20151009Comments.pdf

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DEPUTY ATTORNEY GENERAL
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IDAHO BAR NO. 5156
Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-59I8
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILTTIES COMMISSION
IN THE MATTER OF AVISTA )
CORPORATTON'S APPLICATION TO ) CASE NO. AVU-G-r5-02
CHANGE ITS NATURAL GAS RATES AND )
CHARGES (2015 PURCHASED GAS COST ) COMMENTS OF THEADJUSTMENT). ) COMMISSION STAFF
)
The Staff of the Idaho Public Utilities Commission comments as follows on Avista
Corporation' s Application.
BACKGROUND
On August 27,2015, Avista Corporation dba Avista Utilities filed its annual Purchased
Gas Cost Adjustment (PGA) Application. The PGA is, in summary, a Commission-approved
mechanism that adjusts rates up or down to reflect changes in Avista's costs to buy natural gas
from suppliers-including changes in transportation, storage, and other related costs. Avista
defers these costs into its PGA account, and then passes them to customers through an increase
or decrease in rates.
With this Application, Avista proposes to: (1) pass any change in the estimated cost of
natural gas for the next 12 months to customers (Tariff Schedule 150); and (2) revise the
amortization rates to refund or collect the balance of deferred gas costs (Tariff Schedule 155).
Avista's proposal would decrease Avista's PGA rates by about $10.3 million (14.5%). Average
residential or small commercial customer's rates would decrease by $7.94 per month (about
13.4%). Large commercial customers'rates would decrease by about l8%. The rate of Avista's
STAFF COMMENTS OCTOBER 9,2015
sole customer receiving intemrptible service would decrease by about 24.6%. Avista's proposal
would not affect Avista's earnings. Avista asks the Commission to process the Application by
Modified Procedure, and that the new rates take effect November 1, 2015.
STAFF ANALYSIS
Avista's PGA Application proposes the following changes:
To assess the reasonableness of the proposed changes, Staff examined Avista's gas
purchases for the year, its fixed price hedges, pipeline transportation and storage costs, and
estimates of future commodity prices. Staff also reviewed Avista's jurisdictional allocations and
the reasonableness of Avista's Lost and Unaccounted for Gas (LAUF) volumes.l Staff
thoroughly analyzed Avista's Application and work papers and verified that Avista's filing will
not change Avista's earnings. Staff also confirmed that the proposed changes to Schedules 150
and 155 accurately capture Avista's fixed (demand) and variable (commodity) costs given the
coming year's forecasted gas purchases and properly amortize the deferral balance from the prior
year. Based on its review, Staff recommends that the Commission approve Avista's PGA
Application and proposed tariffs as filed. Staff s analysis and recommendation is discussed in
detail below.
Schedule 150 - Purchased Gas Cost Adjustment
The tariff Schedule 150 portion of the PGA consists of commodity costs and demand
costs. These two types of costs are discussed in turn below.
Avista's commodity costs are the variable costs that Avista incurs to buy natural gas.
The weighted average cost of gas (WACOG) is an estimate of those costs. In this case, Avista
estimates its commodity costs will decrease by $0.133 (13.3P) per therm, from the currently
' LAUF Gas is the difference between the volumes of natural gas delivered to the distribution system at the city gate
and volumes of natural gas billed to customers at the meter.
Table l: Rate Changes by Class
Service
Schedule
No.
Commodity
Change per
Therm
Demand
Change per
Therm
Total
Sch. 150
Chanse
Amortization
Change per
Therm
Total Rate
Change per
Therm
Overall
Percent
Change
General l0l s(0.133 12)s0.00133 s(0.13179)$0.00170 (s0.13009)(13.40h)
Ls. General 111 $(0.133 12)s0.00133 s(0.13179)s0.00170 (s0.13009)(18.0%)
Interruptible 131 s(0.133 l2)0.00000 s(0.133 l2)s(0.02097)(s0.15409)(24.6\%
STAFF COMMENTS OCTOBER 9,2015
approved $0.385 (38.51) per therm to $0.252 (25.2O per therm. However, as commodity costs
can fluctuate, Avista has tried to minimize company and customer exposure to potentially rising
gas costs by diversifying how it procures natural gas. Avista's procurement strategy includes
hedging, the use of underground storage capacity, and estimating the cost of index purchases
using a 30-day historical average of forward prices for each supply basin.
