20060922Decision memo.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
CO MMISSI 0 NER SMITH
COMMISSIONER HANSEN
COMMISSION SECRETARY
COMMISSION STAFF
LEGAL
, FROM:CECELIA A. GASSNER
DATE:SEPTEMBER 19, 2006
SUBJECT:IN THE MATTER OF INTERMOUNTAIN GAS COMPANY'S 2006
INTEGRATED RESOURCE PLAN, CASE NO. INT-06-
On May 1 , 2006, Intennountain Gas Company ("Intennountain" or "Company ) filed
its 2006 Integrated Resource Plan (IRP) for the years 2007-2011 with the Commission. This
filing is pursuant to the directives in Order No. 25342, Case No. GNR-93-2 (PURPA ~
303(b )(3), Energy Policy Act of 1992). Order No. 25342 set forth the original requirements for
IRPs for local gas distribution companies in accordance with amended Section 303 of PURP
The Commission has twice modified the requirements for natural gas IRPs: Order No. 27024
allowed natural gas utilities to shorten the planning horizon to five years to match the company
planning horizon and available market products; and Order No. 27098 removed the requirement
that IRPs include a formal evaluation of the costs and benefits of potential demand side
management (DSM) programs, stating that a general explanation of whether there are cost-
effective DSM opportunities will be sufficient.
The Commission solicited comments from interested parties. Order No. 30090. The
only comments received were submitted by Commission Staff. The Company filed Reply
Comments on September 14 2006.
THE INTEGRATED RESOURCE PLAN
In the Executive Summary of the Company s IRP, the Company states that the IRP is
meant to describe the currently anticipated conditions from 2007-2011. It further states that the
document is meant to present strong guidelines rather than be "a prescription for all future
energy resources." IRP at 1. The Company is the sole distributor of natural gas in southern
Idaho, serving 275 800 customers in 74 communities during the first half of fiscal year 2006. Its
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system contains over 10 000 miles of transmission, distribution and service lines. Id. In fiscal
year 2005 , over 446 miles of distribution and service lines were added in response to new
customer additions and to maintain service for the growing customer base. Id.
Intennountain s two major markets are the residential/commercial market (the "core
market") and the industrial market. Id.Intermountain saw an increase of 5% in average
residential and commercial customers during the first half of fiscal year 2006. Id. Forty-four
percent (44%) of the throughput on Intennountain s system during fiscal year 2005 was
attributable to industrial sales and transportation. Id.
Forecast Peak Day Send-Out
According to the IRP, peak day send-out studies and load duration curves were
developed under design weather conditions to detennine the magnitude and timing of future
deficiencies in finD peak day delivery capability. Residential , commercial and industrial peak
day load growth on the Company s system is forecast to grow at an annual average rate of 4%
over the next five years. The Company calculated the growth for the system as a whole as well
as for the separate regions in which the Company operates. When forecasted peak day send-out
is matched against existing resources, a peak day delivery deficit occurs during January 2007 and
increases at a rate of 38%. According to the Company s calculations, a deficit of finD capacity
begins to occur near the peak day beginning in the winter of2009. IRP at 4.
Idaho Falls Lateral Region
The Idaho Falls Lateral (IFL) region serves many cities between Pocatello to the
south and St. Anthony to the north. The residential, commercial and industrial load served off
the IFL represents approximately 15% of the total Company customers and 18% of the
Company s total winter send-out during December of 2005. Id. When forecasted peak day
send-out on the IFL is matched against the existing peak day distribution capacity, a peak day
delivery deficit occurs during 2007 and increases thereafter. Id. Intennountain believes that
small, short direction peak day distribution delivery deficits in the future can be mitigated by
working with customers who have the potential to cut their peak day consumption by switching
to fuel oil during extreme cold temperatures. IRP at 5. However, the Company states that the
projected delivery deficits are of such magnitude that "looping" of the existing system is
warranted to add necessary finD delivery capability to the area.
