20060920Comments.pdf

DONOV AN E. WALKER
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 5921
RECEIVED
200& SEP 20 PH I: 31
I O/tJ-H) PU t3 LiC
UTILlT!i:S CG~iIMiSSION
Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5983
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION OF
INTERMOUNTAIN GAS COMPANY FOR
AUTHORITY TO CHANGE ITS PRICES (2006
PURCHASED GAS COST ADJUSTMENT).
CASE NO. INT -06-
COMMENTS OF THE
COMMISSION STAFF
The Staff of the Idaho Public Utilities Commission, by and through it Attorney of Record
Donovan E. Walker, Deputy Attorney General, in response to the Notice of Application and
Notice of Modified Procedure, issued on August 29, 2006, Order No. 30121 , submits the
following comments.
BACKGROUND
On August 16, 2006, 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 , 2006 that will decrease its
annualized revenues by $1.6 million (.5%). Application at 2. The PGA mechanism is used to
adjust rates to reflect changes in costs for the purchase of natural gas from suppliers, including
transportation, storage, and other related costs of acquiring natural gas. See Order No. 26019.
STAFF COMMENTS SEPTEMBER 20, 2006
Intermountain s earnings will not change as a result of the proposed changes in prices and
revenues. Application at 2.
Intermountain Gas seeks to pass through to each of its customer classes a change in gas-
related costs resulting from: (1) an increase in costs billed to Intermountain pursuant to the
general rate cases filed by Northwest Pipeline Corporation (NPC) and Gas Transmission
Northwest Corporation (GTN); (2) benefits included in Intermountain s firm transportation and
storage costs resulting from the Company s management of its storage and firm capacity rights on
pipeline systems including NPC and GTN; (3) a decrease in Intermountain s weighted average
cost of gas (W ACOG); (4) an updated customer allocation of gas-related costs pursuant to the
Company s PGA provisions; and (5) the inclusion oftemporary surcharges and credits for one
year relating to gas and interstate transportation costs from the Company s deferred gas cost
account. Application at 3-
According to its customer notice, if its Application is approved as filed, all residential and
commercial customers' unit prices will be essentially unchanged for natural gas used during the
next year and the Company s total net revenue will decrease by approximately $1.6 million (.5%).
The Company states that despite increases in other energy prices, such as crude oil's 30% increase
during the past year, that it expects to be able to manage its natural gas purchases such that it will
not need to raise customer prices for this next winter season.
Intermountain Gas proposes to decrease the W ACOG from the currently approved
$0.73219 per therm to $0.72400 per thermo Application at 5. The Company states that the
proposed W ACOG includes the benefits to Intermountain s customers generated by the
Company s management of significant natural gas storage assets whereby gas is procured during
the traditionally lower priced summer season for withdrawal and use during the winter when
prices would otherwise be substantially higher. Application at 6. The Company also reports that
natural gas prices have been moderated by: historically high levels of natural gas stored in the
nation s inventory; natural gas production which has come back on-line in the Gulf of Mexico
following Hurricane Katrina; the moderate outlook for the upcoming hurricane season; and price
induced increases in domestic natural gas rig counts and production. Application at 5-6. The
Company states that although current commodity futures prices dictate the use of a $0.72400
W ACOG, it continues to remain vigilant in monitoring natural gas prices and is committed to
STAFF COMMENTS SEPTEMBER 20, 2006
come before the Commission prior to this winter s heating season to amend these proposed prices
if the forward prices materially deviate from the $0.72400 per thermo Application at 6.
The Company proposes to include various surcharges, credits, and adjustments in its
proposed prices. Application at 7-8. Intermountain has included the elimination of temporary
surcharges and credits pursuant to last year s PGA, Case No. INT-05-2. Application at 7
Exhibit 4, L. 29. The Company includes a fixed cost collection adjustment pursuant to the
provisions of its PGA tariff which provides that proposed prices will be adjusted for updated
customer class sales volumes and purchased gas cost allocations. Application at 7, Exhibit 5 , L.
24. The Company proposes to pass back to customers the benefits generated from its capacity
release agreements through the inclusion of a $3.5 million credit. Application at 7, Exhibit 7.
Further, the Company proposes to allocate deferred gas costs from its Account No. 186 balance to
customers through temporary price adjustments effective during the 12-month period ending
September 30, 2007 as follows: (1) fixed gas costs credit of$3.1 million attributable to collection
of interstate pipeline capacity costs and the true-up of expense issues previously ruled on by the
Commission; and (2) deferred gas cost debits of$14.1 million attributable to variable gas costs
since September 1 , 2005. Application at 7-8. Intermountain proposes to collect the balances via
the per therm surcharges and credits. Id.
