20040630Final Order No 29540.pdf

Office of the Secretary
Service Date
June 30, 2004
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
INTERMOUNT AIN GAS COMPANY FOR
AUTHORITY TO INCREASE ITS PURCHASED
GAS COST ADJUSTMENT (PGA) RATE.
CASE NO. INT-04-
ORDER NO. 29540
On May 5, 2004, Intermountain Gas Company (Intermountain Gas, Company) filed
its annual Purchased Gas Cost Adjustment (PGA) Application (Application) with the
Commission for authority to place into effect on July 1 , 2004, new rate schedules that will
increase its annualized revenues by $22.1 million. The PGA account is a deferral mechanism for
over- and under-collections and for realized savings on spot market gas purchases. Intermountain
Gas supplies natural gas to approximately 200 000 customers in southern Idaho.If its
Application is approved, Intermountain Gas s rates will increase on average by approximately
10%. Because of changes in its gas-related costs, Intermountain Gas s earnings will not be
affected as a result of the proposed increase in prices and revenues.
The Commission issued a Notice of Application, Modified Procedure and Comment
Deadline on May 12, 2004. Order No. 29500. As of the comment deadlines, the Commission
received input from the Northwest Industrial Gas Users (NWIGU), Idaho Community Action
Network (ICAN), Commission Staff, 17 individual customers, and a response from the
Company. After reviewing the comments and record in this case, the Commission grants the
Application, changes the time frame for future PGA filings, and establishes risk management
requirements as set out in greater detail below.
THE APPLICATION
With its Application, Intermountain Gas seeks to pass through to each of its customer
classes a change in gas-related costs resulting from: 1) changes in Intermountain Gas s firm
transportation and storage costs resulting from management of its storage and firm capacity
rights on pipeline systems, 2) an increase in Intermountain Gas s weighted average cost of gas
(W ACOG), 3) an updated customer allocation of gas-related costs pursuant to the Company
Purchased Gas Cost Adjustment provision, and 4) the inclusion of temporary surcharges and
ORDER NO. 29540
credits for one year relating to gas and interstate transportation costs from Intermountain Gas
deferred gas cost account. Application at 3 -
Intermountain Gas proposes increasing the W ACOG from the $0.47500 per therm
currently included in the Company s tariffs to $0.55492 per thermo The Company states it
believes that current future prices, subject to the laws of supply and demand, are poised to soften.
Although current commodity future prices dictate the use of this $0.55492 per therm W ACOG
Intermountain Gas committed to come before the Commission prior to this winter s heating
season to amend these proposed prices if forward prices materially deviate from the $0.55492
per thermo Id. at 5.
CO MMENTS
A. Northwest Industrial Gas Users
NWIGU is a non-profit trade association comprised of 32 end-users of natural gas
with major facilities in the States of Oregon, Washington, and Idaho. NWIGU members include
diverse industrial interests that purchase transportation services from interstate pipelines and
purchase sales and transportation services from local distribution companies like Intermountain
Gas.
In response to the Commission s request for comments on whether Intermountain
Gas s PGA applications in this and future cases should be processed and approved closer to the
winter heating season, NWIGU supported retaining the current annual filing structure with rates
effective July 1. NWIGU does not perceive any customer benefit from a change in the effective
date of Intermountain Gas s PGAs for either the current filing or in the near future.
NWIGU members are concerned with the significant cost increases reflected in the
current Intermountain Gas filing, in particular for T -1 and T - 2 firm transportation services (with
16% and 24% proposed increases, respectively). Changing the effective date of this filing will
only increase the magnitude of the costs to be collected if 15 months of costs (12 months plus
three months delay) are then collected on a 12-month amortization schedule. If the Commission
does change the effective date of the current Intermountain Gas PGA, NWIGU respectfully
1 A "thenn" is a commercial unit of heat energy and comprises approximately 100 cubic feet of natural gas.
thenn is equivalent to 100 000 Btus (British thennal units).
ORDER NO. 29540
requests that the costs be ,amortized over a longer period of time so that the rate impact of date
shifting is mitigated to the T -1 and T -2 customers.