Avista's demand costs are its fixed-capacity costs for interstate transportation and
underground storage, as well as capacity releases that are credited back to customers. The
demand costs are primarily costs to transport gas on interstate pipelines to Avista's local
distribution system. To cover demand costs, Avista proposes a $0.0013 per therm increase in the
overall demand rate for customers on Schedules 101 and I 11. Avista's proposed demand rate
includes the increased cost of transporting gas over TransCanada-Gas Transmission Northwest,
which is to take effect on January 1,2016.
Schedule 155 - Deferral Account
Tariff Schedule 1 5 5 reflects the amortization of Avista's deferral account. With this
Application, Avista proposes to increase the amortization rate for general and large general
service customers by $0.00170 per therm. Avista explains that lower than expected wholesale
natural gas prices contributed to the proposed amortization rate by causing Avista to collect
revenues that exceeded its costs. Part of these revenues were offset by an under collection of
fixed-demand costs that resulted from a warmer-than-normal winter. Avista notes that the
increased amortization rate it proposes would decrease the rebate that customers currently enjoy
from $0.03056 per therm to $0.02886 per therm. The new amortization rate will refund about
$2.3 million dollars to customers through the Schedule 155 portion of the PGA.
STAFF COMMENTS OCTOBER 9,2015
A reconciliation of the Schedule 155 deferral balance is shown on Table 2:
Table 2: Summary of Deferral Balance
Balance as of October 31,2014
Amortization Activity
Total Unamortized Balance
Current Year Deferral Activity
Deferral of Price Differences
Interest on Deferrals
Excess Capacity Releases
Deferred Exchange Contract
Total Current Year Deferral Activity
Balance to be amortized
$ (1,755,891)
(1.816.s87)
$ 60,696
$ 916,051
(5,260)
(2,328,176)
(945.338)
$ (.2.362.722\
s (2,302,026)
The deferral activity consists of the difference in the price Avista paid for natural gas and
the WACOG established in the previous PGA, monthly interest charges on the deferred balances,
and excess capacity releases for the benefit of customers. When Avista has unused capacity, it
routinely releases that capacity to other pipeline users. During the 2015 PGA year, Avista's
Idaho gas customers benefitted by $2.3 million in the Schedule 155 Defenal Account from this
practice.
Avista has a Deferred Exchange contract under which it receives natural gas during the
summer and redelivers that natural gas in winter. Avista charges a fixed per therm price for this
service. Avista's proposed Schedule 150 WACOG includes a forecasted benef,rt of about
$1.4 million for Idaho customers during the year. However, Avista allocated an additional
$945,338 in benefits under the contract to Idaho customers. The additional benefits from the
Deferred Exchange Contract are reflected in the deferral activity in the table above.
Weighted Average Cost of Gas (WACOG)
The WACOG includes fuel charges to move gas at the city gate, plus some variable
transport costs, and Gas Research Institute (GRI) funding. It does not include third party gas
management fees. In this case, Avista proposes a WACOG of 25.2 cents per therm. The
approved WACOG in the Company's last annual PGA was 38.5 cents per therm.2 Staff Chart 1,
below, shows Avista's historical WACOG, and that the proposed WACOG will be a decrease
following two years of consecutive increases.
2 This includes a conversion factor that adjusts revenue up to account for uncollectables, commission fees, and taxes.
STAFF COMMENTS 4 OCTOBER 9,2075
Staff chart WACOG
Weighted Average Cost of Gas (S/Therm)
1.0000
0.5000
02 03 04 05 06 07 08 09 10 11 t2 t3 t4 15
Year
Avista's estimated cost of gas when it files its PGA is usually close to its actual cost if it
has accurately forecasted annual throughput. Here, Avista expects its gas cost for the next 12
months will decrease, because the winter of 2014-2015 was warner than normal and led to
decreased gas demand. The decreased demand, in turn, resulted in extra gas remaining in
storage. This left-over stored gas has combined with high production levels to decrease the
wholesale price of natural gas.
