20040621Decision Memo.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
CO MMISSI 0 NER SMITH
CO MMISSI 0 NER HANSEN
COMMISSION SECRETARY
COMMISSION STAFF
LEGAL
FROM:LISA NORDSTROM
DATE:JUNE 18, 2004
RE:IN THE MATTER OF THE APPLICATION OF INTERMOUNTAIN GAS
COMP ANY FOR AUTHORITY TO INCREASE ITS PURCHASED GAS
COST ADJUSTMENT (PGA) RATE. CASE NO. INT-04-
On May 5, 2004, Intennountain Gas Company filed its annual Purchased Gas Cost
Adjustment (PGA) 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. If its
Application is approved, Intennountain states that customer rates will increase on average by
approximately 10%. Because of changes in Intennountain s gas-related costs, Intennountain
states that its earnings will not be affected as a result of the proposed decrease in prices and
revenues. The Commission issued a Notice of Application, Modified Procedure and Comment
Deadline on May 12, 2004. As of the comment deadline, 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.
THE APPLI CA TI 0 N
With its Application, Intennountain Gas seeks to pass through to each of its customer
classes a change in gas-related costs resulting from: 1) changes in Intennountain s finn
transportation and storage costs resulting from Intennountain s management of its storage and
finn capacity rights on pipeline systems; 2) an increase in Intennountain s weighted average cost
of gas (W ACOG); 3) an updated customer allocation of gas-related costs pursuant to the
Company s Purchased Gas Cost Adjustment provision; and 4) the inclusion of temporary
surcharges and credits for one year relating to gas and interstate transportation costs from
Intennountain s deferred gas cost account. Application at 3-
DECISION MEMORANDUM
According to its customer notice, Intennountain states that residential customers
using natural gas for both space and water heating could experience an average monthly increase
of $6.02 (9.9%). Those residential customers using natural gas for space heating only could
experience an average monthly increase of $4.08 (8.7%). Moreover, commercial customers
could experience an average monthly increase of$26.19 (10.5%).
Intennountain proposes increasing the W ACOG from the $0.47500 per thenn
currently included in the Company s tariffs to $0.55492 per thenn. 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 thenn W ACOG
Intennountain states that it is committed to come before the Commission prior to this winter
heating season to amend these proposed prices if forward prices materially deviate from the
$0.55492 per thenn. Id. at 5.
NORTHWEST INDUSTRIAL GAS USERS' COMMENTS
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 Intennountain
Gas.
In response to the Commission s request for comments on whether Intennountain
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 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 Intennountain filing, in particular for T -1 and T -2 finn 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 3
months delay) are then collected on a 12-month amortization schedule. If the Commission does
change the effective date of the current Intennountain PGA, NWIGU respectfully requested 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.
DECISION MEMORANDUM
IDAHO COMMUNITY ACTION NETWORK COMMENTS
On behalf of its members and low-income customers ICAN opposed the PGA
increase requested by Intennountain Gas. ICAN argued that the proposed average 10% increase
in residential rates is too much for low-income families to absorb. Intennountain 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 Intennountain Gas received
LlliEAP assistance, 2 592 declared moratorium eligibility, and 728 were disconnected in March
April and May 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, to educate the public
on the issues, and to get 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: 1) people will be more interested and likely to
participate and 2) the PUC can make a more infonned decision about winter rates when there is
more infonnation available.
ST AFF COMMENTS
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)
Intennountain s new case contracts for purchase and storage management; 2) Intennountain
2003-2004 financial hedge transactions; 3) the IGI Resources administrative contract; 4) past and
future market prices affecting the Average Weighted Cost of Gas (W ACOG); 5) alternatives to
the W ACOG proposed by the Company; 6) customer notice of the Application; and 7) customer
relations.
Risk Mana2ement and Hed2in2 Staff was particularly concerned that despite clear
Commission risk management statements regarding the need for customer rate stability,
reasonable purchase methodology 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. 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.
DECISION MEMORANDUM
As a result, Staff cannot state that all the Company s decisions or lack of action
relating to hedging are 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 WACOG of $0.475 in
place at the time. This price hedge would have guaranteed a decrease during the next PGA
period while providing significant price protection. However, based on infonnation that was not
disclosed to Staff, the Company decided to wait and perhaps hedge the price if it fell below
$0.425/thenn. Gas prices did not fall to $0.425/thenn and in fact rose to its current projected
level of $0.5549/thenn. 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 W 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
to the W ACOG currently in rates, and layering concepts for hedges have been the primary focus
of these discussions. Intermountain s management has committed to expand its policy and
procedures to better identify these concepts and further document its activities. Intennountain
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.
Summary of Staff Recommendations
. 1. Implement the Company-proposed W ACOG through fall of 2005 unless the
forward prices decline materially before that time. 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 could be even more severe and will provide customers little additional
time to react or prepare. Without a change in the W ACOG, 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
DECISION MEMORANDUM
W ACOG and consider a more immediate W ACOG adjustment if natural gas costs/prices
materially decline.
2. The Commission should direct the Company to send conservation tips and contact
infonnation to customers in the next bill and then send a reminder to customers in October that
rates are higher than for the prior heating season.
