20060922Decision memo.pdf

DECISION MEMORANDUM
TO:CO MMISSI 0 NER KJELLAND ER
COMMISSIONER SMITH
COMMISSIONER HANSEN
COMMISSION SECRETARY
COMMISSION STAFF
LEGAL
FROM:DONOV AN E. WALKER
DATE:SEPTEMBER 22, 2006
SUBJECT:CASE NO. INT -06-, INTERMOUNTAIN GAS COMPANY'S 2006 PGA
On August 16, 2006 , Intennountain Gas 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
approximately $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. Intennountain
earnings will not be increased as a result of the proposed changes in prices and revenues.
Application at 2.
On August 29, 2006, the Commission issued a Notice of Application and authorized
Modified Procedure with a comment deadline of September 20, 2006. Order No. 30121. The
only comments filed were those of Commission Staff. On September 20, 2006, the Company filed
amended exhibits and proposed tariff sheets, amending their initial Application by asking to
incorporate a lower W ACOG than originally proposed. The Company also filed an amended news
release as well as a Motion to Waive Further Customer Notification regarding the additional
decrease in the proposed W ACOG.
THE APPLICATION
With this Application, Intennountain 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
Intennountain pursuant to the general rate cases filed by Northwest Pipeline Corporation (NPC)
and Gas Transmission Northwest Corporation (GTN); (2) benefits included in Intennountain
finn transportation and storage costs resulting from the Company s management of its storage and
DECISION MEMORANDUM
finn capacity rights on pipeline systems including NPC and GTN; (3) a decrease in
Intennountain 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 of temporary
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 original Customer Notice, if its Application is approved as filed, all
residential and commercial customer s unit prices will be essentially unchanged for natural gas
used during this next year and the Company s total net revenue will decrease by approximately
$1.6 million (.5%). The Company stated 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.
Intennountain Gas proposed in its original Application to decrease the W ACOG from
the currently approved $0.73219 per thenn to $0.72400 per thenn.Application at 5. The
Company states that the proposed W ACOG includes the benefits to Intennountain 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-
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
come before the Commission prior to this winter s heating season to amend these proposed prices
ifthe forward prices materially deviate from the $0.72400 per thenn. Application at
The Company proposes to include various surcharges, credits, and adjustments in its
proposed prices. Application at 7-8. Intennountain has included the elimination of temporary
surcharges and credits pursuant to last year s PGA, Case No. INT-05-02. Application at 7
Exhibit 4, 1. 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 , 1.
DECISION MEMORANDUM
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. Intennountain proposes to collect the balances via
the per thenn 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 ' finn 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 -1 tariff, a cents-per-thenn 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-thenn 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' finn transportation TF-l commodity charge. Id.
THE AMENDED W ACOG REQUEST
On September 20, 2006, Intennountain Gas filed amended exhibits reflecting a further
decrease in the proposed W ACOG from its original Application. The currently approved
W ACOG is $0.73219 per thenn. The original Application sought a decreased W ACOG to
$0.72400 per thenn. The amended exhibits propose a W ACOG of $0.68500 per thenn.
approved by the Commission, the amended W ACOG would further decrease the Company
annual revenues by $11.2 million resulting in a total decrease of $12.8 million (3.86%).
The reduced W ACOG is the only change proposed to the original Application. The
Company states that the lower W ACOG reflects a further softening of the wholesale price of
natural gas and the Company s purchasing strategies towards the same. The Company states that
with the amended W ACOG it seeks to pass through to its customers the further decline in natural
gas prices that occurred subsequent to its original filing.
The Company also filed a Motion to Waive Further Customer Notification regarding
the proposed change in the requested W ACOG. The Company states that customers were notified
DECISION MEMORANDUM
of the original Application through individual customer notices and a press release. Rather than
send individual notices of the incremental decrease to its customers, the Company proposed to
alert its customers through the news release filed with the Amended Application, and states that it
will provide notice of the outcome of this case through individual bill stuffers. The Company
further states that it believes that as a result of the Commission s Notice of Modified Procedure,
Order No. 30121 , and the Company s original notices and press release that customers are already
aware of the Application and the process to communicate with the Commission regarding the
Application. The Company believes that individual notice of the additional incremental decrease
other than through a supplemental news release, is unnecessary and therefore, seeks a waiver
regarding individual notice.
