20050920Comments.pdf

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DONOVAN E. WALKER
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 5921
2005 SEP 2 0 Pf~j 2~ 54
d TfL.! T i E3'' Jo fi'Es ION
Street Address for Express Mail:
472 W. WASHINGTON
BOISE, ID 83702-5983
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLI CA TI 0 N OF
INTERMOUNT AIN GAS COMPANY FOR
AUTHORITY TO CHANGE ITS PRICES (2005 )
PURCHASED GAS COST ADJUSTMENT).
CASE NO. INT-05-
CO MMENTS OF THE
COMMISSION STAFF
The Staff of the Idaho Public Utilities Commission, by and through its Attorney of record
Donovan E. Walker, Deputy Attorney General, in response to Order No. 29856, the Notice of
Application and Notice of Modified Procedure issued on August 26 2005, respectfully submits
the following comments.
BACKGROUND
On August 8, 2005, Intermountain Gas Company (Intermountain; Company) filed its
annual Purchased Gas Cost Adjustment (PGA) Application with the Commission requesting
authority to place new rate schedules in effect as of October 1 , 2005 that will increase its
annualized revenues by $67.6 million (27.2%). Application at p. 2. The PGA mechanism is used
to adjust rates to reflect changes in the costs of gas purchased from various suppliers, including
transportation, storage, and other related natural gas acquisition costs. See Order No. 26019. The
ST AFF COMMENTS SEPTEMBER 20, 2005
Company s earnings will not be increased as a result of the proposed changes in prices and
revenues. Application at p. 8.
Commission Staff conducted a public workshop in Pocatello on September 12 2005, and
in Boise on September 13, 2005, in order to dispense information concerning the Company
Application and to receive comments from the public prior to filing its own comments with the
Commission.
THE APPLICATION
Intermountain Gas seeks to pass through to each of its customer classes a change in gas-
related costs resulting from: (1) changes in the Company s firm transportation and storage costs
resulting from the Company s management of its storage and firm capacity rights on pipeline
systems, (2) an increase in the Company 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 Intermountain s deferred gas cost account.
Application at p. 3-
According to its customer notice, if its Application is approved, the Company states that
rates for residential customers using natural gas for space heating only would increase an average
of25.5%. Rates for residential customers using natural gas for space and water heating would
increase an average of 27.4%, and rates for commercial customers would increase an average of
28.4%.
Intermountain Gas proposes increasing the W ACOG from the currently approved
$0.55492 per therm to $0.73219 per thermo Application at p. 5. The Company also proposes to
include various surcharges, credits, and adjustments in its proposed prices. Application at pp. 6-
STAFF COMMENTS SEPTEMBER 20, 2005
Staffhas calculated the impact of the Company s proposal by class of service as follows:
Proposed
Proposed Average Proposed Proposed
Customer Class Increased Class Increase Average %Average Price
Revenue $/Therm Increase $/Therm
RS-1 Residential 065 627 25572 25.49%1 .25888
RS-2 Residential 247 192 24543 27.44%13985
GS-1 General Service 643 239 24223 28.36%09646
L V-1 Large Volume 593,241 21301 31.51 %88894
1 Transportation 525 00009 08%11085
T -2 Transportation (Demand)8,492 01285 50%86678
2 Transportation (Commodity)566 00003 0.46%00653
555,700 21713 27.21 %01524
The overall effect of the proposed changes would be an increase in the Company s revenues of
$67 555 700. The net increase is made up of:
Proposed Permanent Price Changes
Increase in Producer/Supplier Costs
Changes in Storage and Transportation Costs
Adjustments to Fixed Cost Collection Rate
Eliminating INT-04-02 Temporary Surcharges
Total Permanent Price Change
806 362 (1)
143 144
(1,162 244) (2)
832 890
620 152
Proposed Temporary Surcharges (Credits)
Fixed Cost Collection Adjustment
Capacity Release & Purchases
Segmentation Credits
Undercollection of 186 Variable Accounts
Other Items
Total Temporary Price Surcharges (Credits)
500 307
236 131)
333 963)
730 036
(724 701)(3)
935 548
Total Proposed Price Change 555 700
Notes:
1. Increase in Producer/Supplier purchases also includes the change in the W ACOG for LV-
calculated by taking the change in the W ACOG of $0.17727 * LV-1 therms of2 785 039 for an
LV-1 increase of $493 704.
