20110921Comments.pdf

KARL T. KLEIN
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
BARNO. 5156
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Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5918
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF )
A VISTA CORPORATION FOR AUTHORITY )
TO CHANGE ITS RATES AND CHARGES (2011 )
PURCHASED GAS COST ADJUSTMENT). )
)
CASE NO. AVU-G-11-04
COMMENTS OF THE
COMMISSION STAFF
The Staff of the Idaho Public Utilties Commission comments as follows on A vista
Corporation's Application for authority to change its rates and charges (2011 Purchased Gas Cost
Adjustment).
BACKGROUND
Initial Application
On August 15,2011, Avista Corporation dba Avista Utilties (Avista; Company) filed its
annual Purchased Gas Cost Adjustment (PGA) Application requesting authority to increase its
annualized revenue by about $1.1 milion (1.53%). Application at 1. The PGA mechanism is used
to adjust rates to reflect annual changes in Avista's costs for the purchase of natural gas from
suppliers - including transportation, storage, and other related costs. A vista says the proposed
changes wil not increase its earings. The Company requests that its Application be processed by
Modified Procedure and that its proposed rates become effective on October 1, 2011.
STAFF COMMENTS 1 SEPTEMBER 21,2011
The Company states that if the proposed changes are approved, its anual revenue would
increase by $1.1 milion or 1.53%. The average residential or small commercial customer using 62
therms per month wil see an increase of$0.99 or approximately 1.63%.
The Company buys natural gas for customer usage and then transports this gas through
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 (WACOG) purchased and the W ACOG embedded in rates. The Company also defers
various pipeline refunds or charges and miscellaneous revenue received from gas-related
transactions.
Avista's Application proposes decreasing the WACOG from the currently approved $0.461
per therm to $0.423 per thermo
Avista proposes an amortization rate of approximately 4.7 cents per therm to refud
approximately $1.6 millon to customers over the 13-month period beginning October 1, 2011.
Typically, the PGA rate adjustment takes effect on November 1. However, given several different
rate adjustments proposed by A vista in other cases taking effect on October 1 st this year, the
Company timed its 2011 PGA filing to coincide with the effective date in those other cases,
necessitating the need for a 13-month amortization of the PGA contra-balance.
Amended Application
On August 25,2011, the Company updated its Application to fuher reduce the proposed
WACOG to $0.418 per thermo Recent forward 30 day-average natual gas costs, which impact
planed hedges and the pricing of index volumes, have decreased to a level lower than what the
Company included in its original filing. The updated filing proposes to increase anualized
revenues by approximately $0.7 milion or about 0.98%, as opposed to the $1.1 milion or 1.53%
increase proposed in the original filing.
STAFF ANALYSIS
Staff reviewed the Company's Application (as amended) to determine whether its proposed
adjustments to Schedules 150 and 155 reasonably capture its fixed (demand) and variable
(commodity) costs. More specifically, Staff reviewed the Company's pipeline transportation and
storage costs, fixed price hedges, estimates of future commodity prices, and its risk management
policies. In addition, Staff reviewed the appropriateness of the Schedule 155 change in
STAFF COMMENTS 2 SEPTEMBER 21, 2011
amortization rates that "true up" the expenses from the 2010 PGA. Each component of the rate
changes wil be discussed in greater detail below.
The Company requested the following rate changes that would result in an increase of
approximately $0.7 milion in anual revenue, or approximately 0.98%.
Table 1:
Proposed
Proposed Schedule 155 Proposed Overall
Schedule 150 Amortization Total Rate Proposed
Change per Rate Change Change per Percentage
Schedule Service Therm Per Therm Therm Change
101 General ($0.03614)$0.04697 $0.01083 1.10%
111 Large General ($0.03614)$0.04697 $0.01083 1.40%
131 Interrptible ($0.04304)$0.04777 $0.00473 0.81%
Under the proposed rates, a Schedule 101 residential or small business customer using an average
of62 therms per month wil see an increase of$0.67 per month, or approximately 1.10%. Actual
customer increases wil var based on the amount of therms consumed.
Schedule 150 - Purchased Gas Cost Adjustment
The Schedule 150 portion of the PGA consists of commodity costs (W ACOG) and demand
costs. The WACOG is the Company's forward-looking price of purchased gas and storage gas
embedded in base rates. This also includes the benefit of some off system transactions, (this
section of Staff's Comments contains confidential information).