B. Idaho Community Action Network
On behalf of its members and low-income customers ICAN opposed the PGA
increase requested by Intermountain Gas. ICAN argued that the proposed average 10% increase
in residential rates is too much for low-income families to absorb. Intermountain Gas s records
show that many of its customers are having trouble paying their power bills. During the 2002-
winter heating season, 6 207 households taking service from Intermountain Gas received
LIHEAP assistance, 2 592 declared moratorium eligibility, and 728 were disconnected in March
April and May of 2003 for non-payment. Raising the rates by 10% would make it even harder
for these families to keep their heat on this winter.
ICAN requested that the PUC hold public hearings before deciding this Application
because of the large effect a 10% rate increase would have on consumers. ICAN contends
hearings would also help educate the public on the issues and allow for additional consumer
input from people who are more comfortable speaking rather than writing down their opinions.
Finally, ICAN asked the PUC to delay deciding on the PGA increase until the fall when:
people will be more interested and likely to participate, and 2) the PUC can make a more
informed decision about winter rates when there is more information available.
C. Commission Staff
Staff has reviewed the Company s filing and related documentation to verify that the
Company s earnings will not increase because of the filing. Staff particularly described: 1)
Intermountain Gas s new gas contracts for purchase and storage management, 2) Intermountain
Gas s 2003-2004 financial hedge transactions, 3) the IGI Resources administrative contract, 4)
past and future market prices affecting the weighted average cost of gas (W ACOG),
alternatives to the W ACOG proposed by the Company, 6) customer notice of the Application
and 7) customer relations issues.
ACOG and Timine: of PGA Cases: To more closely align rate changes with the
winter heating season, Staff believes the Commission should direct the Company to file its next
PGA case during the late summer of 2005 for an effective rate change on or about the end
October 2005. Staff also recommended the Commission implement the Company-proposed
ACOG through fall of 2005 unless the forward prices decline materially before that time.
ORDER NO. 29540
While noting the diminished price signal associated with raising rates in July when customers
may not notice, Staff also recognized that a single increase in October 2004 could be even more
severe and would provide customers little additional time to react or prepare.If this
Application s W ACOG is not approved, Staff estimated that the Company would likely defer an
additional $5 million in gas costs to be included in the surcharge by October 2004. Staff also
recommended that the Company be directed to continually monitor its W ACOG and implement
an immediate W ACOG adjustment if natural gas costs/prices materially decline.
Risk Manae:ement and Hedgillg: Staff is particularly concerned that despite clear
Commission statements regarding the need for customer rate stability, a reasonable purchase
methodology, a need for a risk management strategy and requirements for increased
documentation, it is still unclear how the Company makes fixed-price decisions because the
Company s purchase strategy does not allow for any method of measurement or systematic
review. Staff believes the current written policy is so broad that it allows the Company to simply
guess when using management discretion to make decisions rather than conducting a thorough
analysis.
As a result, Staff could not state with certainty that the Company s decisions (or lack
thereof) related to hedging were prudent. For example, last winter IGI presented the Company
with an opportunity to secure 2004-2005 gas at a price of $0.4511 , below the W ACOG of $0.4
in place at the time. This price hedge would have guaranteed a decrease during the next PGA
period while providing significant price protection. However, the Company decided to wait and
perhaps hedge the price if it fell below $0.425/therm. Gas prices did not fall to $0.425/therm and
in fact rose to its current projected level of $0.55492/therm. It is this undocumented decision-
making and apparent reliance simply on a price view that Staff believes is inappropriate.
Although it is inappropriate to lock in high prices solely for the sake of stability, Staff believes
that not locking in at least some gas under a layering approach at prices below the current
ACOG was a mistake. Even if prices had declined below the prices that were locked in
additional hedges could have been purchased and customers would have received a lower price
in the next period, providing significant price protection.