2. The Exhibit 6 changes to the Fixed Cost Collection Rate are multiplied by Exhibit 4 volumes
to tie to Exhibit 11 rather than being multiplied by the forecast volumes from Exhibit 6 as
they are in the filing (difference of $110 280).
3. Includes rounding of $772.
STAFF COMMENTS SEPTEMBER 20, 2005
STAFF REVIEW
Staff has reviewed the Company s filing and gas purchase contracts to verify that the
Company s earnings will not increase because of the filing, that the deferred costs are prudent, and
to determine the reasonableness of the W ACOG request. During the course of the investigation
Staff made additional findings, which are discussed below.
IS-Month Deferral of Purchased Gas Costs
In Order No. 29540, the Commission required Intermountain Gas Company to submit its
next PGA filing by August 15 2005 with new rates going into effect on October 1 2005. Prior to
2005, rate changes due to Intermountain s PGA filings were effective on July 1. In this current
PGA filing, Intermountain accrued 15 months worth of deferred gas costs and fixed pipeline
charges instead of the usual 12 months.
The purpose of changing the effective date of the PGA rate changes was to better align the
price changes with the time the gas was to be used. By establishing an August filing date, the
Company and Staff will have more reliable data in which to estimate winter gas commodity
prices. However, the additional 3 months of deferred variable and fixed expenses added
substantial amounts to this increase. Most of the $8.7 million in variable costs and the majority of
the $10.5 million under collection of the fixed costs is due to the additional 3 months. Customers
would have paid these costs no matter when the Company filed its application, but with the later
filing, the payment of these amounts was deferred by three months. Beginning with the PGA
filing in 2006, and subsequent filings, the deferral period will revert to 12 months.
New Gas Contracts for Purchases and Storage Management
During the previous year, Intermountain had the opportunity to acquire additional gas
storage facilities in the Clay Basin region. The Company contracted for the storage with Questar
after conducting a cost and benefit analysis and submitting the winning bid for use of the storage
for the next 35 years. The additional storage allows the Company to purchase gas in the summer
when prices have traditionally been lower and use the gas during the winter when gas is
traditionally higher priced. Although gas price volatility has made winter-summer price spreads
less predictable, the storage continues to provide operational flexibility that allows the Company
to save money by avoiding certain high-priced peaks during the winter. Staff has reviewed the
STAFF COMMENTS SEPTEMBER 20, 2005
analysis performed by the Company and agrees that the additional storage does tend to reduce the
costs that will ultimately be passed on to customers.
Intermountain is currently pursing bids to manage the storage for the duration of its
contract with Questar and will select the proposal that is most beneficial to customers and the
Company. Staff will review the bidding process and the resultant contract during the next PGA
year.
2004-200S Financial Hedge Transaction
During the PGA year, Intermountain used two different hedging strategies. First, the
Company compared the first of the month gas price to what it believed would be the daily prices
for the coming month. If the daily prices were forecasted to be lower, the Company would trade
its monthly price for a series of daily prices and include that savings or cost in the actual cost of
gas. This was done six times during the year and overall it was less expensive than the first of the
month price.
The second type of hedging strategy Intermountain executed involved a traditional
financial instrument to fix the price of gas for any given month or months. In December (as it
does each month), the Company s Gas Management Committee (Committee) reviewed a variety
of factors to determine if it should fix the price of gas for all or a portion of gas purchased for
upcoming periods. The Committee decided to execute fixed price hedges for 90% of January
2005 gas purchases. This analysis was based on the estimated future cost of gas in January and
the probability that the cost to purchase the gas could be higher than the all-in-cost to purchase a
hedge. The Committee determined that it could purchase hedges that would be at a lower cost
than the filed W ACOG for January and provide a high degree of price stability during this winter
month of higher price volatility. The Company provided detailed documentation and analysis to
justify its decision to undertake the transaction. Even though the actual prices for January turned
out to be lower than the hedges, customers were protected from potential price increases that could
have occurred.
Overall, the Company s financial hedges provided a benefit of$115 033.06 to customers
for the PGA year.
STAFF COMMENTS SEPTEMBER 20, 2005
Weighted Average Cost of Gas (W ACOG)
The Company s requested WACOG of$0.73219/therm is an increase of31.95% over the
$0.55492 W ACOG currently included in Intermountain s rates. The current W ACOG was
approved last year in Order No. 29540 and has been in effect since July 1, 2004. The chart below
provides a five-year history of the annual W ACOG and illustrates the volatility of the natural gas
market during this period:
Increase
Year ACOG Over Prior
Year
2000 $0.42296 n/a
2001 $0.35295 (16.55)
2002 $0.32000 (9.34)
2003 $0.47500 48.44
2004 $0.55492 16.
