20061024Comments.pdf

DONOV AN E. WALKER
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 5921
RECEIVED
200& OCT 24 PM 3: 41
IDAHO F'l UL!C
UTILITIES CU!ii",l8;;;IOi'J
Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5983
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
VISTA UTILITIES FOR AN ORDER
APPROVING A CHANGE IN NATURAL GAS
RATES AND CHARGES (2006 PURCHASEDGAS COST ADJUSTMENT)
CASE NO. A VU-06-
COMMENTS OF THE
COMMISSION STAFF
The Staff of the Idaho Public Utilities Commission, by and through it Attorney of Record
Donovan E. Walker, Deputy Attorney General, in response to the Notice of Application and
Notice of Modified Procedure, issued on October 4 2006, Order No. 30141 , submits the following
comments.
BACKGROUND
On September 14, 2006, A vista Utilities filed its annual Purchased Gas Cost Adjustment
(PGA) Application with the Commission requesting authority to place new rate schedules in effect
as of November 1 , 2006 that would increase its annual natural gas revenues by approximately $2.
million (3.2%). 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. A vista s earnings would not be increased as a result of the proposed
changes in prices and revenues.
STAFF COMMENTS OCTOBER 24, 2006
On September 29 2006, Avista filed a revised PGA Application and tariff sheets with the
Commission to adjust the Company s proposed weighted average cost of gas (W ACOG) to reflect
a further reduction in wholesale natural gas prices. The revised Application proposes to reduce the
Company s estimated annual natural gas revenues by approximately $2.8 million (3.4%).
The Revised Application
According to A vista s Application if the requested price decrease is approved the
Company s annual revenue will decrease by approximately $2.8 million or about 3.4%. The
average residential or small commercial customer using 65 therms per month would see an
estimated decrease of$2.70 per month (3.4%).
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 W ACOG
purchased and the W ACOG embedded in rates. Avista 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.
A vista s original Application requested an increase in the W ACOG from its present
78.600 cents per therm to 84.712 cents per thermo The revised Application requests a decrease in
the W ACOG from its present 78.600 cents per therm to 76.244 cents per thermo The proposed
W ACOG is based on a weighting of forward natural gas prices on September 21 , 2006, for
unhedged volumes, and the Company s hedges executed to date. The Company generally
executes hedges to fix the price of gas on approximately 66% of its estimated annual gas sales for
the year, and uses a dollar-cost averaging approach for volumes to be hedged, with those volumes
divided into 45-day execution windows between February 15 and November 15. The Company
states that it has hedged approximately 60% of its estimated annual gas sales for the forthcoming
year. It states it will hedge an additional 20% of the estimated sales within days of the revised
Application filing, in order to take advantage of the recent sharp drop in forward gas prices.
This past year the Company has begun incorporating an amount oflonger-term hedges into
its purchase portfolio to provide an additional degree of rate stability. Approximately 11 % of the
total purchases for the next year have been hedged at a three-year fixed price. The Company
plan is to keep layering-in three-year fixed price hedges until these hedges represent one-third of
STAFF COMMENTS OCTOBER 24, 2006
the portfolio going forward. This plan has been incorporated into the Company s Risk
Management Policy and has been provided to Commission Staff.
The Company s proposed rates in this filing also incorporate the proposed rate increases
filed by the Company s two main pipeline suppliers, Northwest Pipeline and Gas Transmission
Northwest. The proposed pipeline rates, while not yet approved, are set to begin being billed to
Avista on January 1 , 2007. The Company states that while these pipeline rate increases are
substantial, the effect on the Company s proposed rates in this filing is completely mitigated by an
increase in the estimated revenue to be received from pipeline capacity releases.
The Company is also proposing a change in the present amortization rate, which is used to
refund or surcharge to 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 decrease the amortization rate
from the present surcharge of 5.027 cents per therm to 3.420 cents per thermo The Company states
it has an estimated deferred gas cost balance of approximately $2.8 million as of October 31
2006, reflecting higher gas costs than projected during the past year. The proposed amortization
rate of 3.420 cents per therm is expected to recover this balance over 12 months.