ST AFF COMMENTS
Staff 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 detennine the reasonableness of the W ACOG request. After a complete
examination of the Company s Application and gas procurements for the year, Staffrecommends:
(1) that the Commission accept the Company s Application and filed tariffs, reducing the
approved W ACOG and the Company s annual revenue; and (2) that the Commission reserve the
right to reopen any approved tariffs should the FERC pipeline rate increases be less than what the
Company has included in the Application.
The Company s Application includes proposed prices that are weighted to account for
a January 2007, effective date of the proposed price increases from Northwest Pipeline
Corporation (NPC) and Gas Transmission Northwest (GTN), both of which have pending general
rate cases pending before the Federal Energy Regulatory Commission (FERC). Though the
outcome of the proceedings 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 10 years ago.
Intennountain Gas has estimated the dollar impact of the pipelines' cost increases to be
$11 294 815 for the 2006-2007 gas year. Since the increases are subject to possible negotiation
between the pipelines and their customers, 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. Staff recommends that the weighting methodology used by Intennountain to detennine
DECISION MEMORANDUM
the annual impact of the January 1 , 2007 , 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 PCA year in which the increases occur. Rather than deferring the entire
effect of the increases until next year, 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. Staff
recommends that the Commission reserve the right to reopen any approved tariffs should the
FERC pipeline rate increases be less than what the Company has included in the Application.
Staff reports that the previously approved W ACOG was fairly reflective of market
rates through most of the PGA year, and consequently resulted in a nominal balance in the
Company s deferral accounts for the 12 months ended June 30, 2006, and a small decrease in
customer rates for the coming year. Last year s W ACOG was established just prior to the time
when Hurricanes Katrina and Rita struck the gas and oil producing areas of the Gulf Coast. This
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. Without
the supply disruption from the hurricanes , and the ensuing spike in prices, the Company
forecasts from the 2005 PGA case would have been accurate and deferral balances would have
been minimaL
The Company s proposed W ACOG in its original Application of $0.72400 per thenn
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. However, the Company has taken the
aggressive stance that it can deliver the natural gas yet to be purchased for a lower price than the
forward prices indicate. Staff recommends that the deviation from the use of the NYMEX pricing
is acceptable in this case because: all natural gas needed for Intennountain s storage has already
been purchased at favorable prices; the resulting affect of the Company s aggressive forward
purchasing plan on the W ACOG is small; and the risk is placed on the Company rather than the
consumer. Intennountain s substantial storage capacity has allowed it 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.
DECISION MEMORANDUM
The Company and Staff are continuing to evaluate and work on the risk management
guidelines with the "Gas Supply Risk Management Program." The objectives of the 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 reports that the Company s documentation of its market evaluations and market
fundamentals continues to improve, and the market expertise and experience of the Company and
its purchasing agent are extensive.
Finally, Staff reviewed the Company s customer notice and press release and
detennined they were in compliance with the requirements of IDAP A 31.21.02.102. No customer
comments were received by the Commission. Although the Company did not propose an increase
to gas rates for the upcoming year, Staff points out that gas rates have nearly doubled since the
year 2000 , and that many customers continue to struggle to make ends meet. Staff would like to
remind qualified customers to take advantage of the energy assistance programs available to them.
Because the Company s amended W ACOG and exhibits were filed on the same day
that Staff Comments were due, Staff did not have an opportunity to comment upon the amended
numbers in its written comments. However, after reviewing the amended exhibits Staff does not
change its recommendation set forth in its written comments. The only change in the amended
request is a further lowering of the requested W ACOG, resulting in a larger rate decrease for
customers. This is the result of the Company taking advantage of purchases at lower prices
subsequent to when they filed the original Application in this case.
COMMISSION DECISION
Does the Commission wish to approve the Company s Application, as amended by its
September 20, 2006, filing? Does the Commission wish to reserve the right to reopen any
approved tariffs should the FERC pipeline rate increases be less than what the Company has
included in the Application?
DECISION MEMORANDUM