2005 $0.73219 31.95
Last year s W ACOG of $0. 55492/therm was based on forward gas prices for the
Company s supply sources as of the date of submittal and while actual gas prices varied
throughout the year, the W ACOG estimates were fairly reflective of market rates through most of
the PGA year. The result was very little accrual in the Company s gas cost deferral account for
the 12 months ending June 30, 2005. However, over the course of the past three months, daily
NYMEX spot prices, as well as prices at local hubs, for gas have risen dramatically both before
and after Hurricane Katrina. NYMEX has spiked at $1.39/therm and then softened to a current
price of $1.7/therm.
Increases in the Company s cost of natural gas and the price risk posed by the natural gas
market require an understanding by customers, Staff and the Commission of the factors driving the
W ACOG. Growing demand combined with long lead times to deliver new production to
consumers contributes to the continuing upward trend in prices. Similarly, new pipelines can now
deliver Northwest natural gas to eastern and California markets in larger volumes than a few years
ago. The supply basins where Intermountain purchases its gas have experienced this additional
demand. The upward volatility of world market energy prices is also affecting North American
natural gas prices. The sum of these factors has driven prices the Company currently pays and the
STAFF COMMENTS SEPTEMBER 20, 2005
forecasts of future costs to record levels. They have also resulted in uncertainty about when and
where prices will stabilize.
The Company proposed W ACOG of $0.73219 per therm, was reviewed by Staff against
other forecasts, including those published weekly by the US Energy Information Administration.
Staff notes that this requested increase, reflects the Company s belief that the increasing cost of
gas it has paid in the 15 month 2004-2005 PGA year will continue. Current views of natural gas
forward pricing include considerable uncertainty. In fact, market prices have increased since the
Company proposed the W ACOG on August 15, 2005 and forward prices indicate the possibility of
an even higher W ACOG. However, like the past two years, there are also market expectations
that prices will decrease in the coming year.
The impact of hurricane Katrina is not included in the proposed W ACOG since it was
calculated prior to that event. The very large natural gas price increases seen immediately after
Katrina have begun to moderate. Ifproduction and transport can be brought back on-line quickly
and there are no further storms in the gulf, forward prices may return to pre-hurricane levels.
Nationally, the level of gas being placed into storage, for winter withdrawal, has dropped
as prices have risen in late summer. However, the total storage that is predicted to be available as
the heating season begins is well within the average range for the most recent five-year period.
The Company relies heavily on its own storage agreements to mitigate winter demand and price
spikes. Intermountain has the full capacity of its storage available for this coming winter. The
Company s storage quantities should be sufficient to meet winter demand spikes.
The increase in purchased cost of gas for the Company, if approved by the Commission
will have a significant adverse impact on consumers, especially lower and fixed income
consumers. The proposed price increase will be a strong signal to consumers to conserve and to
consider alternative heating sources. However, given the magnitude and cost of deferring the
proposed 2004-2005 permanent increase ($53.6 million per year), Staff does not believe it is a
reasonable to deny the proposed increase. In addition to sending a less appropriate price signal
setting a lower W ACOG would ignore additional price increases that have occurred since the
Company s filing and the potential for a higher deferral balance subject to recovery next year.
In addition to its recommendations to approve the Company s requested W ACOG, Staff
also recommends that the Company be directed to continue its monthly reporting of the changes to
balances in the deferral accounts and continue to provide a quarterly W ACOG report.
STAFF COMMENTS SEPTEMBER 20, 2005
Risk Management and Gas Purchasing Decisions
During the audit of the 2004 PGA costs, Staff raised concerns regarding the gas purchasing
policies of Intermountain Gas. These concerns related to a lack of a hedging policy and
procedures that establish trigger points and volatility limits to support and justify the Company
gas purchasing decisions. Staff recommended and the Commission ordered that $696 276 be set
aside for this case to make sure that the Company implemented the changes ordered by the
Commission. These changes should include an enhanced decision-making system and possible
trigger points for purchases. Continued improvements in documentation were also stressed.
Staff has worked with Intermountain over the last 15 months to assist the Company in
developing a more appropriate risk management/hedging policy. On September 1 , 2005
Intermountain Gas filed its Gas Supply Risk Management Program - Objectives, Policy,
Guidelines & Procedures (RMC Program). This document represents the efforts of the Company
and Staff to accomplish the goals and objectives outlined in Order No. 29540 along with Company
and Staff concerns. The Risk Management Program is an ongoing effort that Staff and the
Company expect to enhance and refine as the RMC Program is evaluated in connection with the
marketplace.