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Sun Valley Lateral Region
The Company s residential , commercial and industrial customers in the Sun Valley
Lateral (SVL) region account for 4% of the total customer base and 4% of the Company s total
winter send-out during December of 2005. Id. When forecasted peak day send-out on the SVL
is matched against the existing peak day distribution capacity, a peak day delivery deficit occurs
during 2009 and increases thereafter. The tourism industry-related industrial load on the SVL is
limited in size and does not currently have the capability to switch to alternative fuels in order to
mitigate peak day send-out. IRP at 6. The Company believes that the growth in the SVL will
warrant future upgrades to the existing pipeline system, and the Company plans to increase the
delivery capability and capacity on the SVL through a series of cost-effective system upgrades.
Id.
Canyon County Region
Fourteen percent (14%) ofthe Company s residential, commercial and industrial load
is served off the Canyon County Lateral (CCL) region, and it accounted for 13% of the
Company s total winter send-out during December of 2005. Id. When forecasted peak day
send-out on the CCL is matched against the existing peak day distribution capacity, a peak day
delivery deficit occurs during 2007 and increases thereafter. Id. The industrial customer base in
the CCL region does not currently have the capability to switch to alternative fuels as a means of
mitigating peak day send-out and the Company states that it is currently exploring optional
means of enhancing the distribution capability in this region. IRP at 7.
STAFF COMMENTS
Staff timely filed its comments on August 29, 2006. In accordance with the Public
Utility Regulatory Policies Act of 1978 (PURPA) (as amended by the 1992 Energy Policy Act),
Commission Orders No. 25342, 27024 and 27098 require that the Company submit an Integrated
Resource Plan (IRP) to the Commission every two years , addressing the following elements:
Demand Forecasting
Assessment of Efficiency Improvements (DSM Actions) & Avoided Costs
Natural Gas Supply Options
Natural Gas Purchasing Options and Cost effectiveness
Integration of Demand and Resources
Two- Year Action Plan
Relationship Between Consecutive Plans (2004 Plan to 2006 Plan)
Public Participation
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Legal Effect
The Staff addressed each of these in turn.
Demand Forecasting
In June 1997 the Commission granted the Company s request to change the planning
horizon for the Company s IRP process from 20 years to 5 years. See Order No. 27024. The
planning period of 2007-2011 used for this IRP meets that requirement. The Company forecast
which is the basis for the five-year planning period, provides daily, monthly and peak demands
and predicts significant growth of peak demand in the core sectors of residential and commercial
customers and stable peak demand in the industrial sector over the planning period. The forecast
is based on: (1) growth in the number of households in the service territory commensurate with
growth of the population and the economy, (2) corresponding growth in the number of small
commercial customers, and (3) conversion to natural gas use by residences that presently do not
use natural gas.
The Staff stated that it believes the economic forecast issued by John S. Church in
May 2005 and the conservative Design Heating Degree Year were appropriate to use in the IRP;
however, it is Staffs opinion that, in general, the forecasting inputs and methodologies used by
the Company are neither as comprehensive nor as robust as they could be. Staff Comments at 4.
Although Staff concurs that some of the aspects of the modeling may be adequate, there are other
factors that should undergo a wider range of analysis than the Company perfonned here. Staff
believes that the IRP should be considered a comprehensive planning document perfonned for
the benefit of the utility s customers. Id. The Staff further commented that the Company should
not shy away from addressing multiple scenarios and sensitivity analyses for such items as
natural gas pricing or factors affecting demand when perfonning the analysis necessary for the
IRP. Id.
The Staff noted the following areas where it felt the IRP was deficient in some
manner:
(1) Market Penetration Data. The Staff believes that the market penetration numbers
presented in the IRP are more realistic than those presented in the 2004 IRP. However, the
increasing market penetration going forward seems contradictory to market conditions and
invites more explanation. Id at 5.
