20120119Comments.pdf

KARL T. KLEIN
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 5156
r¡ "' t'
Z.il.,l? JHJ I Q pui:' 2: "J4litL. .r-~¡.~ -i (1.
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 DECREASE ITS PRICES )
)
)
)
CASE NO. INT-G-ll-03
COMMENTS OF THE
COMMISSION STAFF
The Staff of the Idaho Public Utilties Commission comments as follows on
Intermountain Gas Company's December 22,2011 Application for authority to decrease its
prices.
BACKGROUND
On December 22, 2011, Intermountain Gas Company applied for authority to decrease its
revenues from Februar 1,2012 to September 30,2012 by $6.0 millon. Application at 2. The
Company contends the proposed revenue decrease relates to changes in the Company's gas
purchase costs and wil decrease customer rates while not affecting the Company's earings. ¡d.
at 2. The Company asked the Commission to process the Application by Modified Procedure,
and that the new rates take effect Februar 1,2012. ¡d. at 6.
With this Application, Intermountain Gas seeks to pass-through to its customers a
decrease in gas commodity costs resulting from a decrease in Intermountain's weighted average
STAFF COMMENTS 1 JANUARY 19,2012
cost of gas ("W ACOG"). The Company says this would result in an overall price decrease to
Intermountain's RS-l, RS-2, GS-l, LV-I, IS-R and IS-C customers. Application at 3.
Intermountain proposes decreasing the WACOG from the currently approved $0.45342
per therm to $0.41812 per therm because regional natural gas prices have continued to decline
since Intermountain fied INT -G-II-0 1 in August 2011. Id. at 4. The Company attributes the
decline to: (1) the continued prolific availabilty of U.S. shale gas production, (2) storage
balances being at or near record high levels, (3) the lack of material huricane activity that would
typically reduce natural gas deliverability, and (4) a mild winter that has dampened natural gas
demand across the Pacific Northwest. Id. Additionally, the Company says the domestic Ruby
pipeline has displaced traditional Canadian natural gas supplies and softened "prices at the
AECO hub in Alberta which makes up a significant portion of the Company's gas supply
portfolio." Id.
Intermountain says it has allocated the proposed price changes to each of its customer
classes based on Intermountain's Purchased Gas Cost Adjustment (PGA) provision. Id.l The
Company says the proposed price changes are just, fair, and equitable. Id. at 5.
Intermountain asserts that customers have been notified regarding Intermountain's
Application through a customer notice and press release. Id. Finally, the Company requests that
this matter be handled under Modified Procedure and that its rates become effective on February
1,2012. Id. at 6.
STAFF ANALYSIS
Intermountain's curent fiing results from the Company's adherence to Order No. 32372,
which requires that the Company apply to reduce prices whenever purchased gas costs materially
deviate from those curently authorized and embedded in rates. The Company proposes to
reduce the WACOG from $0.45342 per therm to $0.41812 per thermo This is 7.79 percent less
than the W ACOG approved in the 2011 PGA, which took effect on October 1, 2011.
i The PGA mechanism is used to adjust rates to reflect annual changes in Intermountain's costs for the purchase of
natural gas from suppliers - including transportation, storage, and other related costs. See Order No. 260 i 9.
STAFF COMMENTS 2 JANUARY 19,2012
Staff reviewed the Company's Application primarily by comparing it to Staffs analysis
of the WACOG approved in the October 1,2011 PGA (Case No. INT-G-ll-l). Based on this
review, Staff finds that:
1. the Company's method to determine the WACOG is rigorous and the calculations are
accurate;
2. the Company's proposed reduction in its WACOG correlates with market trends
identified in Staffs comments for the October 2011 PGA filing and that these trends
persist; and
3. the cost of purchased gas that forms the basis for the proposed WACOG reasonably
compares to current benchmark market prices forecasted by third-party sources.
Accordingly, Staff recommends that the Commission approve the Company's proposed
WACOG and reduce rates by $0.03530 per therm for the Company's RS-l, RS-2, GS-l, LV-I,
IS-R and IS-C customers.
Method and Accuracy Review
The Company used the same method to develop this proposed W ACOG as the method it
used in the October 2011 PGA. Because Staff found that method to be rigorous and sound, Staff
has limited its review of the proposed W ACOG decrease to auditing calculations contained in
workpapers accompanying the Company's Application. Staffs review found all relevant data
and calculations to be appropriate and accurate.
Market Trend Analysis
After analyzing the W ACOG trend given current and future market conditions, Staff
concluded that a continued trend for a decrease in the Company's WACOG is valid and
reasonable. As reflected in the char below, the proposed W ACOG, if approved, wil be the fifth
consecutive decrease.
STAFF COMMENTS 3 JANUARY 19,2012
Weighted Average Cost of Gas
0.800
0.7000
0.000
i 05000
t. 0.400'"
0.300
0.2000
0.1000
WACOG
($/Therm)0.1568 0.1825 0.2867 0.3880 0.3200 0.4750 0.5549 0.6850 0.6358
ios '09** '10
(Dec.)'
0.6748 0.4960
'11.
(Dec.
prop.)
'05 '06 '07
0.4181
% Inc. or Dec.0.0% 16.4% 57.1% 35.3% (17.5%) 48.4% 16.8%(6.4%) (7.2%)6.1% (26.5%)(7.8%)
. % Change based on previous regularly scheduled PGA filing
.. % Change based on previous OecemberfiDng
When analyzing the Company's October 2011 PGA Application, Staff recognized that
natural gas prices had continued to soften between the time the Company developed its
purchased gas forecast and when Staff pedormed its market analysis for comparison only 23
days later. The same conditions hold for this Application, which indicates that the same trends
continue. Futures prices have continued to soften between the December 16, 2011 settles2 used
to determine the Company's proposed WACOG reduction and the January 9, 2012 settles used to
determine Staffs benchmark analysis.