The Company proposes a W ACOG of $0.41797 per therm with this
Application. The proposed W ACOG is a reduction of 8.77% from the present $0.45817 per therm
W ACOG established by Order No. 32102. The demand costs represent the cost of pipeline
transportation to the Company's distribution system. The Company proposes a demand cost
increase of $0.00690 per thermo The Company attributes this increase in demand cost to a proposed
rate case settlement between TransCanada - Gas Transmission Northwest (GTN) and their shippers
(including A vista).
The Company delivers transported natual gas to its Idaho and Washington city- gates via
two interstate transportation natural gas pipeline providers, Northwest Pipeline and TransCanada-
Gas Transmission Northwest (GTN). Each provider has transmission pipelines ruing through the
Company's service territory. The Company benefits directly from the geographic proximity to
these transmission lines, each of which transmits natural gas from separate and distinct supply
STAFF COMMENTS 3 SEPTEMBER 21, 2011
basins. This allows the Company to procure natural gas from the lowest cost supply basin to
minimize commodity cost. Available capacity on these pipelines remains a key component in
serving customers and maintaining supply diversity. The Company maintains that it continuously
determines when its contracted interstate transportation supply is under-utilzed due to warer
weather or industrial demand declines and wil post for release to others with the release payments
received benefiting the Company's customers.
Northwest Pipeline (NWP) supplies natural gas to northwest utilties from both
Sumas and the Rockies. The utilties can purchase natual gas from either basin based on pricing;
however, NWP retains the right to require the utilties to align their natural gas supply to the
original design/contract (this section of Staff's Comments contains confidential information).
According to the
Company, Sumas gas prices have typically been higher than both Rockies and AECO and, due to
the price allocation established by Northwest Pipeline, the Company has utilzed its proximity to
GTN to acquire gas supply at lower commodity prices without incurring significant demand costs to
acquire the gas supply.
Lower Rockies Basin prices have benefited natural gas utilties in the Northwest due to the
Rockies' lack of pipeline infrastructure capable of moving Rockies gas east. However, Rockies
Express pipeline, a 639 mile pipeline built to move gas east, was recently completed. This pipeline
enables Rockies direct access to the eastern markets for the first time. In the past, the utilties in the
Northwest holding NWP firm transport have benefited from lower priced Rockies gas caused by
limited pipeline takeaway abilty from the Rockies. This lower priced Rockies gas did act as a
market indicator for the development of additional pipeline capacity (both new
construction/greenfield, as well as through varous expansions). Rockies Express was one of the
new pipelines built to access the lower priced Rockies supply. This development caused Rockies
prices to increase for a short period of time but production continued to grow and Rockies pricing
again moved lower than other supply basins.
More recently, Ruby Pipeline was constrcted as a response to lower Rockies prices. It was
built from the Rockies to Malin, Oregon (the California/Oregon border). This increased pipeline
infrastructure has since shifted pricing in the forward markets. For example, in the summer
(Apr-Oct), Rockies gas was at a premium over the other delivery points and, for the winter Rockies,
now is priced between Sumas and AECO.
STAFF COMMENTS 4 SEPTEMBER 21, 2011
The Company's diversity of supply basins has enabled it to hedge expected winter flowing gas
requirements at favorably contracted prices to provide customers with lower priced natual gas.
Weighted Average Cost of Gas
Throughout the last year, the wholesale cost of natural gas has been low, which has allowed
the Company to purchase gas for the coming year at favorable rates. This request reflects the fourth
decrease within the Company's past five PGA filings, and makes the Company's proposal the
lowest rate since a 2003 fiing. The table below ilustrates the changes in the natural gas market
over the past nine years and the volatility experienced over the same period.
Approved Weighted % Change Resulting Total General % Change
A vg. Cost of Gas From Previous Service Schedule 101 From Previous
Year $/Therm Year Tariff, $/Therm Year
2002 0.34572 Base Year 0.75722 Base Year
2003 0.44989 30.13%0.77716 2.63%
2004 0.55739 23.89%0.95315 22.64%
2005 0.76786 37.76%1.18692 24.53%
2006 0.76085 -0.91%1.16175 -2.12%
2007 0.75544 -0.71%1.1056 -4.83%
2008 0.78646 4.1 1%1.15103 4.1 1%
2009*0.75984 -3.38%1.07507 -6.60%
2009 0.49093 -35.39%0.88199 -17.96%
2010 0.45817 -6.67%0.91553 3.80%
2011 0.41797 -8.77%0.92636 1.10%
*The WACOG change was part of the A VU-G-09-01 settlement mtended to offset the impact of the residential base
rate increase approved in Order No. 30856.