3. To more closely coincide with the winter heating season, 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 of October 2005.
4. 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 methodological approach. Consequently, the Commission should
reserve $696 2761 of the upcoming 2004-2005 deferral 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.
5. The Commission should direct the Company to continue to file its W ACOG
projections and deferred costs reports with the Commission and Staff.
6. In calculating the level pay amount, Intennountain s practice has been to divide
customers' annual energy bill by 11 rather than the 12 months used by all other Idaho energy
utilities. The Commission should require Intennountain to calculate level pay amounts using
months as a divisor to make monthly level pay amounts more affordable.
PUBLIC COMMENTS
The Commission received 17 written comments from customers, all opposing any
Increase. Eight of the commenters 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
1 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/therm were available to reduce the
current forecasted W ACOG of $.5549. 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 Intermountain.
DECISION MEMORANDUM
PGA review should take place closer to the heating season; two did not think the time of year
made any difference.
COMPANY REPLY COMMENTS
In a response filed June 17, 2004, Intennountain concurs with the Staffs
recommendation to implement the Company-proposed W ACOG on July 1 , 2004. As was stated
in the Company s Application, Intennountain ". . . 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 thenn.Intennountain is
also committed to sending a timely price signal to customers reminding them by mailer prior to
the winter heating as to the change in their natural gas prices. Included with this reminder will
be: 1) conservation tips that customers can adopt to save money on their winter heating season
bill; 2) contact infonnation for those customers needing assistance for payment of their natural
gas bill; and 3) payment options available to customers to include level pay.
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 Intennountain recovers from customers during the wann, low
sales volume periods of summer and fall. By way of example, postponing the PGA until October
2004 would add an incremental 3-4% increase to the proposed residential prices. Thus
Intennountain requests a continuation of the Company s ability to request a July 1 PGA
implementation date. Intennountain strongly believes that a July 1 implementation date, coupled
with the above-mentioned infonnational 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.
Intennountain Gas believes a review of its total perfonnance shows that it has
exercised very good judgment and financial accountability. For instance, Intennountain has
exercised judgment in managing its business affairs such that it has not had to request an increase
to the service component of its prices for over 20 years - a record unmatched by any other retail
gas utility. Intennountain continually searches for and adopts measures that benefit its retail
prices. The renegotiation during the past 12 months of the Company s Asset Management and
DECISION MEMORANDUM
Administrative Service Agreement contracts highlighted by the Staff will alone save customers
in excess of$10 000 000 over the lives of the contracts.
In addition to cost savings Intennountain Gas has sought whenever practical, to
mitigate the impacts of price volatility to its customers by employing various gas management
tools and by offering unit prices to its customers that remain constant for a prescribed period of
time. We believe Intennountain s history of cost containment for the benefit of its customers
speaks loudly and favorably with regards to its record of exercising good judgment and financial
accountability, including matters of sourcing, transporting and price mitigation of its customer
gas supply.
Notwithstanding this record, the Company respects the Staffs perceived need for a
more "fonnal, methodological or systematic strategy" with respect to the Company s W ACOG
so as to aid Staff in its review of the Company s Application. However, Intennountain does not
believe that the incorporation of automatic "trigger points" is in its customers ' best interest.
There is no substitute for good judgment employed using a backdrop of natural gas price
fundamentals and other market indicators. Having said that, however, the Company believes it
can bridge the needs of the Staff with the Company s approach to decision-making and
committed to work towards that end.
The Company is preparing a risk management proposal to the Staff that will be
presented for their review and discussion prior to the month of December. Intennountain Gas
strongly opposes the Staffs proposal to "reserve $696 276 for future detennination" pursuant to
future discussions with the Staff. The Company remains committed to work with the Staff to
bridge those areas of concern.
Finally, Intennountain is currently in the process of updating its customer billing
system which includes the process behind level payment amounts. As part of that update
Intennountain is including a revision to the level pay calculation whereby future level payment
amounts will be calculated by dividing by 12 months rather than an II-month period.
COMMISSION DECISION
1. As requested by the Idaho Community Action Network, does the Commission
wish to hold public hearings before making its decision?
2. Ifnot, does the Commission wish to:
a. Approve Intennountain Gas ' Application and W ACOG as filed?
DECISION MEMORANDUM
b. Specifically address the following issues:
i. What W ACOG amount to implement. (i., that recommended by
11.
Company and Staff, or some other amount?)
What date the Company s PGA applications should be filed and/or rates
go into effect? (Note: NWIGU and the Company recommend no change
Staff recommends no change this year but that both be moved closer to the
heating season next year, and ICAN favors delaying a decision until fall of
this year.
iii. Whether the Company should be required to send conservation tips and
contact infonnation to customers in the next bill, and then send a reminder
to customers in October that rates are higher than for the prior heating
season. (Note: Staff recommended this and the Company agreed)
IV. Reservation of $696 276 of the upcoming 2004-2005 deferral 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. (Note: recommended by Staff and opposed by the
Company)
v. Whether the Commission should require Intennountain to calculate level
pay amounts using 12 months. (Note: recommended by Staff and agreed to
by the Company)
M: INTGO402 In2
DECISION MEMORANDUM