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(2) Conversion Rate Data. The conversion rates for existing homes noted in this IRP
are less optimistic than in the previous IRP, however, those conversion rates are presented as
generally increasing over the planning period. This seems counter-intuitive since conversion
reduces the size of the non-natural gas users market. Staff voiced a suggestion that the Company
should provide a fuller explanation of its data and conclusions regarding conversion rates to
clarify this inconsistency. Id.
(3) Forecasting Method Staff believes that the Company employed an overly
simplistic forecasting method that ignores other factors driving demand, such as prices of natural
gas and electricity, seasonality, and timed heating systems among other factors. Use of one or
more of these other factors could be included to improve the model with little computational
cost. Id. at 6.
(4) Range of Pricing Forecasts. Staff comments that the Company used a single
source for the natural gas pricing used in the IRP (the NYMEX market close data), and that no
effective date or dates for the price data was stated in the IRP. Id. The Company also stated in
its response to a production request that an additional pricing data point from November 6, 2005
was used in the model to check for the impacts of differing pricing and that the results did not
materially effect the model's optimization. Staff asserts that "these scenarios or sensitivity
analyses are exactly the product that Staff believes should be published in the IRP in order to
show that the IRP has resulted in selection of the best plan going forward.Id. Otherwise, Staff
has no basis for believing that the Company has used anything other than intuition and reliance
on a unique forecast to prepare the plan.Id. at 6-7. Staff comments that it believes the number
of scenarios that are necessary or the computer sensitivity runs necessary to develop those
scenarios is not an undue burden and notes that many other utilities perfonn literally hundreds of
runs for many scenarios to arrive at their planning results. Id. at 7. Staff observed that "at least a
half-dozen other natural gas price forecasts exist that could be used for comparison, to ensure
that not too much weight is placed in merely a single forecasted price set." Id.
(5) Price Elasticity of Demand. In Staffs evaluation, the demand forecast appears to
lack a consideration of the price elasticity of demand. Id. Staff notes that although this factor
has not been thought to be significant within the retail price levels of natural gas, the recent large
price increases could result in an expected change in demand would be 2.50-75%. Id. Staff
considers this to be a significant change. Id. Staff notes that in its response to a production
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request on this topic, the Company states that it has considered addressing price elasticity of
demand but believes it is not appropriate, primarily due to its belief that price elasticity of
demand will not effect the design weather assumptions for the coldest day to be served. Id. Staff
understands that the Company may "logically come to that conclusion in its analysis, but would
prefer to see the analysis conducted and presented rather than have a simple assumption drive the
IRP.Id. In addition, Staff made note of the Company s statement in its response to the
production request that it does not wish to include price elasticity of demand because it would
add additional possible scenarios to be included in the IRP. Id. Staff believes that that is
precisely what is needed here - an examination of all likely scenarios in order to derive the plan
that will best meet customer demands.Id. at 7-8. Staff recommends that the Commission
require price elasticity of demand to be addressed in future IRPs to capture the effect the change
in the price of the commodity may have on consumer demand.
Assessment of Efficiency Improvements (DSM Resource Options)
In response to an April 27, 1997 filing by the Company (Case No. INT-97-2), the
Commission issued Order No. 27098 allowing the Company, in its biennial IRP , to address
efficiency measures with a "general explanation with each IRP filing of whether there are cost
effective (demand-side management (DSM)) opportunities." Order No. 27098 at 2. Prior to that
time the Commission required that the IRP address . . . a full spectrum of opportunities available
to the Company, including conservation and efficiency measures... ." Order No. 25342.
In addressing efficiency, the IRP provides an overview of growth of the North
American natural gas markets and makes its case for natural gas being the most efficient energy
source available. IRP at 58-63. Staff recognizes that Intennountain goes further by addressing,
among other things, its support and promotion of certain conservation-based programs. Id. at 8.
