2001071328783.doc

BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION

IN THE MATTER OF THE APPLICATION OF INTERMOUNTAIN GAS COMPANY FOR AUTHORITY TO INCREASE ITS RATES FOR SERVICE )
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CASE NO. INT-G-01-3

ORDER NO.  28783

On July 2, 2001, Intermountain Gas Company (Intermountain; Company) filed an Amended Application seeking to increase revenues by approximately $9.5 million (4.5%) and reduce the weighted average cost of gas (WACOG) to $0.35295 per therm. Intermountain Gas supplies natural gas to approximately 200,000 customers in southern Idaho. After reviewing the comments and record in this case, the Commission partially grants and partially denies the Amended Application as set out in greater detail below.
BACKGROUND
A. Procedural History
On May 25, 2001, Intermountain Gas Company filed an Application with the Idaho Public Utilities Commission for authority to place into effect new rate schedules that would result in an overall revenue increase of approximately $27.1 million (12.9%). In Order No. 28745, the Commission issued a Notice of Application, Modified Procedure and Comment Deadline. To allow additional time for public comment, the Commission suspended the Application’s proposed effective date from July 1, 2001 until July 14, 2001. Order No. 28752.
On July 2, 2001, Intermountain Gas filed an Amended Application seeking an overall increase of approximately $9.5 million (4.5%), rather than the $27.1 million (12.9%) requested in its original filing. To effectuate the proposed rates, the Company requested that the WACOG be reduced to $0.35295 per therm. In light of the Amended Application, the Commission extended the comment deadline to 12 p.m. (Noon) on Friday, July 6, 2001. Order No. 28771.
B. The Amended Application
Wholesale natural gas prices have fluctuated dramatically over the past year, resulting in higher natural gas costs for gas utilities nationally and in Idaho. As a result of the increased commodity prices that Intermountain Gas paid its suppliers during the last year, the Commission approved a 28% rate increase effective July 1, 2000 and a 20% increase effective January 15, 2001.
In its Amended Application, Intermountain seeks to pass through to each customer class a change in gas-related costs resulting from 1) a decrease in storage and transportation costs, 2) an updated customer allocation of gas-related costs pursuant to the Company’s Purchased Gas Cost Adjustment (PGA), 3) inclusion of temporary surcharges and credits for one year related to deferred gas costs and interstate transportation costs, and 4) a decrease in the WACOG.
Intermountain also seeks to eliminate the temporary surcharges and credits from Case No. INT-G-00-1 that were included in its prices during the past 12 months. The aforementioned changes would result in an overall price increase to Intermountain’s RS-1, RS-2, GS-1 and T-1 customers, and a decrease to Intermountain’s T-2 customers. Because the Company seeks only to recover costs already incurred, Intermountain’s earnings will not be increased as a result of the proposed changes in prices and revenues. The overall effect of the proposed changes would be an increase in the Company’s Idaho revenues of $9,493,804. The net increase is made up of:

Permanent Price Changes:
Decrease in the WACOG
($17,572,887) Eliminating INT-G-00-01’s Temporary Surcharges (14,633,206) Changes in Storage and Transportation Costs (382,418) Adjustment to Fixed Cost Collection Rate (1,852,579) Total Permanent Price Change ($34 ,441,090) Temporary Price Surcharges (Credits): Pipeline Segmentation Credits ($2,377,070) Overcollected Fixed Costs from INT-G-00-01 (191,946) Overcollected Variable Costs from INT-G-00-01 (262,530) Uncollected Wholesale Commodity Costs 46,766,440 Total Temporary Price Surcharges (Credits): $43,934,894 Total Proposed Price Change $9,493,804
Permanent Changes
The permanent adjustment reflects a decrease in rates to reduce the WACOG, the elimination of the temporary surcharge from last year’s tracker (Case No. INT-G-00-1), a decrease in storage and transportation costs, and an adjustment to the fixed cost collection rate. These reductions would decrease annual Idaho revenues by $34,441,191.
Temporary Changes
The temporary surcharges and credits reflect the true-up of prior-period costs deferred in the Company’s PGA 186 accounts. The surcharges and credits are separated into pipeline segmentation credits, overcollection of temporary and permanent surcharges, and a large amount of deferred gas costs. The largest adjustment requested by the Company consists of the temporary surcharge to recover $46,766,440 in wholesale gas costs incurred in prior periods. The deferred balance has continued to grow through May of this year because gas costs incurred by the Company were higher than the revenues recovered in rates. The Company maintains that these costs have been a significant burden and need to be recovered from customers. The total amount of temporary charges requested by the Company is $43,934,894.
The impact of the Company’s proposal on each customer class would be as follows:

Customer Class

Revenue Proposed
Average Increase $ /Therm Proposed Average Increase % Change Proposed Average Price
$/Therm RS-1 Residential $591,173 $0.01602 1.68% $0.96759 RS-2 Residential $5,114,371 $0.04287 5.23% $0.86251 GS-1 General Service $2,964,973 $0.03260 4.18% $0.81325 LV-1 Large Volume * $482,189 $0.12512 23.47% $0.65813
* T-1 tariff price plus the Weighted Average Cost of Gas (WACOG) $0.35295
WACOG = total commodity cost of gas ( total purchase therms

Transportation

Revenue Proposed
Average Increase
(Decrease)
$/Therm Proposed
Average Increase
(Decrease)
% Change
Proposed
Average Price
$/Therm T-1 Transportation $356,059 $ 0.00986 10.28% $0.10575 T-2 Transportation ($14,961) ($0.00063) (2.10%) $0.02934
WRITTEN COMMENTS
Public Comments
As of July 6, 2001, the Commission received fifty-four (54) written comments. With the exception of one customer, all of the comments opposed the proposed rate increase. The Commission’s Customer Assistance Staff also registered five informal complaints directed at Intermountain Gas opposing the request to increase rates. Many comments expressed outrage at the prospect of a third rate increase in a little more than a year. A significant number of those who commented were concerned about their ability to pay their heating bills in light of these multiple rate increases. Several ratepayers thought that Intermountain’s suppliers were engaging in price gouging and that excess profits were being reaped at the expense of Intermountain Gas customers.
B. Staff Comments
Staff proposed to freeze rates for Intermountain Gas commodity customers and allow recovery of $43 million in deferred gas costs. To facilitate this outcome, Staff recommended that the Commission authorize the proposed WACOG decrease and approve the Company’s requested fixed cost transportation adjustments. Rather than implement the Company’s requested rate increase, Staff proposed the Commission continue to defer $9.4 million in accrued costs until the next PGA period. Of this amount, Staff recommended that $3.5 million in spot gas purchase costs be deferred until the Company can demonstrate that it was charged a price equal to or lower than that paid by its marketer, IGI Resources. Staff’s recommendations regarding the recovery of deferred gas costs and spot market purchases are discussed in greater detail below.
Recovery of Deferred Gas Costs
Staff recommended that the Company recover $43 million in deferred gas costs – approximately $33.9 million in this PGA year and $9.1 million in the next PGA year. Even though recovery of the $9.1 million would be deferred until the following PGA year, the Company would collect nearly 80% of the deferral in 2001. Staff noted that the $9.1 million deferral recommendation includes the $3.5 million in unsupported spot market purchases. Assuming the WACOG will not increase above $0.467 per therm, Staff estimated that the Company would recover the remaining deferral without an overall rate increase in 2002.
Staff asserted that customers do not need yet another rate increase to promote conservation and that it is reasonable to minimize price fluctuations in light of the two large PGA rate increases authorized last year. In addition to providing rate stability this year, Staff argued that its proposal anticipates an overall average decrease of approximately 14% in rates for the 2002 PGA. However, Staff also noted that customers would be required to pay an additional $460,000 in interest for continued deferral of the $9.1 million and receive a rate decrease next year that is smaller than the 20% decrease estimated to occur under the Company’s Amended Application.
Spot Market Purchases
Since the early 1990’s, the Company has used IGI Resources (IGI, Resources), a former Intermountain Gas affiliate, as an agent to purchase gas to sell to customers. Because of a change in billing last year, Resources’ invoices no longer show the original purchase price or the identity of the seller for purchases made on Intermountain’s behalf. Consequently, Staff was not able to verify from the invoices to the Company whether Intermountain pays for gas at cost or if the gas was purchased at the best price available.
According to its comments, Staff asked for and received some additional information to show that the purchases made by the Company from Resources were reasonable. Based on the limited invoice information available prior to filing comments, Staff stated that the verification of IGI invoices still will not show that gas was purchased at the best price available. Staff emphasized that this information must be developed going forward, and Intermountain Gas and Resources have indicated they will do so.
Staff also discovered that for at least the past several years, it appears Resources supplied most of the Company’s short-term purchase needs with gas from its own pool of long-term, indexed-priced contracts. Consequently, Staff maintained that most of the gas purchased by Intermountain is priced based on first-of-the-month market indices.