The Company states that notice of its Application 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 rates currently in place, are shown
below:
Estimated
Proposed Average Proposed
Decrease Decrease Average Price
Customer Class Schedule $/Therm % Change $/Therm
General 101 04154 36%1.14538
Large General 111 04154 74%1.12736*
Large General 112 02547 28%1.09316*
Commercial 121 04154 98%1.11625 *
Commercial 122 02547 57%08205*
Interruptible 131 00148 16%91412
Interruptible 132 00701 79%87992
Transportation 146 00000 00%10976
* Price per therm for the initial block of usage
STAFF COMMENTS OCTOBER 24, 2006
STAFF ANALYSIS AND REVIEW
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 decrease of2.547 cents per therm for firm sales customers on rate
Schedules 101 , 111 , 112, 121 and 122. Interruptible customers on Schedules 131 and 132 will see
a rate decrease of .701 cents per thermo These rates are based on the decrease in the overall
Weighted Average Cost of Gas (W ACOG) proposed by A vista.
Schedule 155 - Deferred Expenses
A vista 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 is proposing to decrease the present Schedule 155
amortization rate by 1.607 cents per therm from the current surcharge of 5.027 cents per thermo
The proposed surcharge of 3.420 cents per therm will allow the Company to recover its deferred
costs of nearly $2.8 million in approximately twelve months. The deferred balance consists of the
following:
Amount
Accrued
Deferred Account Item Through
October 2006
Beginning Deferred Costs Balance $3,483 885
Wholesale Gas Costs Above W ACOG 103 051
Fixed Pipeline Charges 554 265
Cascade Natural Capacity Release (233 446)
Off-System Capacity Release/Sales 367 776)
Interest on Deferrals 187 259
Refunds to Industrial Customers/Transfer to Amortization Accounts (16,428)
Over-Collections from Prior PGA Year 935 178)
Total Deferred Amount Owed by Customers 775,633
Staffhas reviewed the Application, performed an audit of gas purchases and hedging, and
reviewed additional information provided by the Company and third parties. In analyzing
A vista s proposal, Staff notes a few issues that need to be discussed further: pipeline
STAFF COMMENTS OCTOBER 24, 2006
transportation rate cases pending before the Federal Energy Regulatory Commission (FERC), a
backcast analysis of the cessation of the Benchmark Mechanism for gas purchases, and the
Company s hedging policies.
Effects of the 2005 Hurricane Season
After the Company made its filing in last year s PGA case, Case No. A VU-05-, and
before the Commission ultimately issued its final Order in that case, Hurricanes Rita and Katrina
struck the gas and oil producing areas of the Gulf of Mexico and the Gulf Coast. The disruption
of gas supply in the Gulf of Mexico caused very large spikes in the wholesale cost of natural gas
throughout North America. This increase in the prices of natural gas after the hurricanes was not
anticipated in the W ACOG approved by the Commission and resulted in the Company having to
purchase natural gas at prices much higher than had been forecast. This results in a larger amount
that must be included in this year s cost adjustment for recovery of deferred costs resulting from
the several months of high prices following the two hurricanes. This is lower than last year, but
would have been lower still if it not for the storms' affect.
Pipeline Transportation Rate Cases Pending Before FERC
On June 30, 2006 Northwest Pipeline Corporation (NPC) and Gas Transmission Northwest
(GTN), two of the interstate systems on which Avista transports gas, filed general system rate
cases with the FERc. The FERC suspended the effective dates of the rate increases until January
2007, subject to refunds to be determined by the conditions and outcome of hearings to be held
at a later date. Staff has been working with intervenors in these proceedings and will continue to
do so to ensure that the interests of customers are represented.
In its Application, Avista s proposed prices are weighted to account for the January 1
2007 effective date of the proposed price increases. Though the outcome of the proceedings are
still uncertain until final orders are issued by FERC, an increase in transportation costs is likely
given that rates charged by these two pipeline corporations were established over ten years ago.
However, the sizes of the proposed increases are large and there is a significant difference between
the NPC and the GTN increases, in both the amount and the reasons for the increases. NPC has
requested an increase of approximately 42% over the current tariff due primarily to operational
and maintenance issues. GTN has requested an increase of over 70% due primarily to decreased
STAFF COMMENTS OCTOBER 24, 2006
demand resulting from competing pipelines with lower tariffs. Since both increases are subject to
possible negotiations between the pipelines and their customers (including Avista) and are subject
to FERC approval, it is reasonable to expect that the approved transportation price increases may
be lower than those requested by the pipelines.