The W ACOG decline primarily has occurred because natural gas prices have continued
declining due to regional and national economic weakess that reduced the weather-adjusted natural
gas demand when natural gas supplies have been plentifuL. A national report issued by the Energy
Information Administration (EIA) in August 2011 provides insight into the anticipated conditions
of the natural gas industry through 2012 in the areas of natural gas consumption, production,
inventory and pricing. Natural gas consumption is forecast to increase 1.8% from 2010 levels, to
STAFF COMMENTS 5 SEPTEMBER 21,2011
67.4 bilion cubic feet per day (Bcf/d) in 2011 and increase slightly to 67.8 bilion Bcf/d in 2012.
Natural gas consumption in the industrial sector is projected to remain flat for the rest of2011 and
increase by approximately 1.8% through 2012. Electric power generation natural gas consumption
is expected to increase by 3.7% through 2012. Extremely hot weather in the United States this past
July contributed to an increase in consumption of natural gas for electric power to meet the
increased air conditioning loads. As a result, electric power consumption in July 2011 increased by
4.2% compared to June 2011. Residential and commercial consumption through 2012 is projected
to remain at levels comparable to those of 2010.
Natural gas production is expected to average 65.5 Bcf/d in 2011, which is a 5.9%
production increase over 2010. This increased production is centered in the onshore production in
the Lower 48 States offsetting production declines in the Gulf of Mexico. EIA forecasts that
production wil continue to increase in 2012, but at a slower pace of 0.9% growth. In addition, EIA
forecasts that increased domestic production wil decrease import natural gas volumes by 4.3 % in
2011 and by 3.7% in 2012. The EIA Report (August 2011) states that inventories held in
underground storage in the lower 48 states is down slightly in 2011,2.758 trillon cubic feet, as
compared to the five-year average of2.998 trilion cubic feet. Finally, natural gas spot price
averaged $0.442 per therm in July 2011-$0.0013 per therm less than June 2010. EIA forecasts
natual gas prices for the rest of2011 to average $0.424 per therm, with an average price of $0.441
per therm in 2012.
Staff reviews publications relating to the natural gas industry throughout the year.
However, two primary sources are used to develop forecasts, specifically: (1) NYMEX Futures
Index and (2) EIA. For puroses of this Application, Staff reviewed the Company's proposed
WACOG of$0.41797 and its forecasted natural gas prices through October 2012. Comparing the
data from the above informational sources, forecasts, and the W ACOG of other Pacific Northwest
natural gas utilties, Staff believes that the Company's forecasted natural gas prices are reasonable.
Schedule 155 - Deferred Expenses
The Schedule 155 portion of the PGA is the amortization component of the Company's
deferral account. When the Company pays more for gas than what is estimated in the preceding
W ACOG, a surcharge is assessed to customers. If the Company pays less for gas than what is
estimated in the preceding WACOG, a credit is issued to customers. The proposed change in the
amortization rates are an increase of approximately 4.7 cents per thermo This increase is a result of
STAFF COMMENTS 6 SEPTEMBER 21,2011
the large one-year refund amortization rate from the 2010 PGA being replaced by a smaller one-
year (13-month) amortization rate proposed in this filing. The large refud balance from the 2010
PGA was almost completely amortized during the curent PGA year resulting in a reduction in the
refud amortization rate in this curent PGA application. This reduction, coupled with the curent
refund balances of approximately $1.6 milion, results in the increase of approximately 4.7 cents
pertherm.
Hedging Policies
As in prior years, the Company's gas procurement plan generally incorporates a structured
approach for the hedging portion of the portfolio, while maintaining flexibilty so the Company can
make discretionary adjustments when wholesale gas markets present opportunities to reduce costs.
Discretion is used in evaluating curent volatilty, forward cure shapes, and alternatives when
considering price triggers. The Company continues to hedge utilzing a series of price targets.
When prices decrease, target purchase volumes increase. The Company typically develops,
establishes and implements the anual procurement plan by November or December of each year.