According to Staff’s Comments, IGI President Randy Schultz stated that “on average IGI Resources secured gas for certain industrial customers at prices that were less expensive than published market indices.” Because Intermountain effectively purchases gas at market-index prices, Staff noted that it appears that Intermountain “has not received the optimized benefits available from the cost-lowering tools Resources has used for other customers.” Consequently, Staff expressed concern about the appropriateness of Intermountain paying a management fee to IGI Resources “for the right to purchase gas at a price that will never be better than a market or index price.” Staff asserted that Intermountain should be entitled to rely on Resource’s expertise to search out gas at a price that is lower than an index price. To the extent Resources acquires gas at prices below market, Staff argued the savings should be passed on to Intermountain ratepayers.
Until it can review the necessary documentation, Staff recommended continued deferral of $3,505,756.35 until the next PGA. Staff argued that the Company must be able to reasonably demonstrate that the spot gas purchased from Resources was transferred at cost. If the Company cannot demonstrate that such was the case, Staff recommended that the amount associated with spot purchases in the deferral account be excluded from recovery. To remedy this problem in the future, Staff emphasized that Resources must obtain individual supplier invoices when it purchases gas on Intermountain’s behalf to facilitate Commission and Staff review. In addition, Resources must be able to show that the purchases for the Company are in the best interest of the customers.
Company Comments
Even though Staff and the Company agree that the WACOG should be decreased, Intermountain Gas opposes Staff’s recommendation to deny a rate increase and continue deferring accrued gas costs. The disputed issues are discussed below.
(1) Recovery of Deferred Gas Costs
The Company opposes deferred recovery of the gas costs it has already incurred in order to serve its customers. In its Reply Comments filed July 9, 2001, the Company noted that Staff extensively reviewed the PGA mechanism within the last two months and deemed it to be an acceptable tool to administer gas cost changes to Intermountain’s customers. Furthermore, Intermountain argued that “the effect of the Staff’s comments in this proceeding would now be to abandon the PGA mechanism and replace it with speculative assumptions about the future.” The Company asserted that prices paid by Intermountain’s customers would in no way be indicative of the market if gas costs continue to be deferred into the future. Moreover, the customers that incurred the cost might not pay it once the deferred amount comes due at a later date.
Spot Market Purchases
In regard to Staff’s concern that customers “have not received the optimized benefits available from the cost-lowering tools Resources has used for other customers,” the Company explained that Staff took Mr. Schultz’s comment about the IGI pricing pool out of context. Intermountain further explained that an industrial customer can access IGI’s expertise in the gas futures pricing environment and pricing opportunities available to IGI when it agrees to pay IGI’s weighted cost of gas in the pool for the chosen period. Although the IGI pricing pool may have previously been less expensive than the index or future price, certain pools being priced for upcoming periods are currently more expensive.
The Company pointed out that “invoices provided to the Staff detailed that Intermountain’s customers actually paid less than the market-based index on several instances.” Furthermore, it contended that the additional invoices supplied to Staff on July 6 “support the market responsive prices paid for natural gas purchases during the period in question.” Intermountain also affirmed its commitment to work with Staff to help further identify the appropriateness of the spot market costs.
Finally, Intermountain commented that Staff appears to be advocating a new standard of review that is unfair, unrealistic, and relies on hindsight when evaluating the IGI pool price in relation to the market price. The Company argued that the Commission’s traditional test of prudency should continue to be applied and that Intermountain should be allowed to collect the $3,505,756.35 at this time.
DISCUSSION AND FINDINGS
Despite a decade of relatively stable and inexpensive natural gas prices, the wholesale markets have recently been extremely volatile. Between 1990 and 1999, Intermountain Gas residential customers paid between $0.20 and $0.27 per therm for the gas commodity portion of their rates. On December 11, 2000, natural gas at the Sumas trading hub sold for $29.89 per MMBtu (or $2.289 per therm) – nearly ten times that amount. As of June 11, 2001, natural gas prices at Sumas had dropped to $3.09 per MMBtu (or $0.309 per therm).
After reviewing the utility’s application to increase rates, the Commission is required to establish “just and reasonable” rates. Idaho Code § 61-502. The Commission greatly appreciates the Company’s vigilant monitoring of producer prices and subsequent amendment of its Application to reflect the recent decline in wholesale prices. The Company’s proposed WACOG reduction would: 1) mitigate customer financial hardship, 2) allow customers to benefit from market forces in a timely manner and 3) prevent over-collection. Because these outcomes are in the interest of ratepayers and the Company, the Commission finds it reasonable to reduce the WACOG from $0.42296 to $0.35295 per therm.
A. Recovery of Deferred Gas Costs