Although Avista expects gas costs to decrease, those costs may vary depending on how
weather and economic conditions impact usage. To protect its customers from the risk that gas
costs will increase, Avista plans to hedge about 43%o of its estimated annual load requirements
for the coming PGA year at an average price of $0.332 per therm.
Avista has traditionally hedged against high winter prices by purchasing gas in the
summer, when prices are typically lower, and then injecting the gas into underground storage at
its Jackson Prairie facility. However, during the last winter, natural gas prices declined, which
diminished the benefits of summer purchases for winter use. This year, Avista is using a new
Procurement Plan that takes advantage of winter prices being closer to summer prices and relies
less on storage as a strategy to hedge against traditionally high winter prices. Instead, Avista will
use storage to opportunistically purchase and sell gas throughout the year. Avista now says it
has about 920,000 dekatherms of total capacity at Jackson Prairie. As of June 30,2015, Avista
has about 412,000 dekatherms available to serve peak day needs and 508,000 dekatherms to use
to capture financial benefits.
Avista plans to meet its estimated annual load requirement using 4Yo underground
storage, 43Yohedges and 53oh index purchases. In contrast, last year Avista's plan included20o/o
E
o.CF
STAFF COMMENTS OCTOBER 9,2015
underground storage, 35% hedgesand45o/o index purchases. Changes in20l4to2015 storage,
hedge, and spot purchase ratios reflect that the Company is using the new Procurement Plan.
Under the new plan, Avista expects its stored gas will have a WACOG of $0.237 per therm, and
its planned hedges and index purchases will be executed at a WACOG of $0.25 per therm.
Mqrket Fundamentals & Price Analysis
Since over half of Avista's annual throughput consists of market index purchases, Staff
scrutinizes Avista's projected monthly cost of purchased gas. Avista continues to use a30-day
historical average of forward prices to forecast the volume-weighted average annual index price,
and forecasts a mainline fuel cost of $2.50/MMBtu. To test Avista's forecast, Staff developed its
own volume-weighted forecast using the NYMEXA{GX Futures prices at each of the three hubs
where Avista purchases gas.3 By using Avista's estimated volume allocation percentages for
these three hubs, Staff forecasts the volume-weighted cost of gas to be $2.48/MMBtu. Staff s
forecast is thus similar to Avista's forecast.a
Staff also examined the forecasts of national and regional organizations to see how
perceived market conditions might vary from the NYMEXAIGX Futures prices. Specifically,
Staff reviewed the forecasts from the Energy Information Administration (EIA) and the
Northwest Gas Association (NWGA). According to the most recent EIA report, Henry Hub
prices are expected to increase from an average price of $2.84/MMBtu in 2015, to $3.11AvIMBtu
in 2016. Avista predominately purchases gas from the AECO basin, which this year is selling
gas for about 8% less than gas from Henry Hub.
Based on Staff s review of the market fundamentals and trends, the 201 5-2016 forecasts
are consistent, predicting relatively stable near-term gas prices. Staff concludes that Avista's
weighted average cost of its current hedges, and estimated cost of forward-looking index
purchases, are reasonable. Staff thus recommends the Commission accept Avista's proposed
WACOG of $0.252 per therm. Staff also recommends that Avista return to the Commission with
a new filing if prices materially deviate from the proposed rates during the upcoming year.
3 Avista is supplied by three natural gas hubs (Rockies, Sumas, and AECO). Future settlement prices are reported
daily as a price differential from the NYMEX Henry's Hub price.
a Avista's proposed WACOG is slightly higher than the Avista's mainline fuel cost because the WACOG includes
variable interstate transportation costs, and contributions to the Gas Research Institute (GRI).
STAFF COMMENTS OCTOBER 9,2015
Risk Management
Avista uses a diversified approach to procure natural gas for the coming PGA year.
Avista's Procurement Plan uses a structured approach to execute its hedges that includes a range
of possible hedge windows with varying long-term and short-term trigger prices. However, its
Procurement Plan also allows it to make discretionary decisions so it can adjust to changes in
market conditions. A new provision of the Procurement Plan calls for Avista to lock in financial
benefits for Avista and its customers. In summary, when Avista buys gas for storage incection, it
will also agree to sell the gas forward at a fixed price. This reduces volatility in the average cost
of stored gas. Avista mitigates risk to ratepayers with its market purchases, storage, and
interstate transportation capacity. Avista meets with Staff semi-annually to discuss the status and
performance of its Procurement Plan. This process allows Staff to evaluate Avista's strategies to
minimize risk and keep prices stable for customers.
