20030620_508.pdf

DECISION MEMORANDUM
TO:COMMISSIONER KJELLANDER
CO MMISSI 0 NER SMITH
COMMISSIONER HANSEN
COMMISSION SECRETARY
COMMISSION STAFF
LEGAL
FROM:JOHN HAMMOND
DATE:JUNE 18,2003
SUBJECT:IN THE MATTER OF THE APPLICATION OF INTERMOUNTAIN GAS
COMPANY FOR AUTHORITY TO INCREASE ITS RATES FOR
SERVICE, CASE NO. INT-03-
On May 7, 2003 , Intennountain Gas Company filed an Application with the
Commission for authority to place into effect new rate schedules that would result in an overall
increase of approximately $61 million or 37.76% in revenues. The Company requested an
effective date of July 1 , 2003 for its proposed rate schedules. On May 28, June 4 and 5 , 2003
the Commission convened public workshops and hearings in Boise, Idaho Falls and Twin Falls.
Pursuant to the Commission s Notice of Modified Procedure, persons interested in submitting
comments were requested to do so no later than June 13 , 2003. Order No. 29242 at 5.
Intennountain Gas was required to file any reply comments no later than June 17 2003.
THE APPLICATION
Intennountain Gas requests authority to pass through to each of its customer classes
the change in gas related costs resulting from:(1) changes in Intermountain Gas s finn
transportation and storage costs resulting from the Company s management of its storage and
firm capacity rights on pipeline systems including the Williams Northwest Pipeline ("Williams
or "Northwest"); (2) an increase in Intennountain Gas s weighted average cost of gas
W ACOG"); (3) an updated customer allocation of gas related costs pursuant to the Company
purchased gas cost adjustment provision; and (4) the inclusion of temporary surcharges and
credits for one year relating to gas and interstate transportation costs from the Company
deferred gas account. Application at 3-4. The Company also requests authority to eliminate the
temporary surcharges and credits included in its current prices during the past 12 months. See
DECISION MEMORANDUM
Case No. INT-02-3. The aforementioned changes will result in an overall price increase to
Intennountain Gas s RS-, RS-, GS-1 and LV-1 customers and a decrease to Intennountain
Gas s T-1 and T-2 customers.
The overall effect of the Company s proposed changes in this would be an increase
in Idaho revenues of 60 972 028 or a 37.76% increase. The net increase is made up of:
Pennanent Adjustments
Elimination of Surcharges and Credits from INT -02-
. W ACOG Adjustment
$10 163,440
$47 034 183
Temporary Surcharges and Credits
Fixed Cost Collection Adjustment
Uncollected Gas Costs in Account 186
Market Segmentation
Miscellaneous Gas Costs & True Ups
217,435
427 982
($2 366,437)
($504 575)
The following tables represent Intennountain Gas s proposed changes in rates per
customer class.
Proposed Proposed Proposed
Customer Class Revenue Average Average Average PriceIncreaseIncrease %
$/Therm Change $/Therm
RS-1 Residential 384 066 23826 33.44%95075
RS-2 Residential 108 992 880 23129 37.90%84164
GS-1 General Service 025 514 23886 42.49%80100
LV-1 Large Volume 089 088 22058 53.91%62976
1 Tariff price plus the Weighted Average Cost of Gas (WACOG) $0.50305 per therm
WACOG = total commodity cost of gas / total purchase therms
Proposed Proposed Proposed
Transportation Revenue Average Average Average PriceIncreaseIncrease %
$/Therm Change $/Therm
T -1 Transportation 338 014 (0.00421)22%09554
2 Transportation 602 291 (0.00024)89%02672
Intennountain Gas proposes to allocate the change in rates to each of its customer classes in
accordance with its PGA tariff and approved cost-of-service methodology.
See Case Nos. INT-95-, INT-88-2 and U-IO34-137.