Staff continues to advocate a hedging policy that includes volatility limits and
purchase points and has discussed this approach to hedging with the Company. The need for
established policies and procedures that include reference or trigger points, an action point linked
ORDER NO. 29540
to the W ACOG currently in rates, and layering concepts for hedges have been the primary focus
of these discussions. According to Staff, Intermountain Gas s management has committed to
expand its policy and procedures to better identify these concepts and further document its
activities. Intermountain Gas s management will develop and present to its Risk Committee a
more concrete proposal with recommended changes to its policy and procedures. The proposal
will then be presented to Staff for additional discussion.
Without some financial accountability, it appears that the Company has not, and
currently will not, routinely make forward fixed-price decisions for customer rate stability using
a reasonable, systematic and methodical approach. Consequently, Staff recommended the
Commission reserve $696 2762 for possible future adjustment if the Company does not present
the Commission by December 20, 2004 with: 1) reasonable documentation and rationale for its
hedging inaction last winter, and 2) enhanced risk management policies and procedures.
D. Individual Customers
The Commission received 17 written comments from customers, all opposing any
Increase. Eight of the commentors questioned the need for an additional increase after the 33%
increase granted last year. One stated
, "
All the utility companies need to be reined in. Rates are
already too high." Five indicated that they are seniors on fixed incomes. Four of the comments
mentioned the proposal to change the time of year for reviewing the PGA. Two thought the
PGA review should take place closer to the heating season; two did not think the time of year
made any difference.
E. Company Reply
ACOG and Timine: of PGA Cases : In a response filed June 17, 2004
Intermountain Gas concurred with the Staff s recommendation to implement the Company-
proposed W ACOG on July 1 , 2004. In regard to future PGA applications, the Company noted
that postponing the next PGA price adjustment until the late fall of 2005 might have negative
implications to customers. Additional months of deferred gas costs beyond a 12-month period
cause upward price pressure on the PGA, primarily from fixed costs paid to the various pipelines
that Intermountain Gas recovers from customers during the warm, low sales volume periods of
2 This amount is 10% of the savings customers would have achieved had the Company locked 25% of its 2004-2005
gas needs on December 8, 2003 when natural gas options priced at $.4511/thenn were available to reduce the
current forecasted W ACOG of $.55492. This is based on what Staff believes would have been a reasonable hedge
purchase and shares an appropriate amount of the additional cost (10%) with lntennountain Gas.
ORDER NO. 29540
summer and fall.For example: postponing the PGA until October 1 , 2004, will add
incremental 3%-4% increase to the proposed residential prices.Thus, Intermountain Gas
requested a continuation of the Company s ability to request a July 1 PGA implementation date.
Intermountain Gas strongly believes that a July implementation date, coupled with
informational mailers to customers, better enables customers to prepare for the upcoming winter
heating season. Moreover, a July 1 implementation date provides customers additional months
to better prepare their equipment efficiencies, conservation decisions and budgets before the
winter heating season commences.
Risk Manae:ement:Intermountain Gas Company believes a review of its total
performance shows that it has exercised good judgment and financial accountability. For
instance, Intermountain Gas has not had to request an increase to the service component of its
prices for over 20 years and recently renegotiated the Company s Asset Management and
Administrative Service Agreement contracts that will save customers more than $10 000 000
over the lives of the contracts.
Notwithstanding this record, the Company respected Staff s perceived ,need for a
more "formal, methodological or systematic strategy" with respect to the Company s W ACOG
to aid Staff in its review of the Company s Application. However, Intermountain Gas does not
believe that the incorporation of automatic "trigger points" is in its customers' best interest
because there is no substitute for good judgment employed with natural gas price fundamentals
and other market indicators. However, the Company believes it can bridge the needs of the Staff
with the Company s approach to decision-making and is committed to work towards that end.
The Company noted that it is preparing a risk management proposal for Staff s
reVIew and discussion before December. Intermountain Gas strongly opposes the Staff
proposal to "reserve $696 276 for future determination" pursuant to future discussions with the
Staff and remains committed to work with the Staff to bridge those areas of concern.
