20070403Comments.pdf

CECELIA A. GASSNER
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
BAR NO. 6977
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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
AVISTA CORPORATION REQUESTING
APPROVAL OF A NATURAL GAS
TRANSPORTATION SERVICE AGREEMENT
CASE NO. AVU-O7-
COMMENTS OF THE
COMMISSION STAFF
The Staff of the Idaho Public Utilities Commission, by and through its Attorney of
record, Cecelia A. Gassner, Deputy Attorney General, in response to the Notice of Application
and Notice of Modified Procedure in Order No. 30271 issued on March 13, 2007, submits the
following comments.
BACKGROUND
On February 20, 2007, Avista Corporation ("Avista" or "Company ) filed an Application
with the Commission requesting approval of a Natural Gas Transportation Service Agreement
(the "Agreement") between the Company and Potlatch Forest Products Corporation ("Potlatch"
According to the Application, A vista has been providing natural gas transportation service to
Potlatch's Lewiston, Idaho plant under an existing agreement since 1993. During that time
Potlatch has increased its efficiency and reduced its annual natural gas consumption from 64
million therms to 38 million therms. In addition, Avista has seen considerable load growth in the
STAFF COMMENTS APRIL 3 , 2007
Moscow/Lewiston area and an increased need for pipeline capacity. Avista and Potlatch
negotiated a capacity release agreement, and Potlatch expressed its desire to negotiate a new gas
distribution agreement as well.
The initial term of the Agreement is ten years, beginning the day following Commission
approval and ending November 30, 2016. The parties have agreed on charges based upon
Potlatch's desire to pay Avista for distribution service in the future that more reasonably reflects
the alternative cost of connecting directly to a different pipeline, and Avista s desire to retain a
reasonable level of distribution charges. Based on Potlatch's usage in 2006, its annual bill under
the existing agreement is $264 000. Under the Agreement, Potlatch would pay: $185 000
through November 2007; $150 000 from December 2007 through November 2008; $111 000
from December 2008 through November 2009; and $74 000 per annum from December 2009
through the end of the Agreement. The Company believes that the current and projected rate of
growth it is experiencing in north Idaho should offset a portion of the lost revenue/margin
received from Potlatch under the existing agreement.
ST AFF ANALYSIS
Staff has reviewed the application and the proposed contract with Potlatch. Several issues
were considered in order to determine whether, if approved, this contract will have consequences
beyond the services provided to Potlatch. The Company s costs to serve as well as the existing
contract were also reviewed.
The ability of Potlatch to secure a by-pass of the Company and be served directly from
the interstate pipeline via third party contracts is an important issue influencing both the
Company s negotiation of terms in the proposed contract and Staffs review of that contract.
Potlatch, as a large user of natural gas, has the right to contract for supply of natural gas
independent ofthe Company and to contract with Northwest Pipelines (NWPL) to deliver that
gas to a nearby point. Because the pipeline is close to the Potlatch facility and there is an
existing tap into the pipeline that could be used to supply Potlatch, a by-pass could be
inexpensive and quickly completed. Of particular note is that the Company has imbedded
(fixed) costs associated with serving Potlatch that will not go away, even if Potlatch is no longer
a customer.
STAFF COMMENTS APRIL 3, 2007
Staff s review of the financial contract terms was aimed at answering two questions -
(1) does the revenue from the proposed contract pay for the variable costs of providing the
service to Potlatch and, (2) ifit does, what part of the Company s fixed costs allocated to that
service is covered by the revenue margin over and above the variable costs of that service? The
costs to Potlatch are a single Annual Delivery Charge that is paid monthly. Those annual
charges, the variable cost of service (provided by the Company) and the resulting contribution to
fixed costs for the life of the contract are presented in tabular format below.
Annual Annual Variable
Delivery Cost to Serve Contribution
Contract Dates Charge Potlatch 1 to Fixed Costs
Dee 06-Nav 07 $185 000 $20 646 $164 354
Dee 07 -Nav-$150 000 $21 265 $128 735
Dee 08-Nav 09 $111 000 $21 903 $89 097
Dee 09-Nav 10 $74 000 $22 560 $51,440
Dee 10-Nav 11 $74 000 $23 237 $50 763
Dee 11-Nav 12 $74 000 $23 934 $50 066
Dee 12-Nav 13 $74 000 $24 652 $49 348
Dee 13-Niv 14 $74 000 $25 392 $48 608
Dee 14-Nav 15 $74 000 $26 154 $47 846
Dee 15-Nav 16 $74 000 $26 938 $47 062
An annual escalation of 3 percent is used.
Fixed costs associated with this service are all associated with the capital investment in
the regulator station, short run of piping (100 feet) and odorizer used to serve Potlatch. This
equipment is highly depreciated and has a low residual book value and therefore very low annual
fixed costs. It is Staffs opinion that, given the negotiating position, the Company has negotiated
an acceptable net contribution to fixed costs.
Staff evaluated other issues and inconsistencies when reviewing the proposed contract.
Delivery points, as stated in the Application, are unclear when compared to the Agreement. The
Application states that a dedicated Northwest Pipeline city gate serves Potlatch. In contrast, one
paragraph of the contract identifies three separate delivery points. The actual situation is that
though Potlatch is served by a single city gate, the interstate pipeline transport capacities released
by the Company to Potlatch are for delivery at three Lewiston area city gate locations. Potlatch
STAFF COMMENTS APRIL 3 2007
as addressed in the capacity release agreement between the Company and Potlatch, has
responsibility to coordinate those three delivery capacities with Northwest Pipeline for delivery
of the total capacity at the single city gate serving Potlatch.
Staff is satisfied that the Company s applicable liabilities to NWPL are assumed by
Potlatch under the related capacity release agreement. Potlatch's use of the interstate pipeline
capacity released to them by the Company requires that Potlatch take full responsibility for that
capacity regardless of whether or not they use it. This includes all fees owed to NWPL for the
capacity as well as remarketing of that capacity if it is not used.
Interruptability and curtailment addressed in the 1993 agreement are not included in the
proposed Agreement. However, they are addressed as part of the capacity release agreement
where the Company has the right to recall up to half of the released capacity to serve its core
market in peak demand conditions.
According to the Agreement, Potlatch will perform the balancing needed for the delivery
of gas to Avista. Any penalties resulting from Potlatch's failure to perform this balancing in a
timely manner will be passed through to Potlatch. Staff believes these provisions of the new
Agreement are reasonable.
STAFF RECOMMENDATION
Staff believes this Contract is in the best interest of both the Company and its customers.
Staff recommends that the Commission approve the contract as proposed.
Respectfully submitted this
":j
rJ- day of April 2007.
Cecelia A. ner
Deputy Attorney General
Technical Staff: Harry Hall
i:umisc:comments/avugO7, lcghh
ST AFF COMMENTS APRIL 3 , 2007
CERTIFICATE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS 3RD DAY OF APRIL 2007 SERVED
THE FOREGOING COMMENTS OF THE COMMISSION STAFF IN CASE
NO. AVU-07-, 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
KELLY NORWOOD
VICE PRESIDENT - STATE & FED. REG.
A VISTA UTILITIES
1411 EMISSION AVE, MSC-
SPOKANE W A 99220
SECRET
CERTIFICATE OF SERVICE