In addition, Staff verified numerous factors that indicated further softening of natural gas
prices. Long term, the most significant factor causing price decline over the past few years has
been the discovery of non-traditional gas deposits due to new driling technologies. Regionally,
Staff confirmed a trend of decreased demand and softening prices of Alberta Canada (AECO-C)
gas due to the newly operational Ruby and Rocky Mountain Express pipelines, which have
increased West coast and mid-West access to Rocky Mountain gas. Short term, there were
indications of stabilty in the number of operating dril rigs and lack of forecasted huricane
activity in the Gulf of Mexico. These factors, along with mild weather across the nation and
record quantities of stored gas, have further depressed prices for the short-to-medium term.
2 A "settle" is the last price paid or "closing" price for a futures contract on a paricular trading day.
STAFF COMMENTS 4 JANUARY 19,2012
Price Benchmark Analysis
Staff repeated its price benchmark analysis from the October 2011 PGA using current
NYMEXlGX exchange futures prices. Based on this analysis, Staff concluded the Company's
proposed W ACOG reasonably compares with current price benchmarks. These comparisons are
ilustrated in Char 1.0, Confidential Attachment A.
The analysis compares the Company's forecasted monthly cost of purchased gas from
this fiing to two, volume-weighted cost-of-purchased-gas estimates developed by Staff. These
estimates use historic volume allocation percentages for the three hubs where the Company buys
gas.3 The first estimate uses NYMEXlGX futures prices and differentials based on Januar 9,
2012 settles. The second estimates uses Company-adjusted price forecasts based on December
12,2011 NYMEXlGX settles included in the curent fiing. The difference between the Staffs
two estimates helps ilustrate that market prices continued to soften between when the Company
submitted its current Application and when Staff analyzed that Application 28 days later.
Comparing the Company's cost of purchased gas in the current Application to Staffs
estimates shows significant price differences during the winter (October through March) and
much smaller differences during the summer (April through September). Most of the winter
price differences can be attributed to: (1) significantly softer prices reflected in Staffs estimate
based on a Januar 9, 2012 settle date; and (2) earlier purchases the Company made at "locked-
in," higher prices under contracts that anticipated higher winter prices that never materialized.
The difference in summer pricing reflected in Staffs estimates and the Company's Application
can be explained by embedded transportation costs, contract adjustment factors, fixed and option
priced gas cost premiums, and hub allocation differences between Staffs method and methods
used by the Company to develop its proposal.
In addition, Staff compared the monthly cost-of-purchased-gas forecast used in the
Company's Application to the forecast used in Intermountain's October 2011 PGA. This
comparison is ilustrated in Chart 2.0, Confidential Attachment A.
3 These allocation percentages are forecasts based on historical allocations supplied by the Company through audit
requests submitted in case TNT -G- I 1-0 i. These are not the same allocations used in the W ACOG calculation for the
current Application.
STAFF COMMENTS 5 JANUARY 19,2012
Staff notes the differences between the two fiings during the remaining winter months
are much smaller than differences in summer months. The smaller differences during winter
months can be attributed to the Company's hedging strategy, which "locked-in" prices for
approximately 70 percent of winter gas.4 However, the Company's hedging ratio left
approximately 30 percent of winter gas indexed to the market, which has allowed the Company
to take limited advantage of currently lower market prices. In the current filing, the cost of
purchased gas during summer months decreases significantly compared to the October 2011
PGA forecast. This decrease can be attributed to a combination of lower prices overall and the
Company leaving all its purchases indexed to the market or "un-locked" when it fied the
October 2011 PGA. The Company's curent fiing demonstrates the Company has "locked-in"
prices of significant volumes of gas to take advantage of currently low prices. Staff believes this
has merit given the potential for higher prices, especially if snowpack levels remain low
throughout the Pacific Northwest and electric utilties utilze natural gas plants to make up for
shortfalls in hydropower generation.
STAFF RECOMMENDATION
After examining the Company's Application, Staff recommends that the Commission
accept the Company's request and fied tariffs establishing a W ACOG of $0.41812 per thermo
Respectfully submitted this I q fL day of Januar 2012.
j! 1 £
Karl T. Klein
Deputy Attorney General
Technical Staff: Mike Louis
i:umisc/comments/intgll.3kkml comments
4 See Staff Comments, Case INT-G-I 1-01, page 10.
STAFF COMMENTS 6 JANUARY 19,2012
THIS
ATTACHMENT
CONTAINS
CONFIDENTIAL
INFORMATION
AND IS FILED
UNDER SEPARATE
COVER
Attachment A
Case No. INT-G-ll-03
Staff Comments
January 19, 2012
CERTIFICATE OF SERVICE
.-L
I HEREBY CERTIFY THAT I HAVE THIS 19TH DAY OF JANUARY 2012,
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF, IN
CASE NO. INT-G-II-03, BY MAILING A COPY THEREOF, POSTAGE PREPAID, TO
THE FOLLOWING:
SCOTT MADISON
VP & CHIEF ACCT OFFICER
INTERMOUNTAIN GAS CO
PO BOX 7608
BOISE ID 83707
STEPHEN R THOMAS
MOFF ATT THOMAS ET AL
STE 1000
101 S CAPITOL BLVD
BOISE ID 83702
\b~amSECRETA~ ~
CERTIFICATE OF SERVICE