Procedurally, the Company utilizes a 30-day historical average of forward prices calculated
by supply basin to develop an estimated cost for index/spot purchases. The estimated monthly
volumes to be purchased by basin are multiplied by this 30-day average price for the corresponding
month to determine estimated spot purchase costs. These index/spot purchase volumes represent
approximately 30% of the Company's estimated anual load for the coming year. At the time of
this Application, the price for this segment of the Company's anual gas volume is $0.390 per
thermo
The Company maintains approximately 20% of the estimated anual volume in
underground storage at the Jackson Prairie Storage Facilty. At the time of this Application, the
WACOG for the stored gas is $0.390 per thermo
As outlined in the Application, the Company has hedged gas purchases on both a periodic
and discretionar basis throughout 2011 to meet Company needs for the forthcoming PGA year
(November 2011 through October 2012). As of the date of the Application, 70% of the Company's
estimated anual load requirements for the PGA year will be hedged at a fixed price, comprised of
(1) 32% of volumes hedged for a term of one year or less, (2) 18% of volumes multi-year hedges
from prior years, (3) 20% of volumes from underground storage. By the end of July 2011, planed
hedge volumes have been executed at a weighted average price of $0.476 per thermo
STAFF COMMENTS 7 SEPTEMBER21, 2011
According to the Company, average wholesale prices of natural gas remain similar to 2010
levels. However, cash prices over the storage injection season (April- September) have been
slightly higher than 2010. This increased pricing level has caused storage W ACOG to be higher
than what is curently in rates. While cash prices are currently higher than a year ago, the forward
natural gas prices for the upcoming PGA year have continued to drop. This decline has provided an
opportunity to hedge natural gas at a cost below what is embedded in rates. The decreased hedge
cost more than offsets the storage W ACOG increase.
The Company meets with Staff quarerly to collaborate on the procurement plan given the
wholesale natural gas environment. The Company wil continue to (1) keep long-term hedges open
for up to two or three years, depending on which strip triggers first; (2) keep price targets "open" all
year; and (3) maintain the current minimum portfolio hedge percentage (this section of Staffs
Comments contains confidential information).
Throughout the year, the Company communicates with Staff when it believes
a decision is being made outside the scope of the normal procurement plan. Over the course of the
year, the Company has continued to communicate with Staff regarding the Company's storage and
procurement activities, (this section of Staffs Comments contains confidential information).
CUSTOMER RELATIONS
Customer Notice and Press Release
The Customer Notice and Press Release were included with Avista's initial Application.
The initial Application was received on August 15,2011. Staff reviewed the customer notice and
press release included with the initial Application and determined they were in compliance with the
requirements ofIPUC Rules of Procedure 125.04 and 125.05. IDAPA 31.01.01.125. The initial
customer notice was mailed with cyclical bilings beginning August 19,2011 and ending September
20,2011.
After Staff and Avista reached a settlement in Avista's General Rate Case, (AVU-G-11-01),
the Company fied its revised Application in this case on August 26. Because A vista reduced its
requested overall PGA increase from 1.53% to 0.98%, Staff determined it was not necessar for the
Company to revise its customer notices.
STAFF COMMENTS 8 SEPTEMBER 21,2011
Customer Comments
Customers were given until September 21, 2011 to fie comments. As of September 19, no
comments had been received.
Financial Assistance for Paying Heating Bils
If approved, residential customers wil see an approximate 1 % increase in their natural gas
rates. Because some customers continue to struggle to make ends meet, Staff would like to remind
qualified customers to take advantage of the energy assistance available through the federally-
fuded Low Income Home Energy Assistace Program (LIHEAP) and other non-profit fuel fuds
such as Project Share in Avista's northern Idaho service territory. For more information on these
programs, customers may call the nearest Community Action Agency, Avista Utilties, the Idaho
Public Utilties Commission, or the 2-1-1 Idaho Care Line.
STAFF RECOMMENDATION
Staff recommends that the Commission approve the change in natural gas rates as proposed
in the Company's amended fiing.
\~tRespectfully submitted this i day of September 2011.
~A~hr
Karl T. Klein
Deputy Attorney General
Technical Staff: Donn English
Doug Cox
Marilyn Parker
i:umisc:commentsavegl 1.4kkdedcmp.doc
STAFF COMMENTS 9 SEPTEMBER 21, 2011
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 21ST DAY OF SEPTEMBER 2011,
SERVED THE FOREGOING NON-CONFIDENTIAL COMMENTS OF THE
COMMISSION STAFF, IN CASE NO. AVU-G-11-04, BY E-MAILING AND MAILING
A COPY THEREOF, POSTAGE PREPAID, TO THE FOLLOWING:
DAVID J MEYER
VP & CHIEF COUNSEL
A VISTA CORPORATION
PO BOX 3727
SPOKANE WA 99220-3727
E-MAIL: david.meyer(iavistacorp.com
KELL YO NORWOOD
VP STATE & FED REG
AVISTA CORPORATION
PO BOX 3727
SPOKANE WA 99220-3727
E-MAIL: kelly.norwood(iavistacorp.com
JJl4:D.~
SECRETARY
CERTIFICATE OF SERVICE