The weighting methodology used by the Company to determine the annual impact of the
January 1 , 2007 pipeline rate increases on the total cost of service is appropriate. The
methodology aligns the transportation increases with the Purchased Gas Cost Adjustment during
the PGA year in which the increases will occur. The methodology will also promote price
stability to customers by limiting the amount that would have been deferred until the 2007 PGA
filing. Rather than the Company deferring until next year the entire effect of the increase, the
Company will only have to true-up any differences between the Applications filed by GTN and
NPC and the final order issued by FERc. With A vista s proposed price decrease and uncertainties
in the natural gas market, Staff believes that measures to defray future deferrals will serve the best
interest of the ratepayers.
Staff recommends that, in the event that the FERC approved rate increases are significantly
lower than those requested by the pipeline companies, or the forecasted W ACOG decreases
materially from what A vista has proposed in its Application, the Company file to further reduce
tariffs approved in this proceeding.
Weighted Average Cost of Gas
Avista has requested a W ACOG of $0. 76244/therm for the coming PGA year. This is a
decrease of $0.00542/therm or approximately 0.71 percent from the present W ACOG which was
approved in Order No. 29902 and became effective November 1 2005. The table below shows
the past and the proposed W ACOG along with the resulting effect on residential customers
(Schedule 101) and the percentage change in both the W ACOG and the Schedule 101 tariff for the
most recent five years.
STAFF COMMENTS OCTOBER 24, 2006
APPROVED RESULTING % CHANGE
YEAR TARIFF WEIGHTED % CHANGE TOTAL GENERAL FROM
WAS A VG. COST FROM SERVICE PREVIOUS
ESTABLISHED OF GAS PREVIOUS SCHEDULE 101 YEAR
$/THERM YEAR TARIFF, $/THERM
2001 0.48044 Base Year 89753 Base Year
2002 34572 28.04%75722 15.63%
2003 0.44989 30.13%77716 63%
2004 55739 23.89%95315 22.64%
2005 76786 37.76%1.18692 24.53%
2006 76244 71 %1.14538 50%
(Proposed)
Last year s W ACOG of $0.76786/therm was based on forward gas prices as of August 4 2005
and while gas prices varied throughout the year, the W ACOG was fairly reflective of the market
rate.
The Company s proposed WACOG of$0.76244/therm was reviewed by Staff against
other forecasts, including those published weekly by the US Energy Information Administration.
Staff notes that this requested decrease, reflecting the Company s belief that the cost of gas will
decrease slightly, is consistent with the forecasted northwest cost of natural gas. Use of this
forward pricing may be regarded as aggressive and has the potential, if prices are higher to result
in a large deferral balance to be recovered in the rates to be set a year from now for the 2007-2008
gas-year. However, as discussed below, the Company is currently actively participating in the
natural gas markets to purchase price hedges for the approximately 20% of the 2006-2007 gas-
year supply that it has not already purchased. As discussed below, this action will further reduce
the price risk faced by customers.
Hedging Policies
Avista continues to follow its price stabilization practice of systematically fixing portions
of gas costs using physical hedges and financial instruments in a time staggered purchasing
procedure aimed at achieving a diversified portfolio of purchases and hedges. A vista hedges up to
its estimated minimum daily demand each month with a combination of fixed price gas purchases
STAFF COMMENTS OCTOBER 24, 2006
and scheduled withdrawals from available storage. Typically, these hedges total approximately 66
percent of the Company s forecasted loads, although for the forthcoming PGA year, the hedges
total nearly 80 percent of the forecasted load. Recent sharp drops in forward prices, and the
volatility of the wholesale natural gas market led to the additional hedged amounts. If prices
continue to drop, A vista plans to execute additional hedges beyond the 80 percent of forecasted
demand.
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 1 , 2005 through September 30, 2006
the Company s hedging practices, including storage withdrawals, provided a benefit to customers
of approximately $2 766 874.
During the past eight months, when purchasing gas for the coming gas-year, the Company
has pursued the revised natural gas procurement program that it proposed approximately one year
ago. Under that program, 11 % of supply is now purchased, at a fixed price, three years in
advance. Next year another 11 % will be added and the same the following year. Each year the
Company will purchase 11 % to replace the 11 % contract(s) that expire. The resulting 33%
purchased with three-year terms will result in more price stability than has been the case in recent
years. Commission Staff continues to work with the Company to evaluate this methodology and
to develop other hedging and purchasing practices with the intent of both stabilizing and reducing
gas costs.