Avista buys the right to transport gas through several interstate pipelines. This enables
Avista to buy gas from a variety of basins, both in the US and in Canadas, and then transport that
gas to Idaho and Washington. Whenever Avista has surplus capacity because demand for gas is
low, it sells its surplus capacity at the highest price available. Since Avista serves both
Washington and Idaho, Avista credits the benefits from off-system sales to each jurisdiction
based on a three-year average of the five highest consecutive days of gas consumption in each
year. Staff Chart 2, below, shows Avista's total capacity release revenue and Idaho's portion,
which is typically about 30Yo of the total. Avista's total capacity release revenue this year is
about $l 1.9 million, of which Idaho receives about $3.49 million with $2.3 million reflected in
the deferral as shown on page 4,Table2.
5 Avista delivers domestically produced natural gas to its city gates through Northwest Pipeline, Gas Transmission
Northwest (GTN), TransCanada's Foothills Pipeline system (Foothills), and Spectra Energy Pipeline.
STAFF COMMENTS OCTOBER 9,2015
Staff Chart 2: Capacity Release Revenue
$15.0
$14.0
$12.0
Slo.o
$B.o
56.0
s4.0
$2.0
$o.o
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Other Considerations
Staff believes that LAUF gas is an important part of its annual review. Staff reviewed
Avista's LAUF gas volume and compared it to total throughput. Staff believes Avista's overall
LAUF gas volume of 0.61o/o of throughput is reasonable compared to that of other local
distribution companies (LDCs). In the past, Avista's LAUF gas information was provided at
Staff s request, on an as needed basis. Last year, Avista agreed to provide a workpaper with its
Application that describes the actual LAUF gas percentage of overall throughput. Staff
appreciates that Avista provided the requested workpaper with this filing.
Customer Relations
Avista included a press release and customer notice in its Application. Staff determined
that both documents comply with Rule 125 of the Commission's Rules of Procedure (IDAPA
31.01.01 .125). The customer notice was included with bills mailed beginning September 3,
2015 and ending October 2,2015.
Customer Comments
Customers have the opportunity to file comments on or before October 9,2015. As of
October 8, 2015, the Commission has received no comments from customers.
Avista Tra nsportati on Ca pacity Rel ease Reven ue
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STAFF COMMENTS OCTOBER 9,2015
STAFF RECOMMENDATION
After thoroughly examining the Avista's Application, natural gas purchases, and deferral
activity for the year, Staff recommends that the Commission approve Avista's proposed:
1. Tariff Schedule 150, including the proposed WACOG of $0.252 per therm.
2. Tariff Schedule 155, including the proposed amortization rate of $0.02886 per therm
credit to refund approximately $2.3 million to customers. This will result in a net
decrease in the Avista's Idaho natural gas revenue by approximately $10.3 million or
t4.5%.
Respecttully submitted this 1/1. day of October 2015.
k //L
Karl T. Klein
Deputy Attorney General
Technical Staff: Daniel Klein
Donn English
Kevin Keyt
i:umisc/commens/avugl 5.2k*dkdekk comments
STAFF COMMENTS OCTOBER 9,2015
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 9th DAY OF OCTOBER 2015,
SERVED THE FOREGOING COMMENTS OF Tr{E COMMISSION STAFF, IN
CASE NO. AVU.G.I5-02, BY E.MAILING AND MAILING A COPY THEREOF,
POSTAGE PREPAID, TO THE FOLLOWING:
KELLY O NORWOOD
VP STATE & FED REG
AVISTA CORPORATION
POBOX3727
SPoKAI{E WA99220-3727
E-MAIL: [e-mail]{n
DAVID J MEYER
VP & CHIEF COLINSEL
AVISTA CORPORATION
PO BOX3727
SPoKANE WA99220-3727
E-MAIL: david.meyer@avistacorp,qom
CERTIFICATE OF SERVICE