Although this WACOG reduction is indicative of recently declining market prices, it does not diminish the Company’s need to recover the cost of commodity purchases it made months ago. In our December Order that granted only a portion of the already incurred purchase gas costs, the Commission noted that “deferring these costs is a calculated risk. With the information available at this time, granting the WACOG increase but deferring collection of Account No. 186 appears to be the best way to reasonably balance the hardship to ratepayers while allowing the Company to recover its unprecedented commodity costs.” The Commission finds it necessary to pass through $5.9 million of the currently requested $9.4 million in deferred gas costs now. These costs have already been deferred once before. Immediate recovery of these costs will avoid the accrual of additional interest that would otherwise pass through to customers. As a result of this increase, residential (RS-1) customers using natural gas for space heating only will experience an average monthly increase of $0.11 (0.22%). Residential (RS-2) customers using natural gas for space and water will experience an average monthly increase of $2.23 (3.53%). Commercial customers will experience an average monthly increase of $6.04 (2.39%). This represents an average per therm increase of 2.74%.
According to Idaho law, utilities cannot increase their rates for service without a finding by the Commission that the increase is justified. Idaho Code § 61-622. Based on the Amended Application and evidence presented, we find that the gas rates previously authorized in Order No. 28578 are not adequate to compensate Intermountain Gas for the prices it paid its suppliers during the past PGA period. Consequently, we find the rate previously authorized by that Order are no longer “just and reasonable” as required by Idaho Code § 61-502.
The Commission is sensitive to the financial hardship experienced by many Idahoans as a result of the last two rate increases. Although the Commission is mindful of this burden, it would not be prudent to put off a rate increase in reliance on a continued decline in wholesale market prices. The PGA mechanism is designed to pass through commodity costs in a timely fashion. Although the Commission deviated from this in Order No. 28578 by deferring a portion of an enormous rate increase, it declines to further defer $5.9 million. This is a relatively small increase and the uncertainty of wholesale prices prevents us from being assured of a future rate decrease. By passing through the Company’s reasonable and documented commodity costs now, the Commission allows the PGA to operate as it was intended to. If commodity prices continue to decline it is likely that a rate decrease will be implemented next year, however, the recent volatility in the wholesale gas market provides the message that nothing is certain.
The rate increase approved in this Order shall become effective on July 16, 2001. The Commission orders Intermountain Gas to adjust its billing and file new tariffs prior to implementing the new rate. Idaho Code § 61-618.
B. Spot Market Purchases
In order for the Commission to increase rates by allowing recovery of costs incurred by a utility, Idaho Code § 61-622 requires the Commission to find that such an increase is justified. In its comments Staff indicated that it was unable to verify the prudency of certain spot market transactions IGI Resources made on behalf of Intermountain Gas due to changes in IGI Resources’ billing practices. As of this date, Intermountain Gas continues to gather the information necessary to support these transactions. To allow Staff the opportunity to confirm that the price paid by Intermountain Gas was reasonable, the Commission finds it necessary to defer consideration of $3,505,756.35 in spot market purchases until the next PGA period.
To prevent this situation from occurring in the future, Resources has indicated to Staff that purchases will be invoiced separately beginning with July 2001 purchases invoiced in August 2001. In addition, the Company has stated its commitment to providing the documentation detailing the decision-making process followed when securing the short-term spot market purchases. The Commission appreciates the efforts of Intermountain and IGI Resources to remedy this situation on a forward-going basis. In addition to this documentation, the Commission directs Intermountain to continue filing monthly deferral account balance status reports and quarterly updated WACOG forecasts with the Commission.
C. The PGA Mechanism
The Company noted that Staff had recently reviewed and approved the PGA mechanism as a method of passing through gas cost changes to Intermountain customers. However, Staff’s PGA investigation also found that a profit-sharing mechanism could be implemented to provide Intermountain with an incentive to aggressively seek out natural gas at low market prices. Staff did not recommend a sharing mechanism in its report because the Company’s current long-term contracts, employee needs and supplier relationships would require a long implementation period. Immediate implementation of the sharing mechanism would cause Intermountain to lose money because it currently has purchase contracts focusing on reliability with significant costs above index prices.
