20070413Decision memo.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
CO MMISSI 0 NER SMITH
CO MMISSI 0 NER RED FO RD
COMMISSION SECRETARY
COMMISSION STAFF
LEGAL
FROM:CECELIA A. GASSNER
DATE:APRIL 11,2007
SUBJECT:AVISTA CORPORATION'S APPLICATION REQUESTING APPROVAL
OF A NATURAL GAS TRANSPORTATION SERVICE AGREEMENT
CASE NO. A VU-07-
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"). This Commission has the jurisdiction over such request pursuant to Idaho Code
61-307, 61-622 and 61-623. The Company requested that the Application be processed by
Modified Procedure.
On March 13 , 2007, the Commission issued a Notice of Application and Modified
Procedure and solicited comments from interested parties.
comments submitted were filed by Staff.
Order No. 30271.The only
THE APPLICATION
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. Application at 2.In addition, A vista has seen
considerable load growth in the Moscow/Lewiston area and an increased need for pipeline
capacity.Id.A vista and Potlatch negotiated a capacity release agreement, and Potlatch
expressed its desire to negotiate a new gas distribution agreement as well. Id. at 3.
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
DECISION MEMORANDUM
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
desire to retain a reasonable level of distribution charges. Id. at 3-4. Based on Potlatch's usage
in 2006, its annual bill under the existing agreement is $264 000. Id. at 4. 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. Id. 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. Id. at 4-
STAFF COMMENTS
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 of the 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 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) if it 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.
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
DECISION MEMORANDUM
equipment is highly depreciated and has a low residual book value and therefore very low annual
fixed costs. It is Staff s opinion that, given the negotiating position, the Company has negotiated
an acceptable net contribution to fixed costs.
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.
COMMISSION DECISION
Does the Commission desire to approve the Application?
cec
M:A VU-O7-cg2
DECISION MEMORANDUM