20071101final_order_no_30458.pdf

Office of the Secretary
Service Date
November 1 2007
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF A VISTA UTILITIES FOR AUTHORITY
TO CHANGE ITS NATURAL GAS RATES
AND CHARGES (2007 PURCHASED GAS
COST ADJUSTMENT)
ORDER NO. 30458
CASE NO. A VU-07-
On September 17, 2007, Avista Utilities (Avista; Company) 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 2007 that would decrease its annual natural
gas revenues by approximately $4 million (4.6%). 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 will
not be increased as a result of the proposed changes in prices and revenues.
On September 27 2007, the Commission issued a Notice of Application and Notice
of Modified Procedure to process the Application. Commission Staff was the only party to file
comments. After reviewing the comments and record in this case the Commission approves the
Company s Application for a decrease in rates as more fully set forth below.
THE APPLICATION
A vista states if the proposed changes are approved its annual revenue will decrease
by approximately $4 million or 4.6%. The average residential or small commercial customer
using 65 therms per month would see an estimated decrease of $3.65 per month (4.6%).
The Company 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 weighted average cost of gas (W ACOG) purchased and the W ACOG
embedded in rates. The Company states that it 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.
Avista requests a decrease in the WACOG from its present $0.76085 cents-per-therm
to $0.75544 cents-per-therm, a decrease of approximately $0.005 per thermo The Company
states that approximately 70% of its estimated annual load requirements for the PGA year will be
ORDER NO. 30458
hedged at a fixed price comprised of: (1) approximately 41 % of volumes hedged for a term of
one year or less; (2) approximately 18% hedged for a three-year term; and (3) 11 % of volumes in
Jackson Prairie storage. This planned level of hedging is similar to the prior year. During 2006
the Company began incorporating three-year fixed price hedges into its portfolio to provide
additional rate stability. Through the end of August, approximately 2/3 of planned hedge
volumes for the PGA year have been executed at a weighted average price of $7.94 per
decatherm ($0.794 per therm).
The demand costs included in the Company s Application primarily represent the
cost of pipeline transportation to the Company s system. Overall, total demand costs reflected in
this PGA filing were essentially flat, as compared to the total costs reflected in the 2006 PGA
filing. However, projected firm sales volumes are substantially lower in this filing as compared
to the projected volumes in the 2006 filing. Therefore, a similar level of dollars is recovered
over a lower level of volumes, thus resulting in a proposed increase per thermo The Company
proposed rates in this filing include a decrease that reflects the settlement of the Northwest
Pipeline s (NWP) Federal Energy Regulatory Commission (FERC) rate case. However, this
decrease is offset by the inclusion of higher rates for Gas Transmission Northwest (GTN), whose
FERC rate case is still pending, as well as increases in Canadian pipeline charges. Additionally,
during 2007 the Company terminated its agreement related to the Plymouth LNG peaking
facility, resulting in a savings of$124 000 per year in fixed demand costs.
The Company is also proposing a change in the present amortization rate that 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. The present amortization rate for firm-sales
customers is approximately a 3.4 cents-per-therm surcharge. The proposed decrease in the
amortization rate results in a refund rate of approximately 2.4 cents-per-therm to pass back
estimated over-collected gas costs of approximately $1.7 million as of November 1 2007.
STAFF COMMENTS
Staff reviewed the Company s Application; performed an audit of gas purchases
hedging and risk management policies, and deferred expense accounts; and reviewed additional
information provided by the Company and third parties. Staff verified that the Company
earnings would not change as a result of the proposed changes in the Application. Staff
comments include discussion of the Company s hedging policies, the proposed change in the
ORDER NO. 30458
W ACOG, the Company s deferred expense account, customer issues, and the FERC pipeline rate
cases.
Staff recommended that the Commission approve the Company s Application and
filed tariffs, reducing the Company s Schedule 155 tariff (deferral balance amortization) to a
2.391 cents-per-therm credit and accepting the Company s proposed WACOG of 75.544 cents-
per-thermo This would reduce the Company s annual revenue by approximately $4 million.
Staff also recommended that should rates be approved by FERC in the GTN rate case that are
lower than those included in this case by A vista, any and all refunds be credited back to A vista
customers.
Staff commented that the Schedule 155 deferred cost amortization is proposed to
decrease from the present surcharge of 3.42 cents-per-therm to a credit of 2.391 cents-per-therm.
This would provide for a refund to customers over the next 12 months of approximately $1.7
million in over-recovery of deferred costs from the previous year.