Cessation of the Benchmark Mechanism
Prior to 2004, A vista Utilities purchased gas from A vista Energy at a fixed price based on
a formula that factors in the index price of gas at the three basins from 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.
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 holding company management
receives incentives for acting to benefit shareholders at the expense of ratepayers.
STAFF COMMENTS OCTOBER 24, 2006
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 addressed the issue in its comments in the 2005 PGA case, Case No.
A VU-05-2. Staffs concern was that actions prompted by the Washington UTC may harm
customers in Avista s Idaho service territory. Subsequent to the Commissions Order in that case
(Order No. 29902) Staff worked with the Company to complete a backcast analysis to determine if
Idaho ratepayers would be harmed by the cessation of the mechanism. Based on the analysis
assumptions, Staff believes it is reasonable to conclude that Idaho customers benefited slightly
from the cessation of the mechanism by approximately $25 000.
CONSUMER ISSUES
Avista s Purchased Gas Cost Adjustment (PGA) Application received on September 13
2006 contained the customer notice and a press release. Staff reviewed the press release and the
notice and determined that the Company was in compliance with the requirements of IDAP
31.21.02.102. The press release was issued on September 14, 2006. The customer notice was
mailed with customers' bills beginning September 15 2006 and ending October 13 2006.
On September 29 2006 Avista filed a revised request that would result in a net decrease to
its natural gas customers. The Company filed a revised Application because natural gas prices fell
dramatically in September. Customers had until October 24, 2006 to file comments with the
Commission. As of October 19 2006, six customers had filed comments. All the comments
addressed the September 13 Application where A vista had requested an increase in rates.
Customer Comments
Five of the six customers that commented on the case were concerned about any increases
in natural gas rates because newspaper articles and other media have reported that market prices
for natural gas are at two-year lows.
One customer referred to a Fox news report that stated
, "
Industry officials said
homeowners that depend on natural gas for heat should see lower bills this winter, assuming
normal temperatures." The customer wanted to make certain that the IPUC was aware of this
report.
STAFF COMMENTS OCTOBER 24, 2006
Financial Assistance For Paying Heating Bills
Although Avista s rates for residential customers will drop slightly if the Commission
approves its request, many customers will still struggle to make ends meet. Staff encourages those
customers who qualify for energy assistance to apply for the federally-funded Low Income Home
Energy Assistance Program (LIHEAP) and other non-profit fuel funds such as Project Share. For
more information regarding assistance programs, customers may call the local Community Action
Agency, Avista Utilities, the Idaho Public Utilities Commission, or, for other community
resources, the 2-1 Idaho Care Line.
RECOMMENDATION
After a complete examination of the Company s Application and gas purchases for the
year, Staff recommends the following:
I. That the Commission accepts the Company s Revised Application and filed tariffs
reducing the Company s annual revenue by approximately $2.8 million.
2. The Company should be directed to file for further tariff decreases if the forecasted
W ACOG decreases materially or if the result of the pipeline cases pending before the
FERC results in transportation expenses significantly less than what A vista has
included in its proposed tariffs.
Respectfully submitted this d.1~day of October 2006.
onovan E. Walker
Deputy Attorney General
Technical Staff: Harry Hall
Donn English
Marilyn Parker
i:u mi sc :commen ts/in tgO6. 3d whhdemp
STAFF COMMENTS OCTOBER 24, 2006
CERTIFICATE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS 24TH DAY OF OCTOBER 2006
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF IN CASE
NO. A VU-06-, BY E-MAILING A COpy THEREOF AND BY MAILING A COpy
THEREOF, POSTAGE PREPAID, TO THE FOLLOWING:
DAVID J. MEYER
SR VP AND GENERAL COUNSEL
A VISTA CORPORATION
1411 EMISSION AVE, MSC-
SPOKANE W A 99220
E-mail dmeyer~avistacorp.com
KELLY NORWOOD
VICE PRESIDENT - STATE & FED. REG.
A VISTA UTILITIES
1411 EMISSION AVE, MSC-
SPOKANE W A 99220
E-mail Kelly.norwood~avistacorp.com
SECRETARY
CERTIFICATE OF SERVICE