Staff comments that "except for a very general statement of support for these and similar
activities, there is no mention in the IRP of any efficiency or DSM programs or evaluations of
those programs being perfonned or reviewed by the Company.Id. Staff also believes that any
analysis to identify whether there are other cost-effective DSM opportunities available is absent
from the IRP. Id.
Staff comments that although it believes that education and infonnation are an
important part of DSM, however, providing information and education are not DSM measures in
that they do not directly create alternative resources that can be quantified and substituted for
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supply side resources. Id. at 9. Given the recent history of extreme upward price pressure and
volatility in the natural gas markets, the impact of those prices on consumers, and the fact that
there are few, if any, expectations of substantial decreases in natural gas prices, Staff considers
the IRP's analysis of cost-effective DSM measures to be inadequate, and believes that the
Company has failed in this IRP to satisfy the requirements of Commission Order No. 27098. Id.
Natural Gas Supply Options
The Company addresses commodity supply in two sections of the IRP
, "
Traditional
Supply and Deliverability Resources" and "Non-Traditional Supply Resources." IRP at 45-
and 54-, respectively. Intennountain currently accesses natural gas from two supply basins
and extensively uses natural gas storage to assure the ability to meet winter demands. The
Company utilizes both underground and liquefied storage and Intennountain owns underground
storage in three different and geographically diverse locations. In Staff s opinion, the Company
has adequately addressed supply-side options in the IRP. Id. at 10.
Natural Gas Purchasing Options and Cost Effectiveness
The Company s documentation of its market evaluations and market fundamentals
continues to improve. The market expertise and experience of the Company and its purchasing
agent are extensive and will provide the background to evaluate the current guidelines and
expand the Gas Supply Risk Management Program as Intennountain and Staff continue to meet
on this topic. Id. at 10-11.
Integration of Demand and Resources
The IRP section entitled "Load Duration Curves identifies certain delivery
constraints. IRP at 42. These constraints fall into two categories: (1) deficits in delivery to the
Company s system from the interstate pipeline, and (2) deficits in the Company s distribution
system capacity for delivery to its customers. Id. at 11.
These deficits are addressed in the IRP section entitled "Resource Optimization.
IRP at 64. For the system as whole the Company forecasts, in the year 1 base case, a peak day
deficit in delivery into the system of 23 316 mmbtu/day in 2007 growing to 85,070 in 2011.
Staff notes that the IRP states that this deficit will be met by acquiring an incremental 25 000
mmbtu of interstate delivery on Northwest Pipeline in Year 1 of the plan (2007) along with
unspecified contracts for matching commodity. Id. at 12. Staff also notes that Intennountain
addresses the need for 36 900 mmbtu in year 5 , but is less specific about how that deficit will be
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satisfied. Id. The intervening years are not addressed. The Company s modeling results
designate "fill" (generic acquisition) for the needed commodity for this deficit. Although the
data is available in tables found in the exhibits, in the IRP the Company makes no statement
about what specific purchases or storage plans exist to satisfy this "fill" requirement. Staff
believes that an improvement to this part of the IRP would be for Intermountain to define the
linkage between identifying the necessary resources and perfonnance under its natural gas
acquisition policies and the Risk Management Program. Id.
The Company filed amended pages 43 and 44 to specifically identify the deficits for
the planning period; however, the IRP does not match those deficits with planned resources.
Staff believes that the IRP is intended to be a plan of how the Company will fulfill its obligations
to supply its customers, but that piece is lacking in the IRP itself. Id.
Staff states that the Company set forth, in a response to a production request, how it
originally planned to meet the specific lateral deficits that comprised the basis for much of the
IRP itself. Id. at 13. Staff notes that the Company stated in its response that it "has further
refined its plans to eliminate the projected distribution deficits in a more cost efficient manner
and that further study has resulted in delaying the need for these resources. Id. Staff also notes
that the Company provided approximately two sentences to describe how the delay would be
treated in each region. Id. at 14.