The Company s Application proposed to pass back to customers the benefits from
the settlement of the Northwest Pipeline Corporation (NPC) general rate case. On March 30
2007, FERC issued an order approving the settlement effective April 1 , 2007. A vista had
previously included recovery of NPC's filed rates, and now proposes to reduce that amount to
the rates approved in the settlement. This would result in approximately $430 000 passed back
to customers. Additionally, Avista proposed to incorporate the annualization, or 12-month
application, of GTN's filed rates in its pending rate increase before FERC. This would increase
Avista s annual revenue by approximately $140 000. Staff commented that this treatment is
consistent with the treatment of NPC's and GTN's rate case filing in the previous year s PGA
and reasonable given the uncertainty of the timing and amount of increase to be granted by
FERC. Staff also recommended that should FERC approve an increase less than that proposed
by GTN, any and all refunds should be credited back to Avista s customers.
Staff reviewed the Company s proposed WACOG of 75.544 cents-per-therm against
other forecasts including those published weekly by the U.S. Energy Information
Administration. Staff noted 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.
Although A vista s proposed decrease in the W ACOG is not as significant as that of
Intermountain Gas Company, Avista is partially constrained by its location. Whereas
ORDER NO. 30458
Intermountain Gas can rely heavily on gas coming out of the Rockies, which is priced artificially
low due to transportation constraints, A vista's locational constraints require gas purchases
primarily. out of Canada. The weakening U. S. dollar and unfavorable exchange rate have caused
an upward pressure on Avista s proposed W ACOG. However, Avista s hedging practices
discussed below, have removed some of the price volatility and the proposed decrease, coupled
with the decrease last year, will amount to meaningful savings to customers. The table below
shows A vista s past and proposed W ACOG along with the resulting effect on residential
customers (Schedule 101) and the percentage change in both the WACOG and the Schedule 101
tariff for the most recent five years.
APPROVED % CHANGE RESULTING % CHANGE
YEAR TARIFF WEIGHTED FROM TOTAL GENERAL FROM
WAS AVG. COST PREVIOUS SERVICE PREVIOUS
ESTABLISHED OF GAS,YEAR SCHEDULE 101 YEAR
$/THERM (W ACOG)TARIFF, $/THERM (Residential)
2002 0.34572 Base Year 75722 Base Year
2003 0.44989 30.13%77716 63%
2004 55739 23.89%95315 22.64%
2005 76786 37.76%1.18692 24.53%
2006 76085 91 %1.16175 12%
2007 75544 71 %1.10560 83%
(proposed)
Staff reported that A vista continues to follow its price stabilization practice of
systematically fixing portions of gas costs using physical hedges and financial instruments in a
purchasing program aimed at achieving a diversified gas supply portfolio. For the forthcoming
PGA year, Avista plans to hedge approximately 70% of forecasted loads with a combination of
fixed-price gas purchases/hedges executed throughout the year and scheduled withdrawals from
available storage. Additionally, with the recent drop in forward prices, A vista has established
price targets to execute hedges for an additional 5% of forecasted load; i., if forward prices fall
to a certain level, A vista would execute these additional hedges.
ORDER NO. 30458
The Company continues to follow the revised natural gas procurement program that
it implemented approximately two years ago. While the program is fairly structured, it also
allows for flexibility based on changing market conditions and continuous review by the
Company. Last year, the Company implemented a change to provide additional rate stability for
customers whereby 11 % of supply is purchased each year at a three-year fixed-price. By the end
of 2008 , the Company will have approximately one-third of its gas supply purchased at staggered
three-year fixed prices. Each year thereafter, the Company will purchase an additional 11% to
replace the 11 % contract(s) that expire. The resulting 33% purchased with three-year fixed-price
terms will result in more price stability than has been the case in recent years. The Commission
Staff continues to work with the Company to evaluate the Company s procurement program and
to develop other hedging and purchasing practices with the intent of both stabilizing and
reducing gas costs.
To quantify the impact of the Company s hedging practices for the previous PGA
year, Staff compared the hedged price to the First of Month (FOM) index price and multiplied
the difference by the hedged volume. For the period from July 1 , 2006 through September 30
2007, the Company s hedges were $9.9 million more than the FOM index. Although this
measurement indicates that hedge prices were higher than the FOM index, the Company
hedging practices aim to mitigate volatility rather than secure the lowest price possible. While
spot prices may occasionally be higher than hedge prices in the short-term, Staff believes the
benefits of the Company s procurement policies and hedging practices are price stability
designed to protect customers over the long-term.