The RMC Program objectives are stated as follows:
a) help insure adequate natural gas supplies, transportation and storage are available for
its customers needs;
b) to mitigate the adverse impact that significant price movements in the natural gas
commodity can have on the Company s supplies, customers and other operations, and
c) minimize the credit risk inherent in the implementation of certain price risk reducing
strategies.
The RMC Program addresses gas price mitigation with an analysis of actual and
anticipated commodity prices in the W ACOG in connection with the stated Fundamental Natural
Gas Supply and Demand Price Drivers (Fundamental Factors). These Fundamental Factors are
listed in the RMC Program along with Risk Management/Hedging Instruments and Hedging
Guidelines. The Guidelines establish current trigger or alert points with volume levels of gas
purchases in relation to the currently filed W ACOG. Staff will file separate comments associated
with the RMC Program to specifically address the individual aspects of the program and make
Staffs recommendation to the Commission. Staff recommends the $696 276 previously set aside
be included for recovery.
STAFF COMMENTS SEPTEMBER 20, 2005
CONSUMER ISSUES
Customer Notice and Press Release
The customer notice and press release were included in Intermountain s Application. The
Application was received on August 8 , 2005. Staff reviewed the customer notice and press release
and determined they were in compliance with the requirements of IDAP A 31.21.02.102. The
customer notice was mailed with cyclical billings beginning August 8, 2005 and ending
September 8, 2005. Customers were given through September 20, 2005 to file comments.
Customer Comments
As of September 16 2005, the Commission had received 21 written comments from
customers. All but one customer opposed an increase. More than one-half of the comments came
from low-income and senior citizens on fixed incomes who were concerned about being able to
make ends meet. One customer wrote
, "
According to what we understand, the current commodity
market is affecting everyone across the nation. However, based on this premise, I am frustrated
that people in Idaho will be paying the same price as those who live in New York City and Los
Angeles, who are sometimes making 5 times more than the average Idaho wage earner." Another
customer said
, ".. .
many businesses in the valley have had to take several methods to eliminate
internal costs including reducing labor force and or salary reductions or wage freezes." The one
customer who did not oppose the increase stated that he had skimmed through the case file and it
was apparent to him that the intention of Intermountain was to keep up with the rising wholesale
costs. He said that even though he doesn t want to see increases in his winter heating costs, he
doesn t want his service to suffer from lack of funds to supply the product.
Customer Relations
Given the significant rate increase recommendation in this case, the past history of
increases, and the potential for additional increases in the future, Staff believes it important to
identify issues and measures that could reduce the impact on those least able to pay. Staff
recommends that a new docket be opened to address the issues of customer deposits, fuel fund
contributions, and low-income weatherization.
The first issue identified by Staff to impact customers as rates increase is customer deposit
requirements. Twice as many deposit-related complaints and inquiries were received by the
STAFF COMMENTS SEPTEMBER 20, 2005
Consumer Assistance Staff in 2005 than in 2004. The increase can be attributed in part to a rule
change that became effective in 2003 that allows Intermountain to collect higher deposit amounts
from customers who use gas service for space heating only (RS-l). Until 2003 , Rule 105 stated a
deposit could not exceed one-sixth of the annual estimated billings for one year. While that
formula still holds true for other regulated utility deposits collected, Rule 105 was modified to
allow collection of deposits from space-heating only customers based on the total of the two
highest months' usage during the previous 12 months and adjusted for current rates. Using the
new formula, the deposit amount required of a space-heating-only Intermountain customer is
approximately 45% higher than the deposit amount for a customer with both furnace and water
heater. Space-heating only customers pay a higher rate per thermo The combination of higher
rates, a substantial rate increase, and deposit collection policies create a situation where space-
heating only customers are disproportionately affected by higher rates.
Significantly higher rates for natural gas may exacerbate credit and collection issues
increase disconnections due to non-payment, and result in higher deposits for the customers who
can least afford to pay more. Customers who struggle to pay their bills and end up having service
disconnected are required to pay the total amount that is past due in order to re-establish gas
service as well as a deposit and reconnect fee. That may present an insurmountable barrier for
some customers, preventing them from re-establishing service.