DISCUSSION AND FINDINGS
We have reviewed the record, including the Application and comments filed by
interested parties, and find that we have adequate information upon which to base our decision.
In contrast to a general rate case, the annual PGA tracker considers only those changes in gas
costs that are generally recognized as outside the Company s control. Although holding the
public hearings requested by ICAN would certainly add to our present record, we believe that the
ORDER NO. 29540
comments received by the Commission thus far adequately represent the public sentiment on the
issues presented by Intermountain Gas s Application. Thus, we find that public hearings are not
necessary in this case.
A. The COG
The Commission is required to establish "just and reasonable" rates for utilities
subject to our jurisdiction. Idaho Code ~ 61-502. The PGA mechanism is designed to pass
through prudently incurred commodity costs in a timely fashion. Wholesale natural gas prices
have fluctuated dramatically over the past few years, resulting in higher natural gas costs for gas
utilities nationally and in Idaho. As Staff explained
, "
significant upward pressure remains on the
price of natural gas." Staff Comments at 6. Because natural gas commodity prices are subject to
supply and demand in the spot and futures markets, considerable uncertainty exists. Both
Intermountain Gas and Staff believe the Company-proposed W ACOG of $0.55492 per therm to
be appropriate. Although Intermountain Gas believes prices could soften before winter like they
did last year, forward monthly NYMEX natural gas futures for the northwest region during the
2004-2005 PGA period were in the range of$.4910 to $.6155 as of June 10 2004. The proposed
ACOG is consistent with this amount.
For the foregoing reasons, we find it reasonable to increase the W ACOG from
$0.47500 per therm to $0.55492 per thermo When combined with the adjustments, surcharges
and credits agreed upon by Staff and the Company, rates per therm will increase on average by
10.04%. The following table indicates the annualized change in rates per customer class:
Customer Class
Proposed
Increased Class
Revenue
Proposed
Average Increase
$/Therm
Proposed
Average %
Increase
Proposed
Average Price
$/Therm
RS-l Residential 880 945 08046 72%1.00316
RS-2 Residential 080 132 08083 93%89442
GS-l General Service 495 842 08128 10.52%85423
LV-l Lar2e Volume 234 154 07422 12.33%67593
l Transportation 325 822 01540 16.12%11094
2 Transportation (Demand)109 884 16628 24.18%85393
T -2 Transportation (Commodity)00000 00%00656
Total Requested Amounts $22,126,779 $0.07127 10.04%$0.78105
*T -1 tariff price plus the Weighted Average Cost of Gas
(W ACOG)
ORDER NO. 29540
As a result of this increase, residential (RS-l) customers using an average of 48 therms
per month for natural gas for space heating will experience an increase from 92~ to $1.00 per
therm, or about $3.86. Residential (RS-2) customers using an average of 69 therms per month
for natural gas space and water heating will experience an increase from 81 ~ to 89~ per therm, or
about $5.58. Commercial customers using an average of 299 therms per month will experience
an increase from 77~ to 85~ per therm, or about $24.30.
The rate increase approved in this Order shall become effective on July 1 , 2004. The
Commission orders Intermountain Gas to adjust its billing and file new tariffs prior to
implementing the new rate. Idaho Code ~ 61-618.
The Company s Application indicated that Intermountain Gas
" .
. . is committed to
come before this Commission prior to this winter s heating season with an Application to further
amend these proposed prices, should these forward prices materially deviate from the $0.55492
per therm.Application at 5. Although "materially deviate" was not defined by the Company,
the Commission directs Intermountain Gas to promptly seek a rate adjustment if forward
commodity prices decrease by 5% or more below the $0.55492 per therm W ACOG. The
Commission also directs the Company to continue to file its W ACOG projections and deferred
costs reports with the Commission.
As it explained in its Reply Comments, Intermountain Gas intends to send customers
a reminder prior to the winter heating season that rates are higher than for the prior heating
season. Included with this reminder will be: 1) conservation tips that customers can adopt to
save money on their winter heating season bill, 2) contact information for those customers
needing assistance for payment of their natural gas bill, and 3) payment options available to
customers to include Level Pay. Reply Comments at 1. The Commission finds this approach
reasonable and will send a proper price signal to customers prior to this year s heating season.