After reviewing this response, Staff believes that Intennountain should be directed
to publish an addendum to the Resource Optimization section of the IRP. Id. Staff believes that
the addendum should identify the individual deficits, each resource addition or change originally
planned to satisfy those deficits, the changed situation and the resulting postponement of or
newly planned resource that will be implemented to eliminate the deficit situations. Id. Staff
recommends that the Commission require the Company to specifically describe and evaluate the
additional resources that will be acquired, developed or constructed to eliminate demand deficits
in commodity and transportation in all future IRPs. !d.
Two-Year Plan
Order No. 25342 mandated that each IRP include a two-year plan "outlining the
specific actions to be taken by the utility in implementing" the IRP. Order No. 25342. Order
No. 27024 granted the Company s request to submit a 5-year IRP rather than a 20-year IRP.
Order No. 27024. In light of the Staffs experience in evaluating the Company s IRPs submitted
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since the issuance of Order No. 27024, the Staff respectfully recommends that if the Commission
desires for the Company to continue submitting IRPs with a five-year forecast window, the
Commission may wish to consider striking the requirement for Intennountain to submit a two-
year plan within the IRP. Id. Staff believes that the infonnation presented in the five-year plan
should provide infonnation that would adequately fulfill the two-year plan s purpose, and the
inclusion of the two-year plan within the Company s five-year IRP usually results in duplicative
infonnation that does not further illuminate the overall plan. Id. at 14-15.
Relationship Between the Plans (2006 IRP vs. 2004 IRP)
Staff believes that the IRP satisfies this requirement. In the comparative analysis
section of the IRP, the Company addresses the differences between the 2004 IRP and the present
IRP. Each major section of the IRP is addressed and the significant differences between the two
plans discussed. Id. at 15.
Public Participation
The Staff believes that the Company met the requirement for public participation in
the IRP process. Public involvement in the IRP process consisted of a half-day session wherein
the Company met with customers, concerned consumer groups and Commission Staff to discuss
the inputs to the IRP and questions and comments were solicited from all present. Id.
Legal Effect
The Staff had no comments on the legal effect of the IRP.
Staff Recommendations
After a complete evaluation ofthe Company s IRP, its methodology and conclusions
the Staff recommends that the Commission direct the Company as follows:
(1) That in future IRPs, models that were tested but subsequently rejected in favor of
the documented models be reported (along with a summary of why the alternatives were
rejected), including customer usage over seasonal and annual time periods, a range of natural gas
price forecasts from multiple sources, and price elasticity of demand.
(2) That in future IRPs, the Company address the "full spectrum of DSM
opportunities available to the Company, including conservation and efficiency measures" that
were part of the IRP process prior to Order No. 27098 and that the IRP process be modified to
require that a cost/benefit evaluation of all feasible DSM measures be perfonned and that the
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Commission consider actions aimed at creating a mechanism that will result in all cost-effective
DSM measures being implemented.
(3) To specifically describe and evaluate the additional resources that will be
acquired, developed or constructed to eliminate demand deficits in commodity supply and
transportation in all future IRPs.
(4) That the Company publish an addendum to the Resource Optimization section of
the IRP addressing the changed lateral transportation capacity deficit positions stated in the
Company s response to production request.
COMP ANY REPLY COMMENTS
The Company submitted its Reply Comments on September 14, 2006. These reply
comments addressed the Staff s Recommendations.
Recommendation No.
With regards to Staff s first recommendation, the Company notes that a primary
driver of an IRP is a mathematically-based model created from a system of inputs and
constraints. Reply Comments at 1. Many models with varying inputs and constraints are likely
to be run, and the outcome of a model run may be "rejected" simply because the model could not
run to completion or did not provide satisfactory results without violating any number of mode
or mathematical constraints or criteria. Id.
The Company asserts that it does include seasonal differences in consumption in the
IRP. Reply Comments at 2. The Company perfonns individual regression models for peak
usage months of November through February, takes into account the unique usage numbers of
the "shoulder months " and because there are very few heating degree days in July and August, it
assumes that usage in those months is strictly baseload usage. Id.
