20070921Decision memo.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
COMMISSIONER SMITH
COMMISSIONER REDFORD
COMMISSION SECRETARY
COMMISSION STAFF
FROM:DONOVAN E. WALKER
DATE:SEPTEMBER 21 , 2007
SUBJECT:INTERMOUNTAIN GAS COMPANY'S 2007 PGA,
CASE NO. INT-07-
On August 16, 2007, Intermountain 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 , 2007 that will decrease its annualized revenues by $25.4
million (7.7%). 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. Intermountain s earnings will
not be changed as a result of the proposed changes in prices and revenues. Application at 2.
The Commission authorized the use of Modified Procedure with a comment deadline
of September 18, 2007. Order No. 30413. Comments were filed by Commission Staff and by
the Northwest Industrial Gas Users.
THE COMPANY'S APPLICATION
With its Application, Intermountain Gas seeks to pass through to each of its customer
classes a change in gas related costs resulting from:(1) a decrease in costs billed to
Intermountain pursuant to the settlement of the general rate case filed by Northwest Pipeline
Corporation (NPC), (2) the annualized impact of the general rate case filed by Gas Transmission
Northwest Corporation (GTN), (3) changes in Intermountain s firm transportation and storage
costs resulting from its management of storage and firm capacity rights on pipeline systems
including NPC and GTN, (4) a decrease in Intermountain s Weighted Average Cost of Gas
(W ACOG), (5) an updated customer allocation of gas related costs pursuant to the Company
PGA provisions, (6) the collection of unaccounted for gas on Intermountain s distribution
DECISION MEMORANDUM
system, and (7) the inclusion of temporary surcharges and credits for one year relating to gas and
interstate transportation costs from the Company s deferred gas cost accounts. Application at 3-
According to the Company s customer notice in this case, if its Application is
approved as filed, residential customers using natural gas for space heating and water heating
could experience a $6.00 decrease (8.1 %) on an average monthly bill. Those residential
customers using natural gas for space heating only could experience a $4.00 decrease (7.5%) on
an average monthly bill. Commercial business customers could realize an average monthly bill
decrease of $29.00 (8.7%). Industrial customers who use only Intermountain s delivery service
but do not purchase their natural gas from the Company, could experience an average increase of
5% or $0.004 per therm delivered.
Intermountain Gas proposes to decrease the W ACOG from the currently approved
$0.68500 per therm to $0.63583 per thermo Application at 6. 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 7. The Company states that
although current commodity futures prices dictate the use of a $0.63583 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, if the forward
prices materially deviate from the $0.63583 per thermo Application at 7.
Intermountain Gas proposes to incorporate the benefits of lower prices resulting from
a settlement filed in the 2006 NPC general rate case. In last year s PGA, Case No. INT-06-
Intermountain s prices were weighted to reflect the inclusion of nine months ofNPC's proposed
increased transportation costs , subject to refund pursuant to FERC's order on the then pending
rate case. The subsequent settlement reached in NPC's rate case was approved by FERC with an
effective date of April 1 , 2007. Intermountain Gas proposes to incorporate the benefits of these
lower prices to include the annualization, or 12-month application, of the rate reduction when
compared with NPC's initial case. Application at 5. The outcome of GTN's general rate case
proceeding is still pending before FERC, and Intermountain Gas proposes to incorporate the
annualization, or 12-month application of GTN's filed case. Additionally, Intermountain reports
DECISION MEMORANDUM
that its capacity costs have increased on several Canadian pipelines due to rate increases, expired
temporary credits, and the tightening exchange rate between U.S. and Canadian currencies.
Application at 5-
The Company states that it incurred costs to procure additional upstream capacity in
order to more closely align deliveries from those upstream pipelines with Intermountain s take-
away rights on NPC at it Stanfield interconnect with GTN. Application at 6. These costs have
been included at Exhibit 4 Row 5. The Company includes costs to procure additional
incremental liquid storage at NPC's Plymouth LNG facility to enhance its overall storage
portfolio. Application at 6. These costs are included at Exhibit 4, Row 13-18. The Company
also states that it party to certain agreements whereby it manages its storage related assets in
conjunction with a third-party asset manager. Intermountain Gas proposes to pass back to its
customers the benefits generated from these agreements as shown on Exhibit 4, Line 19.