Incentives to Improve Energy Efficiency and Financial Assistance for Paying Heating Bills
Customers will feel the financial "crunch" of an additional 27% increase to heating costs
this winter and should consider taking advantage of available financial assistance programs and
whatever measures are possible to make sure their homes and appliances are operating efficiently
so that neither energy nor money is wasted.
Low-income customers of Intermountain have some options for financial assistance
through the federally-funded Low Income Home Energy Assistance Program (LIHEAP) and
several non-profit fuel funds: Project Share in southwestern Idaho and Project Warmth and
Helping Hand in southeastern Idaho.
Utility customers donate to these fuel funds and utility shareholders also contribute to the
funds annually. However, there is a disproportionate contribution from Intermountain Gas
Company as compared to other Idaho energy companies. On an annual basis, A vista donates
approximately $0.31 per customer to its local fuel funds, Utah Power & Light about $0.22 per
STAFF COMMENTS SEPTEMBER 20, 2005
customer to southeastern Idaho fuel funds, Idaho Power about $0.13 per customer to Project Share
in its service territory, and Intermountain about $0.03 per customer to Project Share and Project
Warmth in its service territory.
While Intermountain provides information regarding energy efficiency on its Website, it
provides very little in the way of financial incentives to customers for energy efficiency. There
are no conservation or weatherization programs designed specifically for low-income customers.
Intermountain Gas Company does have a Natural Gas Equipment Finance Program
through Wells Fargo Bank. Although it is not low interest, and the loan must be for at least
000 or more, the loans are generally processed very quickly, often within 24 hours. Applicants
need to be able to meet certain credit-related criteria.
Intermountain also gives a $200 rebate to customers who convert their heating systems
from another energy source, such as electric or heating oil, to at least a 90% efficient natural gas
furnace. However, gas-to-gas conversions, including conversions from low to high efficiency gas
furnaces, do not qualify for the rebate program.
For those low-income or fixed-income customers who live in poorly insulated housing
stock or who are using inefficient appliances, assistance may be available to improve a home
energy efficiency through various agencies receiving funds from federal, state, and local grants as
well as private foundations, corporate and individual donations. All regulated Idaho energy
utilities provide funds for the purposes of helping low income customers weatherize their homes
except Intermountain Gas Company. To summarize annual low-income weatherization program
funding by the major energy companies regulated by the Commission, the funds given to agencies
by Idaho Power come to about $3.40 per customer, about $2.30 from Avista, and about $0.80 per
customer from PacifiCorp. Intermountain provides no funding for low-income weatherization.
Staff notes that all funding for utility low-income weatherization programs is collected through
rates charged to utility customers.
Staff recommends that the issue of disproportionate contributions for low-income
assistance by Intermountain Gas as compared to other Idaho energy utilities be addressed given
the rapid increases in natural gas prices. Staff also recommends that the Commission review
Intermountain s existing energy efficiency programs and examine the need to establish new
energy conservation and weatherization programs, especially with respect to low-income
customers.
STAFF COMMENTS SEPTEMBER 20, 2005
RECOMMENDATIONS
Based on the comments above, Staff recommends the following Commission actions:
1. Approve the WACOG of$.773219/therm as requested.
2. Approve the collection of the deferred amounts as requested.
3. Allow the Company to collect the $696 276 that was reserved last year while risk
management actions were investigated.
4. Direct the Company to continue to file its quarterly W ACOG projections and monthly
deferred costs reports with the Commission and Staff.
5. Open a docket to evaluate customer issues such as: customer deposit rules, policies
and practices; the Company s contributions to fuel funds, and energy conservation and
weatherization programs for Intermountain Gas Company.
Respectfully submitted this
oOr/h.
day of September 2005.
onovan E. Walker
Deputy Attorney General
Technical Staff: Donn English
Alden Holm
Marilyn Parker
Harry Hall
i :umisc/comments/in tgO5 .2dwdeahmp hh
STAFF COMMENTS SEPTEMBER 20, 2005
CERTIFICATE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS 20TH DAY OF SEPTEMBER 2005
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN
CASE NO. INT-05-, BY MAILING A COpy THEREOF POSTAGE PREPAID, TO
THE FOLLOWING:
PAULR. POWELL
EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
INTERMOUNTAIN GAS CO
PO BOX 7608
BOISE, ID 83707
MORGAN W. RICHARDS , JR.
ATTORNEY AT LAW
804 E PENNSYLVANIA LANE
BOISE, ID 83706
'" 14
SECRET
CERTIFICATE OF SERVICE