
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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 s 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.
COMMISSION DECISION
1. Does the Commission wish to approve Avista s Application, including the
requested W ACOG and amortization of deferred expense as filed by the Company and
recommended by Staff?
2. Does the Commission wish to direct the Company to continue its monthly
reporting of the changes and balances in the deferral accounts and to continue reporting the
WACOG quarterly?
3. Does the Commission wish to direct the Company to enhance its documentation
of gas hedging?
F: cu5
Donovan E. Walker
M:A VUGO502 dw2
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