The Commission is concerned that the current PGA mechanism fails to optimize Company incentives to acquire gas at the lowest market price available while minimizing volatility risks to ratepayers. To address this concern, the Commission directs Staff and the Company to explore modifications to the PGA that will increase the incentives to Intermountain Gas to manage market risk and obtain the lowest commodity price. Once Staff and the Company report their findings, the Commission will consider taking formal action to implement beneficial changes.
D. Customer Assistance
Because it is necessary to authorize a third rate increase in little more than a year, the Commission is concerned for the health and safety of ratepayers who struggle to pay their natural gas bills. We encourage ratepayers to contact Intermountain Gas, which offers special payment arrangements to help customers manage their utility payments in extraordinary circumstances. Special payment arrangements can be tailored to the unique needs of each customer and may include spreading payments over several months. To make special arrangements, customers should contact Intermountain Gas’s Customer Service Department at 1-800-548-3679.
To minimize bill fluctuations, the Company implemented an Anniversary Level Pay Program. This payment plan allows customers to average their natural gas payments over a 12-month period from the time they begin the program. Participation in the program is limited to those residential and small commercial customers taking service year round. Customers who connect and disconnect on a seasonal basis are not eligible to participate. Customers desiring to participate in this program should call Intermountain Gas at the number above to make the arrangements.
During the warm summer and fall months, very little monetary assistance is available to help customers pay their natural gas bills. County Emergency Assistance and Project Share funds are currently available, but both have restrictive criteria. To access County Emergency Assistance funds, a customer must generally fill out an application and meet with a case worker who investigates the need for such assistance prior to the County Board or Commissioners making a final determination. In order to qualify as an emergency, the applicant must have already received a disconnection notice. These requests are handled on a case-by-case basis and, depending on their circumstances and ability to pay, the recipient may have to pay the money back.
Project Share primarily provides funds for heating assistance from October 1 through the end of April. However, limited summer assistance is available from May 1 through the end of September. To qualify, customers 65 years or older must have a past due bill whereas younger customers must have a disconnect notice. In addition, all applicants must have a physician certify that a medical necessity exists requiring continued utility service (e.g., power for an oxygen machine).
We also encourage natural gas customers to conserve energy in an effort to keep natural gas bills affordable. The Department of Energy offers conservation tips on its website located at http://www.eren.doe.gov/buildings/documents/high_heating_bills.html The Commission also has conservation information available on its website at http://www.puc.state.id.us/hot/conservation.htm.
O R D E R
IT IS HEREBY ORDERED that Intermountain Gas’s Application is partially granted. The Company shall file tariffs in conformance with a WACOG of $0.35295 per therm to be effective July 16, 2001. For meters read on or after the effective date of this Order, usage will be pro-rated back to July 16, 2001.
IT IS FURTHER ORDERED that $5,988,048 of the current costs accrued in Account No. 186 be recovered as a $0.17130 per therm surcharge during the 2001-2002 PGA year.
IT IS FURTHER ORDERED that the $3,505,756 in spot market purchases found in Account No. 186 be deferred until the next PGA tracker case so that Intermountain Gas can provide the Commission with documentation demonstrating that these purchases were reasonable.
IT IS FURTHER ORDERED that Intermountain Gas provide the Commission with IGI Resources’ individual supplier invoices documenting when IGI Resources purchases spot gas on behalf of Intermountain Gas.
IT IS FURTHER ORDERED that Intermountain Gas maintain documentation of the decision-making process IGI Resources uses when it purchases gas for the Company.
IT IS FURTHER ORDERED that Intermountain Gas continue to file monthly deferral account balance status reports and quarterly updated WACOG forecasts with the Commission.
IT IS FURTHER ORDERED that Intermountain Gas notify its customers of the rate changes approved in this Order. The Company shall also advise its customers of its Anniversary Level Pay Program and how to sign up for it.
IT IS FURTHER ORDERED that Commission Staff and Intermountain Gas begin discussions on how to modify the PGA mechanism to optimize Company incentives to manage market risk and obtain the lowest commodity price.
THIS IS A FINAL ORDER. Any person interested in this Order (or in issues finally decided by this Order) or in interlocutory Orders previously issued in this Case No. INTG01-3 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 or in interlocutory Orders previously issued in this Case No. INT-G-01-3. For purposes of filing a petition for reconsideration, this order shall become effective as of the service date. Idaho Code § 61-626. Within seven (7) days after any person has petitioned for reconsideration, any other person may cross-petition for reconsideration. See Idaho Code § 61-626.

DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this
day of July 2001.

PAUL KJELLANDER, PRESIDENT

MARSHA H. SMITH, COMMISSIONER

DENNIS S. HANSEN, COMMISSIONER

ATTEST:

Barbara Barrows
Assistant Commission Secretary

O:INTG013_ln4
A “therm” is a commercial unit of heat energy and comprises approximately 100 cubic feet of natural gas. A therm is equivalent to 100,000 Btus (British thermal units).

Case No. INT-G-00-1. Order No. 28426.
Case No. INT-G-00-2. Order No. 28578.
Pipeline segmentation credits refer to the Company’s rights to excess capacity on the Williams Northwest Pipeline. This pipeline is the only interstate line that runs through Southern Idaho. The excess capacity is “released” or sold to industrial users, marketers and others. The Company provides a credit to customers for the released capacity through a temporary credit that is trued-up on a yearly basis.

The Company sold a greater number of therms than projected during the winter of 2000-2001 because of the colder-than-normal weather. Consequently, the Company collected more than the Commission authorized for a variety of surcharges and credits, including uncollected gas costs, fixed and variable transportation costs, shared revenues and a transportation refund. The temporary credits provide a way for customers to receive a refund of the overpayments from last year.
Staff assumed 5% customer growth, no changes in WACOG, and 5% interest charge on deferred balances to make this calculation.

IGI Resources was sold to BP Energy during the year 2000.
Sumas, Washington is a hub on the Sumas International Pipeline near the Canadian border. More than half of Intermountain’s wholesale gas is purchased at this location.

A “Btu” (British thermal unit) is the heat needed to raise one pound of water by one degree Fahrenheit. A “MMBtu” (million Btus) is equal to 10 therms.

As reported by Natural Gas Weekly.
Id.
Order No. 28578 at 10. Case No. INT-G-00-2.
Case No. INT-G-00-1.
Staff Report filed May 25, 2001, “Investigation into Intermountain Gas Company Natural Gas Purchase Policies and the Purchase Gas Cost Adjustment Mechanism,” pp. 25-26. Case No. INT-G-01-1.

ORDER NO. 28783 1

Office of the Secretary
Service Date
July 13, 2001