B. Timing of Future PGA Cases
The Commission asked commentors to specifically address whether Intermountain
Gas s PGA applications in this case and future cases should be processed and approved closer to
the winter heating season to: 1) take advantage of end-of-summer storage and market pricing
data, 2) improve the effectiveness of customer pricing signals, and 3) promote customer interest
in PGA proceedings when held closer to the winter heating season. Order No. 29500 at 5.
ORDER NO. 29540
The NWIGU supports retention of the current annual filing deadline effective July 1
because it "does not see any customer benefit to altering the filing schedule this year or in the
near term.NWIGU Comments at 2. Intermountain Gas also believes a July 1 st implementation
date coupled with the reminder mailed to customers is the best approach because it "better
enables customers to prepare for the upcoming winter heating season" by providing "additional
months to better prepare their equipment efficiencies, conservation decisions and budgets before
the winter heating season commences.Reply Comments at 2. Comments from individual
customers were evenly split between those who thought changing the filing date would be
beneficial and those who did not perceive any benefit to customers.
The Commission Staff recommended the Company "be directed to file its 2005-2006
PGA establishing new rates by October 31 , 2005 , to more closely coincide with the heating
season to strengthen the price signal currently diminished by reduced summer time
consumption. Staff Comments at 7. Like the NWIGU and Company, Staff was concerned
delaYing the effective date this year would add to the Company s deferred costs and leave little
time for customers to prepare. ICAN also supported delaying a final decision on the PGA
Application until fall when there is greater customer interest and the Commission can make a
more informed decision.
The Commission is charged with setting just and reasonable rates upon the best
information available to us. Due to the market volatility experienced the last several years, we
have struggled to set rates using futures pricing information that projects what winter commodity
prices will be six months in the future. Although we used the best information available in May,
better information is available in August. We understand that commercial customers need time
to plan and budget their natural gas usage. However, we believe all customers will benefit from
rates based on more accurate pricing information to minimize over- and under-collection. We
also believe that customers will be more receptive to the price signal sent by a fall PGA filing
because of its closer proximity to the heating season.
For these reasons, the Commission finds it reasonable for Intermountain Gas to
submit its PGA filings by August 15 beginning in 2005 so that the Application can be reviewed
before rates go into effect October 1. By beginning the new schedule with next year s PGA
filing, Intermountain Gas and its customers have enough notice to adjust their capital budgets as
needed. Delaying the effective date of the next PGA filing rather than this one may mitigate
ORDER NO. 29540
concerns regarding the accrual of additional deferred costs and eliminate the need for a longer
amortization period as requested by the NWIGU.
C. Risk Management Policies and Procedures
The Commission has had concerns about the nature of the Company risk
management strategies. While it is true that the Company has largely been successful using
subjective "market fundamentals in recent years, we believe Intermountain Gas must
systematically minimize upside risk using a flexible methodology that can be audited. The
Company s current risk management approach appears to leave Intermountain Gas and its
customers more vulnerable than necessary. We previously asked and required the Company in
Order Nos. 28783 and 29277 to change how it manages market risk to achieve these ends.
Although considerable time has passed, these concerns have not been adequately addressed.
The Commission believes that a more systematic approach will benefit both
customers and the Company in the long term. While using market fundamentals alone to lock in
gas prices can be effective if Intermountain Gas correctly predicts market prices, it leaves
ratepayers at tremendous risk if lower prices were not locked in when available. The Company
has talented staff that continually monitors the natural gas commodity market for opportunities;
we want this to continue so that ratepayers have the benefit of Intermountain Gas s considerable
expertise. Enhanced hedging strategies can and should incorporate the fundamentals presently
used by the Company while minimizing upside risk through layering of fixed price hedges.