The Company states that a straight cents-per-therm price decrease was not utilized for the
T -1 tariff. Absent Williams' firm transportation TF -1 commodity charge, the proposed decrease
in the T -1 tariff is fixed cost related, and since there are no fixed costs recovered in the tail block
of the T-I tariff, a cents-per-therm decrease was made only to the first two blocks of the tariff.
Application at 8. Likewise, since the proposed increase to the T -2 tariff demand charge is fixed
cost related, a cents-per-therm increase was made to the T-2 demand charge. Id. Additionally, the
proposed decrease to the T-2 commodity charge incorporates the decrease in the Williams' firm
transportation TF -1 commodity charge. Id.
STAFF COMMENTS SEPTEMBER 20, 2006
ST AFF ANALYSIS AND REVIEW
Staff has calculated the impact of the Company s proposal on its customer classes as
follows:
Proposed Proposed Proposed
Change in Average Proposed Average
Customer Class Class Change in Average %Price
Revenue $/Therm Change $/Therm
RS-1 Residential 625 00058 05%1 .2583
RS-2 Residential 153 330 00100 09%1 .13885
GS-1 General Service 166 345 01209 10%08437
LV-1 Large Volume 688 00025 03%88869
1 Transportation 268 276 01110 10.01 %09975
2 Transportation (Demand)981 12103 13.96%98781
2 Transportation (Commodity)575 00169 25.88%00484
559 858 00472 0.47%99758
The overall effect of the proposed changes would be a decrease in the Company s revenue of
559 858. The net decrease is comprised of the following items:
PROPOSED PERMANENT CHANGES
Changes in Weighted Average Cost of Gas (W ACOG)
Removal of Temporary Surcharges
Asset Management Agreements
Capacity Utilization
Increases for Pipeline Transportation
Total Permanent Price Change
356 782)
(14 550 684)
(1,093 942)
316 330)
11.294,815
022 923)
Proposed Temporary Surcharges (Credits)
2005 PGA Deferrals
Pipeline Segmentation
001 232
(3,538,166)
$ 7 463 066TOTAL TEMPORARY SURCHARGES
Total Proposed Change (1.559,585)
Staff has reviewed the Company s Application and gas purchase contracts to verify that the
Company s earnings will not change as a result of the filing, that the deferred costs are prudent
and to determine the reasonableness of the W ACOG request. During the course of the audit, Staff
made additional findings that are discussed in detail below.
STAFF COMMENTS SEPTEMBER 20, 2006
Effects of the 2005 Hurricane Season
When the Company filed its PGA Application last year, the Company used actual usage
data through June 30, 2005 and estimated usage for July, August and September. The 2005-2006
W ACOG, with an effective date of October 1 , 2005 and using data available as of July 29 2005
was established through the use of financial derivatives. After the Company made its filing, and
before the Commission ultimately issued its final Order in the case, Hurricanes Katrina and Rita
struck the gas and oil producing areas of the Gulf of Mexico and the Gulf Coast. The disruption
of gas supply in the Gulf of Mexico caused very large spikes in the wholesale cost of natural gas
throughout North America. This increase in the prices of natural gas after the hurricanes was not
anticipated in the W ACOG approved by the Commission and resulted in the Company having to
purchase natural gas at prices much higher than had been forecast.
For the two months immediately following Hurricanes Katrina and Rita, September and
October 2005, the incremental cost of natural gas was greater than the approved W ACOG
embedded in the Company s prices by the amount of$11 651 182. The total deferral that the
Company seeks to recover in the current filing is $11 001 232. Without the supply disruption
from the hurricanes, and the ensuing spike in prices, the Company s forecasts from the 2005 PGA
case would have been accurate and deferral balances would have been minimal.
Pipeline Transportation Rate Cases Pending Before FERC
On June 30, 2006, Northwest Pipeline Corporation (NPC) and Gas Transmission
Northwest (GTN), the two interstate systems on which Intermountain transports gas, filed general
system rate cases with the Federal Energy Regulatory Commission (FERC). The FERC
suspended the effective dates of the rate increases until January 1 , 2007, subject to refunds to be
determined by conditions and outcome of hearings held at the FERc. Intermountain has
intervened at FERC in these rate case proceedings. Staff will work with Intermountain to ensure
that Intermountain s intervention is aligned with customers' interests.