DECISION MEMORANDUM
The Company also requests that the Commission set its W ACOG at $0.50305 as it
believes that the current forecast for market prices for natural gas dictate that it be set at this level
as compared to the $0.32000 per thenn currently included in the Company s tariffs. However
Intennountain Gas states that forward market prices for gas could be subject to fluctuations.
Accordingly, the Company is committed to file an application with the Commission prior to this
winter s heating season should those forward prices materially deviate up or down from its
proposed W ACOG.
The Company contends that its Application has been brought to the attention of its
customers through a customer notice and by a press release sent to daily and weekly newspapers
and major radio and television stations in the Company s service area.
PUBLIC HEARINGS
The first of three scheduled workshops and hearings was held in Boise on May 28
2003 at the Commission s hearing room.One Intennountain Gas customer attended the
workshop. No customers testified at the hearing. Additional workshops and hearings were held
on June 4, in Idaho Falls and June 5, in Twin Falls. Two customers attended the Idaho Falls
workshop.One customer testified at the hearing.In Twin Falls, no customers were in
attendance at either the workshop or hearing. Television and newspapers covered all three
meetings and hearings.
WRITTEN COMMENTS
A. Public Comments
The Commission has received written comments from 185 customers. None favored
the Commission authorizing the proposed rate increase. Two of the respondents stated that if
such an increase were warranted, only part of the increase should be granted. They further
recommended that the Commission review wholesale gas prices in six months and if they have
not declined, the Commission could order further rate increases. One customer, a fanner, said
that $8 600 in additional unbudgeted costs that he would incur as a result of one rate case
increase "will cut in a very thin margin, possibly into a loss situation.
B. Advanced Energy Strategies, Inc.
Intervenor, Advanced Energy Strategies, Inc. ("AES") filed written comments on
June 13, 2003. AES asserts that Intennountain Gas has done very little to pro actively mitigate
the effect that rising natural gas costs have had on its customers. AES contends that this action
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or lack thereof, is a business strategy employed by IGC to purposely allow and facilitate a rise in
retail gas rates in order to increase incremental revenues from captive customers. Furthennore
AES asserts that Intennountain operates its facilities and has marketing practices that provide a
maximum benefit to the Company s owners at the expense of residential and small commercial
ratepayers who do not qualify for participation in transport gas rate schedules. Specifically, AES
raises concerns regarding three broad topics that it contends helps to maximize investor value at
the expense of ratepayers. First, AES raises concerns regarding the operation oflntennountain
natural gas storage facilities in Nampa, Idaho. AES believes that Intennountain Gas fills its
storage facilities with relatively low cost gas that the Company has purchased and then sells it to
customers at a new higher retail price. AES posits that it is unclear whether this additional
revenue is flowed through to ratepayers or simply benefits Intennountain s ownership.
AES asserts that the Commission should examine Intennountain Gas s conservation
efforts. AES stated that Intennountain Gas does promote energy efficiency, to a minimal degree.
However, it contends it does not result in significant, measurable or quantifiable gas savings.
AES contends that Intennountain does not promote or practice energy conservation in a
meaningful way that might help to mitigate the impacts of aggregate consumption on the national
market. AES thus suggests that the Commission review the Company s current conservation
practices and review whether additional programs and measures are warranted.
Lastly, AES contends that it is possible that as the Company s gas costs raise so will
its profits. AES asserts that this may not be the appropriate proceeding to consider IGC'
approved rate ofretum, but feels that the Company s "internal hurdle rate of 12.5% represents an
enviable investment opportunity available to only a very few over the past three years.
In conclusion AES contends that it has raised valid issues that present the
opportunity to examine more closely Intennountain Gas s practices. AES contends that such an
examination will provide insights that will counterbalance Intennountain s arguments in support
of its Application.
C. Commission Staff Comments
1. Staff Audit
Staff conducted a detailed audit of the Company s gas costs incurred in the PGA
period under review. Staff verified Intennountain profits would not increase if the
DECISION MEMORANDUM
Commission granted the Company s Application. In addition, Staff states that it is currently
conducting a comprehensive financial audit of Intennountain Gas.