The Company must continue to use good judgment and its risk management plan
should be flexible enough to allow for this. To conduct prudency reviews, the Commission
needs to know what information the Company used when it decided whether or not to purchase
natural gas. Criteria that trigger action or Company explanations of why action was not taken
are essential so that the Commission may assess the Company s decisions and avoid hindsight
reviews. We are not singling out Intermountain Gas in this regard; we have previously required
enhanced risk management plans and policies from A vista and Idaho Power.
In light of the foregoing, the Commission finds it reasonable to direct Intermountain
Gas to create a hedging and risk management strategy that accomplishes these goals and to
include the Staff in that process. The Company and Staff should incorporate volatility limits and
layered purchase points as necessary to achieve rate stability without being unnecessarily rigid in
design. To ensure that these important risk management issues are adequately resolved in a
ORDER NO. 29540
timely manner, the Commission finds it appropriate to reserve $696 2763 of the upcoming 2004-
2005 deferral for possible future adjustment if these enhanced policies and procedures are not
presented to the Commission. The Commission will review the disposition of this hold back
when the Company files its policy.
D. Level Pay
In calculating the level pay amount, Staff noted that Intermountain Gas s practice has
been to divide customers' annual energy bill by 11 rather than the 12 months used by other Idaho
energy utilities. Intermountain Gas explained that it is currently in the process of updating its
customer billing system and the process that calculates level payment amounts. As part of that
update, Intermountain Gas intends to revise the level pay calculation so that future level payment
amounts will be calculated using a divisor of 12.
To be consistent in our treatment of Level Pay plans among Idaho utilities, the
Commission directs Intermountain Gas to calculate level pay amounts using 12 as a divisor.
Because bills will be averaged or "levelized" over an additional month, this change will make
monthly level pay amounts more affordable. Intermountain Gas shall implement this change for
level pay plans created after July 1 , 2004, and for all existing plans as the Company reviews
them for annual adjustments.
ORDER
IT IS HEREBY ORDERED that Intermountain Gas s Application is granted. The
Company will file tariffs in conformance with a W ACOG of $0.55492 per therm to be effective
July 1 , 2004. For meters read on or after the effective date of this Order, usage will be prorated
back to July 1 , 2004. Intermountain Gas shall promptly seek a rate adjustment if forward
commodity prices decrease by 5% or more below this W ACOG.
IT IS FURTHER ORDERED that Intermountain Gas pass through its proposed
permanent adjustments and temporary surcharges and credits to customers as filed.
IT IS FURTHER ORDERED that $696 276 be reserved for future determination and
possible adjustment pending the filing of risk management policies and procedures.
3 This amount is 10% of the savings customers would have achieved had the Company locked 25% of its 2004-2005
gas needs on December 8, 2003, when natural gas options priced at $.4511/thenn were available to reduce the
current forecasted W ACOG of $.55492.
ORDER NO. 29540
IT IS FURTHER ORDERED that Intermountain Gas send customers a reminder prior
to the winter heating season that rates are higher than for the prior heating season. Included with
this reminder shall be: 1) conservation tips that customers can adopt to save money on their
winter heating season bill, 2) contact information for those customers needing assistance for
payment of their natural gas bill, and 3) payment options available to customers to include Level
Pay.
IT IS FURTHER ORDERED that Intermountain Gas file future PGA Applications on
or about August 15 so that rates may go into effect on October
IT IS FURTHER ORDERED that Intermountain Gas continue to record and retain
copies of information used to make important decisions regarding the purchase of gas and
financial transactions.
IT IS FURTHER ORDERED that Intermountain Gas continue to file updated
ACOG projections and deferred costs reports with the Commission.
IT IS FURTHER ORDERED that Intermountain Gas calculate level pay amounts
using 12 months as a divisor for level pay plans created after July 1 , 2004, and for all existing
plans as the Company reviews them for annual adjustments.
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. INT -04-
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-04-2. 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.
ORDER NO. 29540
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this J-.91*
day of June 2004.
MARSHA H. SMITH, COMMISSIONER
, COMMISSIONER
ATTEST:
~N.
Jewell
mmis~on Secrctary
O:INTG0402 In2
ORDER NO. 29540