20071029Decision memo.pdf

DECISION MEMORANDUM
TO:CO MMISSI 0 NER SMITH
COMMISSIONER REDFORD
COMMISSIONER KEMPTON
COMMISSION SECRETARY
COMMISSION STAFF
FROM:DONOVAN E. WALKER
DATE:OCTOBER 25, 2007
SUBJECT:A VISTA'S 2007 PURCHASED GAS COST ADJUSTMENT (PGA) - CASE
NO. A VU-07-02.
On September 17, 2007, A vista 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
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, and recommended approval ofthe Company s Application.
THE APPLICATION
A vista states if the changes proposed in its Application 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
DECISION MEMORANDUM
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
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 cost included in the Company s Application primarily represents 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) 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 2007.
DECISION MEMORANDUM
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's
comments include discussion of the Company s hedging policies, the proposed change in the
W ACOG, the Company s deferred expense account, customer issues, and the Federal Energy
Regulatory Commission (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
391 cents-per-therm credit, and accepting the Company s proposed W ACOG 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, that any and all refunds be credited back to
A vista s 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.
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 that that proposed by
GTN, that any and all refunds should be credited back to Avista s customers.
DECISION MEMORANDUM
Staff reviewed the Company s proposed W ACOG 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 Avista s proposed decrease in the WACOG is not as significant as that of
Intermountain Gas Company, A vista is partially constrained by its location. Whereas
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 Avista s past and 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.
APPROVED % CHANGE RESULTING % CHANGE
YEAR TARIFF WEIGHTED FROM TOT AL GENERAL FROM
WAS A VG. COST PREVIOUS SERVICE PREVIOUS
ESTABLISHED OF GAS,YEAR SCHEDULE 101 YEAR
$/THERM (W ACOG)TARIFF, $/THERM (Residential)
2002 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 2.12%
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
DECISION MEMORANDUM
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, Avista 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.
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%
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. 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 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 recommends that the same
were in compliance with the requirements of IDAP A 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
DECISION MEMORANDUM
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 Home Energy 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 2-1 Idaho Care Telephone Line.
In summary, Staffrecommended 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, that any and all refunds be credited back to A vista s customers.
COMMISSION DECISION
1. Does the Commission wish to approve A vista s Application and proposed tariff
including the requested W ACOG and amortization of deferred expenses as filed by the Company
and recommended by Staff?
2. Does the Commission wish to direct the Company to file further tariff decreases if
the forecasted W ACOG decreases materially or if the result of the pending FERC pipeline rate
case for GTN results in transportation expenses significantly less that what the Company has
included in its proposed tariffs?
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
W ACOG quarterly?
M:A VU-O7-02 dw2
DECISION MEMORANDUM