Staff reviewed the customer notice and press release and found that they were in
compliance with the requirements of IDAPA 31.21.02.102. Customers and the general public
were given until October 24, 2007 to file comments. As of October 26, 2007, no comments had
been filed except those of Staff. Even though this year s PGA is a proposed decrease in natural
gas rates, because some customers still struggle to pay their gas bills, Staff would like to remind
qualified customers to take advantage of the energy assistance available through the federally-
funded Low Income HomeEnergy Assistance Program (LIHEAP) and non-profit fuel funds such
as Project Share. For more information on these programs, customers may call the nearest
Community Action Agency, Avista Utilities, the Idaho Public Utilities Commission, or the 2-
Idaho Care Telephone Line.
ORDER NO. 30458
In summary, Staff recommended that the requested decrease in the W ACOG and the
12-month amortization of deferred expenses be approved. Staff recommended approval of the
Company s Application and proposed tariff as filed. Staff also recommended that should rates
be approved by FERC in the GTN rate case that are lower than those included in this case by
A vista, any and all refunds be credited back to A vista s customers.
DISCUSSION AND FINDINGS
We have reviewed the record for this case, including the Application and comments.
No protests to the Commission s use of Modified Procedure were filed. We continue to find that
the public interest does not require a hearing to consider the issues presented in this case and that
Modified Procedure is appropriate. IDAPA 31.01.01.204. The Commission has jurisdiction
over A vista Utilities, its Application for authority to change gas rates, and the issues involved in
this case by virtue of Title 61 , Idaho Code, specifically Idaho Code ~~ 61-129, 61-117, 61-307
and 61-501 , and the Commission s Rules of Procedure, IDAPA 31.01.01.000 et seq.
The Commission is required to establish just, reasonable, and sufficient rates for
utilities subject to our jurisdiction. Idaho Code ~ 61-502. The PGA mechanism is used to adjust
rates to reflect changes in the costs for the purchase of gas from suppliers, including
transportation, storage, and other related costs of acquiring natural gas. The Company s earnings
are not to be increased from changes in prices and revenues resulting from the annual PGA. The
PGA mechanism is designed to pass through prudently incurred commodity costs in a timely
fashion.
The Company s proposed WACOG was compared to other forecasts and is
consistent with the forecasted northwest regional cost of natural gas. Both A vista and Staff
believe the proposed W ACOG of 75.544 cents-per-therm to be appropriate. Although the
Company paid a higher hedged price when compared after the fact to the First of Month index
price, it appears as though the risk management and hedging policies put in place by the
Company have served well to help curb the negative effects of the dramatic volatility in the
natural gas market on the price that A vista passes on to customers, and significantly reduced the
risk of paying higher prices. Weare confident that the Company will continue to take advantage
of lower prices when the opportunity arises within its established risk management policy, and
direct it to continue to work with Staff to refine and enhance its risk management program.
ORDER NO. 30458
find it reasonable to decrease the W ACOG to 75.544 cents-per-therm and approve the proposed
12-month amortization of deferred expenses.
The rate decrease approved in this Order shall become effective on November 1
2007. The Commission approves the tariffs as filed with the Company s Application with a
November 1 2007 effective date.
ORDER
IT IS HEREBY ORDERED that Avista Utilities' Application in Case No. A VU-
07-02 is approved. The tariffs filed with the Company s Application, conforming to a WACOG
of 75.544 cents-per-therm to be effective November 1 2007 , are hereby approved. Avista shall
promptly seek a rate adjustment if the forecasted WACOG decreases materially. Additionally,
the result of GTN's pipeline rate case pending before FERC results in transportation expenses
less than what are included in this case, the difference, as well as any and all refunds, shall be
credited back to Avista s customers.
IT IS FURTHER ORDERED that the 12-month amortization of deferred expenses be
approved as filed.
IT IS FURTHER ORDERED that Avista Utilities continue to file quarterly W ACOG
projections and monthly-deferred cost reports with the Commission. Additionally, the Company
is directed to continue to work with Staff to enhance its risk management and documentation of
gas purchases.
THIS IS A FINAL ORDER. Any person interested in this Order may petition for
reconsideration within twenty-one (21) days of the service date of this Order with regard to any
matter decided in this Order. Within seven (7) days after any person has petitioned for
reconsideration, any other person may cross-petition for reconsideration. See Idaho Code ~ 61-
626.
ORDER NO. 30458
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this 3/ sf
day of October 2007.
MACK A. REDFORD, PRESIDENT
~~
~~J)
MARSHA H. SMITH, COMMISSIONER
ATTEST:
~IC) Je D. Jewell
mission Secretary
O:A VU-07-02 dw2
ORDER NO. 30458