In its filing, Intermountain s proposed prices are weighted to account for the January 1
2007 effective date of the proposed price increases. Though the outcome of the proceeding is
uncertain until a final order is issued by FERC, an increase in transportation costs is likely given
that rates charged by these two pipeline corporations were set over ten years ago. However, the
STAFF COMMENTS SEPTEMBER 20, 2006
sizes of the proposed increases are large and there is a significant difference between the NPC and
GTN increases, in both the amount and the reasons for the increases. NPC has requested increases
of approximately 42% over the current tariff due primarily to operational and maintenance issues.
GTN has requested rate increases of over 70% due primarily to decreased demand resulting from
competing pipelines with lower tariffs. Intermountain Gas' interstate transportation costs are
heavily weighted toward the NPC pipeline. The Company has estimated the dollar impact of the
interstate pipelines' cost increases to be $11 294 815 for the 2006-2007 gas-year. Approximately
80% of this increase is from the proposed NPC price increase and the balance from the GTN and
Canadian (due to exchange rate changes) transportation cost increases. Since the increases are
subject to possible negotiation between the pipelines and their customers (including Intermountain
Gas) and are subject to FERC approval, it is reasonable to expect that the approved transportation
price increases may be lower than those requested by the pipelines.
The weighting methodology used by the Company to determine the annual impact of the
January 1 , 2007 interstate pipeline rate increases on the total cost of service is appropriate. The
methodology aligns the transportation increases with the Purchased Gas Cost Adjustment during
the PGA year in which the increases occur. The methodology will also promote price stability to
customers by limiting the amount that would have been deferred until the 2007 PGA filing.
Rather than the Company deferring until next year the entire effect of the increase, the Company
will only have to true-up any differences between the Applications filed by GTN and NPC and the
final order to be issued by FERC. Given the uncertainties in the natural gas markets and IGC'
current Application with minimal price changes, Staff believes that measures to defray future
deferrals will serve in the best interest of ratepayers.
Staff recommends that, in the event that the FERC approved rate increases are
significantly lower than those in the proposed Intermountain tariffs, the Commission reserve the
right to re-open the approved tariffs that result from this proceeding.
Weighted Average Cost of Gas (W ACOG)
The Company s requested W ACOG of $0.72400 per therm is a decrease of approximately
19% from the $0.73219 W ACOG currently included in Intermountain s rates. The current
W ACOG was approved last year in Order No. 29875 and has been in effect since October 1 , 2005.
The chart below provides a five-year history of the annual W ACOG. Though the requested
STAFF COMMENTS SEPTEMBER 20 , 2006
W ACOG is virtually left unchanged in the current filing, the chart reflects the volatility of the
natural gas market during this period.
Percentage
Year W ACOG Increase/(Decrease)
From Prior Year
2001 $0.35295 ilia
2002 $0.32000 (9.34)
2003 $0.47500 48.44
2004 $0.55492 16.
2005 $0.73219 31.95
2006 $0.72400 (1.19)
Last year s W ACOG of $0.73219 per therm was based on forward gas prices for the
Company s supply sources as of the date of the Company s 2005 PGA filing. While actual gas
prices varied greatly throughout the year, the W ACOG estimates were fairly reflective of market
rates through most ofthe PGA year. The result is a nominal balance in the Company s deferral
accounts for the twelve months ended June 30, 2006 and a small decrease in customer rates for the
comIng year.
The Company s proposed W ACOG of $0.72400 per therm is slightly less than that which
could be justified when applying the forward prices available as of June 30, 2006 to the purchases
that are yet to be made. The Company has taken the aggressive stance that they can deliver the
natural gas yet to be purchased for a lower price than the forward prices indicate. Given that all
natural gas needed for Intermountain s storage has already been purchased at favorable prices, that
the resulting affect ofthe Company s aggressive forward purchasing plan on the W ACOG is small
and that the risk is placed on the Company rather than the consumer, Staff believes that the
deviation from use of the NYMEX pricing is acceptable in this case.
Independent of the hurricane related supply issues effecting natural gas pricing, world
unrest and subsequent instability of energy supply and delivery, supply and demand fundamentals
has continued to affect the price of natural gas purchased by Intermountain Gas in 2006. In spite
of the lack of storms in the Gulf of Mexico and the fact that, entering the spring of2006 North
American storage facilities were at record high levels, there has been little mitigating effect on the
volatility of natural gas prices. Natural gas spot prices have varied from lows below $4.00 to
highs above $9.00. During this period, Intermountain s substantial storage capacity has allowed
STAFF COMMENTS SEPTEMBER 20, 2006
them to take advantage of lower prices when they have occurred by hedging the entire storage
season s purchase at a favorable price early in the summer. This ability to fill storage at a fixed
price along with other hedging strategies discussed below will allow the Company to file changes
to lower the W ACOG.