Application at 6.
The Company proposes to include various surcharges, credits, and adjustments in its
proposed prices. Application at p. 7-8. Intermountain has included the elimination of temporary
surcharges and credits pursuant to last year s PGA, Case No. INT-06-04. Application at 8
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 8, 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 $3.4 million credit. Application at 8, 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, 2008 as follows: (1) fixed gas costs credit of $3.9 million attributable to
collection of interstate pipeline capacity costs, the true-up of expense issues previously ruled on
by the Commission, refunds attributable to the settlement of NPC's general rate case, and
mitigating capacity release credits from Intermountain s upstream capacity; and (2) deferred gas
cost credits of $1.5 million attributable to variable gas costs since October 2007. Application
at 8-9. Intermountain proposed to pass back the balances via the per-therm and credit.
Application at 9, Exhibit 9, Line 4, Column (b), Exhibit 6, Line 3.
DECISION MEMORANDUM
The Company states that a straight cents-per-therm price decrease was not utilized
for the T-l tariff. Application at 9. Absent Williams' firm transportation TF-l commodity
charge increase and the unaccounted for gas recovery as included on Exhibit No., the proposed
increase 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-therm increase related to fixed costs was made only to the
first two blocks of the T -1 tariff. Application at 9-10. Likewise, since the proposed decrease to
the T -2 tariff demand charge is fixed-cost related, a cents-per-therm decrease was made to the T-
2 demand charge for these fixed costs. Application at 10. Additionally, the proposed increase to
the T-2 commodity charge incorporates the increase in the Williams' firm transportation TF-
commodity charge pursuant to NPC's current tariffs as well as the collection of unaccounted for
gas as included on Exhibit No.9. Id.
The Company states that customers have been notified about the Application through
a customer notice and a press release. Id. The Company has requested an effective date for the
new rates of October 1 , 2007.
COMMENTS OF NORTHWEST INDUSTRIAL GAS USERS
The Northwest Industrial Gas Users (NWIGU) filed comments on September 18
2007. NWIGU did not oppose the use of Modified Procedure and did not request a hearing. In
its comments it generally supported Intermountain s proposed adjustments. NWIGU was
primarily concerned with the proposed adjustment for lost and unaccounted for gas (L&U gas).
It requested that the Commission condition its approval of the L&U tracking adjustment to a
factor that is capped at a 2% L&U gas level in prospective annual true-ups that will be used to
credit or surcharge Intermountain s customers.
NWIGU states that its members, many of whom are transportation customers of
Intermountain, are impacted significantly by the imposition of the proposed new adjustment for
lost and unaccounted for gas at a 0.191 cents-per-therm recovery on all industrial throughput.
However, its members view this adjustment as reasonable given the differential in gas costs
between the factor embedded in rates from 1985 (when gas was $0.33 per therm) and current and
prospective gas commodity markets. NWIGU also recognizes the efficiency with which
Intermountain maintains its system, with an L&U factor of just 0., and that the new L&U
adjustment only allows recovery for incremental L&U gas costs on the distribution system
which will be trued up going forward with future PGA filings.
DECISION MEMORANDUM
NWIGU stated that it did not want the creation of the L&U recovery mechanism to
create any contrary incentive for the ongoing and conscientious efforts that Intermountain Gas
undertakes to manage and operate its distribution system to minimize L&U gas. Consequently, it
asks that the Commission limit future recovery under this mechanism to a reasonable ceiling of
2%.
COMMENTS OF COMMISSION STAFF
Staff reviewed the Company s Application and gas purchases 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. After a complete examination of
the Company s Application and gas procurements for the year, Staff recommends: (1) that the
Commission accept the Company s Application and filed tariffs, reducing the approved
W ACOG and the Company s annual revenue; (2) that the Commission reserve the right to
reopen any approved tariffs should the pipeline rate increases be less than what the Company has
included in the Application; and (3) that the Commission reserve the right to reopen this case and
re-evaluate any approved tariffs if the W ACOG materially changes below that included in the
Application.