Intennountain comments that its usage of NY ME X is reasonable as the price reflects
the market consensus of future prices at a given point in time and, when combined with basin
differentials, provide the most reasonable estimate of forecast prices available to the Company.
!d. Further, the Company asserts that other forecast prices have no tie to the economic forecast
provided by John Church, and there is no way to know whether the other price forecast would
provide better or worse results. Id. Lastly, the Company comments that "adding several
difference price forecasts to each demand scenario could result in a multitude of models when
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the main focus of the Company and the Commission is to develop a most likely scenario from
which to build an overall strategy or action plan.Id.
Intennountain states that because its regression models already include the impact of
declining usage. It believes that including price elasticity in the models would be "inappropriate
because it has the potential to underestimate the Company s peak-day requirements... .Id.
The Company believes that most of the decline in usage is related to non-peak load and "has
masked the true peaking load that will occur" when Idaho again experiences severely cold
weather. Id. at 3. The Company has installed metering equipment in the Sun Valley and Idaho
Falls laterals , where the peak usage per customer is higher than the average peak user per
customer for the rest of its customers. Id. The Company states that it has not yet collected
sufficient data to conduct statistically significant analyses regarding the customer usage, but as it
accumulates such data, it "look(s) forward to having enough data to test those correlations in a
future IRP.Id.
Recommendation No.
Intennountain states in its Reply Comments that it believes it has met the
requirements of Order No. 27098 that it provide "a general explanation with each IRP filing of
whether there are cost effective demand-side management (DSM) opportunities.Id. at 4.
Intennountain comments that it is continuing "in its efforts to improve customer education
regarding the wise and efficient use of natural gas.Id. The Company believes that market
forces are the best motivator for conservation and that consumers have a "strong incentive" to
conserve in their usage of natural gas as prices rise. Id. Intennountain provided a list of the
available conservation and efficiency measures that it "promotes in its various communications
with its customers.Id. The Company maintains infonnation, including videos, on its website
to educate its customers regarding conservation, and also uses television advertisements in its
education plan. Id at 4-5. It promotes the Intermountain Gas Equipment Finance Program, and
engages in community outreach with a half-day seminar for energy-assistance providers, among
other outreach efforts. Id. at 5.
Intennountain encourages appliance dealers and builders, and its customers, to use
the most energy efficient appliances available. Id. It is also a partner in the Rebuild Idaho
energy efficiency campaign, and supports the Gas Technology Institute s research regarding
natural gas applications.
DECISION MEMORANDUM
The Company asserts that moving from "the current market based approach to a
system where DSM measures are Company funded through an incremental charge would put
upward pressure on customers ' bills at a time when they can least afford it ... .Id. The
Company does not believe a return to the DSM measures in place prior to Order No. 29078
would be warranted.
Recommendation No.
Intennountain believes that it has already supplied sufficient infonnation on the
resources that will be needed to meet demand. Id. The Company comments that the difficulty in
providing specific infonnation regarding shorter-tenD gas supplies, including "fill" resources
lies in the fact that they usually become available unexpectedly
...
" and the timing and
availability ofthese rarely is within the Company s prior knowledge. Id. at 6.
Recommendation No.
The Company asserts that despite the errors in the data, they "in no way affected the
optimization model outcome.Id. at 6. Intennountain asserts that it has filed corrected data and
believes that filing an addendum would be redundant. Id.
COMMISSION DECISION
Does the Commission wish to acknowledge that Intennountain Gas Company s 2006
Natural Gas Integrated Resource Plan satisfies the requirements set forth by the Commission in
Order No. 24342, as modified by Order Nos. 27024 and 27098? If so, does the Commission
wish to accept the Plan for filing? Does the Commission desire to do anything else?
DECISION MEMORANDUM