RISK MANAGEMENT AND GAS PURCHASING DECISIONS
The Company s contracts for physical gas supplies are typically based on the first-of-
month index price. As part of the short-term hedging strategy, the Company has the opportunity
to convert the first-of-month price to daily pricing. This decision is based on the market
fundamentals reviewed by the Gas Management Committee when the daily pricing is expected to
decrease during the month. Additional financial hedge opportunities are also evaluated with the
same process.
During the 2005-2006 PGA year, the Company converted from first-of-month index price
to daily pricing several times throughout the year, with an overall effect of increasing the
Company s gas procurement expenses by $4 372 066. With each conversion to daily pricing,
there is a risk that prices will increase beyond expectations. In prior years, the Company
hedging transactions provided significant benefits to ratepayers. However, during the current
PGA year, the Company was required to make cash settlements to its suppliers because the
monthly versus daily pricing did not meet the Company s expectations. The bulk of these cash
settlements were due to the extreme volatility in prices following the 2005 hurricane season, when
the Company converted to daily pricing as fundamentals suggested daily prices should decline.
In addition to the storage hedge to provide supply and price stability for the 2006-2007
PGA year, the Company has now hedged winter flowing gas requirements based on normal winter
projections. This strategy will lock the price of90% of the expected winter needs with multiple
financial contracts on gas contracts from the three supply basins of Sumas, Rockies and AECO.
The Company and Staff continue to evaluate the risk management guidelines within the
Gas Supply Risk Management Program" 1 to manage the risk and price volatility to customers.
The Company s documentation of its market evaluations and market fundamentals continues to
1 The objectives ofIntermountain Gas Company s Gas Supply Risk Management Program are to (a) help ensure
adequate gas supplies, transportation and storage are available for its customers; (b) 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.
STAFF COMMENTS SEPTEMBER 20, 2006
Improve. The market expertise and experience of the Company and its purchasing agent are
extensive and they will provide the background to evaluate the current guidelines and expand the
Gas Supply Risk Management Program as the Company and Staff continue to meet on this topic.
CONSUMER ISSUES
The customer notice and press release were included in Intermountain s Application. The
Application was received on August 16 2006. 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 Intermountain s cyclical billings beginning August 17 2006
and ending September 15 , 2006. Customers were given until September 20 2006 to file
comments. The Commission had received no written comments from customers as of the
comment deadline.
Although no rate increase is a welcome announcement, natural gas rates have nearly
doubled since the year 2000. Because ofthis, meeting energy needs continues to challenge many
customers whose income has not kept pace with rising energy costs. Because so many customers
still struggle to make ends meet, Staff would like to remind qualified customers to take advantage
of the energy assistance available through the federally-funded Low Income Home Energy
Assistance Program (LIHEAP) and non-profit fuel funds such as Project Share in southwestern
Idaho and Project Warmth and Helping Hand in southeastern Idaho. For more information on
these programs, customers may call the nearest Community Action Partnership (CAP) agency,
Intermountain Gas Company, the Idaho Public Utilities Commission, or for other community
resources call the 2-1 Idaho Care Line.
RECOMMENDATION
After a complete examination of the Company s Application and gas procurements for the
year, Staff recommends the following:
1 )That the Commission accepts the Company s Application and filed tariffs reducing
the Company s annual revenue by $1 559 858.
STAFF COMMENTS SEPTEMBER 20, 2006
That the Commission reserves the right to reopen any approved tariffs as a result of
the FERC pipeline increases being less than what the Company has included in the
Application.
Respectfully submitted this aO+~day of September 2006.
onovan E. Walker
Deputy Attorney General
Technical Staff: Harry Hall
Donn English
Marilyn Parker
i:u misc: comments/in tgO6 Ad whhdemp
STAFF COMMENTS SEPTEMBER 20, 2006
CERTIFICATE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS 20TH DAY OF SEPTEMBER 2006
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN
CASE NO. INT-06-, BY MAILING A COpy THEREOF, POSTAGE PREPAID , TO
THE FOLLOWING:
PAUL R. POWELL
EXECUTIVE VICE PRESIDENT & CFO
INTERMOUNTAIN GAS CO
PO BOX 7608
BOISE, ID 83707
MORGAN W. RICHARDS, JR.
ATTORNEY AT LA W
804 E PENNSYLVANIA LANE
BOISE, ID 83706
Jo ;J.~SECRETAR
CERTIFICATE OF SERVICE