Staff reported that while gas prices varied greatly throughout the past year, last year
W ACOG estimates were fairly reflective of prices that the Company paid for gas. The result
was a nominal over-collection of the Company s variable costs, which will be returned to
customers through credits over the next 12 months. The Company s proposed W ACOG
$0.63583 per therm is slightly less that that which could be justified when applying the forward
prices available as of June 30, 2007 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
Intermountain 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 any difference will
be deferred and collected in rates next year. Intermountain s substantial storage capacity has
allowed it to take advantage of lower prices when they have occurred, and makes it less
dependent on spot market purchases during the volatile winter months. Additionally,
DECISION MEMORANDUM
Intermountain is able to take advantage of increased production in the Rockies at a lower cost
and consequently, is able to utilize a W ACOG considerable less than other utilities in the region.
Staff reported that the benefits from settlement of the NPC FERC rate case are
proposed to pass through to customers with this filing through the annualized level of
transportation costs from NPC. The benefit received by customers from the settlement is
approximately $970 000. Staff also reports that the outcome of the GTN rate case is still pending
at FERC, and Intermountain is proposing to incorporate the annualization, or 12-month
application of GTN' s filed rate, which increases Intermountain s annual revenue by $1,425 811.
Staff believes that treatment of the pending GTN rate case is consistent and reasonable given the
uncertainty of the timing and amount of increase to be granted by FERC. Staff recommends that
in the event that FERC approves an increase less than that proposed by GTN, the Commission
reserve the right to reopen this case and re-evaluate the approved tariffs that result from this
proceeding.
Although Staff recommended that the Commission allow the Company to recover the
additional amounts requested for lost and unaccounted for gas, it also expressed some concern
with regard to the Company s proposal. First of all, Staff stated that is hesitant to recommend
that recovery be allowed in the PGA, which is designed to recover supply costs that are out of
the control of the Company, when many of the factors that affect the level of unaccounted for gas
are within the Company s control.
Staff noted that the industry average for lost and unaccounted for gas
approximately 2%, and that Intermountain s rate is approximately 0.7%. The normalized level
of revenue collected by Intermountain in its current base rates (set in 1985) for unaccounted for
gas is $445 905.Adjusted for growth, the normalized level is $934 721.The Company
requested to recover the estimated amount of lost and unaccounted for gas over todays
normalized level adjusted for growth, an additional $1.6 million. Staff noted that approval of the
Company s proposal should not guarantee the recovery of all lost and unaccounted for gas
regardless of circumstances.Staff stated that it did not believe it to be appropriate for
unaccounted for gas or losses due to faulty meters and meter reading errors to be included in
PGA rates. Staff stated that it will review the actual levels of unaccounted for gas during next
year s PGA audit to determine the appropriateness of the recovery.
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 ofthe 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 stated 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. Staff reported that the Company executed numerous
financial hedges by locking in specific prices for gas during the 2006-2007 PGA year, and the
hedging practices were successful as they were able to beat the W ACOG and return nearly $1.
million to customers in the coming year.
Finally, Staff reviewed the Company s customer notice and press release and
determined they were in compliance with the requirements of IDAP A 31.21.02.1 02.
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 many customers continue to
struggle to pay their gas bills. Staff would like to remind qualified customers to take advantage
of the energy assistance programs available to them, such as the federally-funded Low Income
Home Energy Assistance Program (LIHEAP) and non-profit fuel funds such as Project Share in
southwestern Idaho anp Project Warmth and Helping Hand in southeastern Idaho.
COMMISSION DECISION
Does the Commission wish to approve the Company s Application and proposed
tariffs, reducing the approved W ACOG and the Company s annual revenue?
Does the Commission wish to reserve the right to reopen any approved tariffs should
the pipeline rate increases be less than what the Company has included in the Application?
Does the Commission wish to reserve the right to reopen this case and reevaluate any
approved tariffs if the W ACOG materially changes below that included in the Application?
Does the Commission wish to place a cap on the recovery of lost and unaccounted
~ E ft/L,~
for gas of2%?
DECISION MEMORANDUM