Staff states the Company made attempts to reduce the price of gas for customers.
First, it sold a large portion of its Sumas gas, then purchased a similar quantity of Rockies gas at
a lower price. This resulted in reduced purchased gas costs. Second, Staff found that in 2002
the Company executed financial transactions to fix the price for a portion of gas purchased for
customers to protect them from significant upward swings in the price of gas on the wholesale
market. Third, Staff notes the Company continues to actively search for opportunities to market
its extra pipeline capacity to maximize revenue. Intennountain s intennediary IGI has
consistently bid out the Company s extra capacity appropriately or purchased the capacity itself
at the highest rate allowed. Fourth, Staff found IGI has also issued three requests for proposals
to meet Intennountain s short-tenn gas supply needs that have largely been cost-effective. Fifth
for the month of March 2002, Staff notes the Company sold all of its gas priced at the first-of-
the-month index and repurchased gas on the daily market. This strategy proved effective as
prices fell from the first-of-month highs to lower levels. Sixth, the Company did not renew a
storage contract for some of its Canadian gas because the supplier wanted a significantly higher
price for that storage capacity. Intennountain found it would be cheaper to purchase the gas
during the winter than to pay significantly more for storage. Even though this appears to have
been the best economic decision at the time, it did not secure the price of gas through the winter
and prices have increased significantly since the decision was made. Finally, Staff found, as
required by Commission Order No. 29199, Intennountain solicited proposals from several gas
marketers to find the most reliable and inexpensive management partner.
2. W ACOG
Staff reviewed Intennountain s transportation and gas procurement contracts, the
Company s gas price forecast, and national market price trends. Based on these factors Staff
states that there have been significant increases in the demand for natural gas along with market
volatility and higher prices for natural gas. Thus, Staff found the Company s proposed W ACOG
reasonable.
Staff notes that the Commission could consider a smaller W ACOG increase but
current market estimates exceeded the Company s request by approximately 5 cents per thenn.
In addition, external factors could force the prices even higher, such as a colder than nonnal
DECISION MEMORANDUM
winter or a warmer than nonnal summer. Thus, even at the Company s requested W ACOG
deferred gas costs could be generated. Accordingly, Staff recommends approval of the
Company W ACOG as requested. Staff recommends that the Commission require
Intennountain to continue to file its quarterly W ACOG reports for the current gas year and to
also file W ACOG reports for the proj ected 2004-2005 gas year to allow Staff to follow the same
data and results the Company should be monitoring.
3. Risk Manal!ement and Price Stability
Staff found that the Company has greatly improved documentation of risk
management activities. However, Staff notes that customers' rates clearly remain unprotected
from annual market volatility. For example, RS-2 customers are still being asked for a 38%
increase in rates. In fact, RS-2 gas costs will go up 57% over the last PGA cycle.
Staff questioned why 2003-2004 hedges were not secured. The Company replied
the obligation of the Gas Management Committee is not to project what prices will do nor is it
the Committee s objective to 'beat' a projected W ACOG, but rather to ensure Intennountain
gas supplies are purchased at a prudent price level."z Staff did not disagree with this practice
however, it believes the Company should add an additional element to its risk management
activities that involves consideration for customer rate stability.
Staff states that there are methodologies that could provide a more disciplined
approach to minimize price volatility for the Company s gas customers. Accordingly, Staff
recommends that the Commission require Intennountain Gas to file a more fonnal risk
management policy within 90 days. Staff recommends that the Commission direct the Company
to fonnalize this policy with special emphasis on managing reliability, price, service quality,
credit risk, and customer rate volatility. Staff also states that the fonnal policy should include
trigger points or volatility limits that could be used to make hedging decisions or forward market
purchases. Staff also believes that after the initial filing, this fonnal policy could easily be
incorporated into the Company s biannual Integrated Resource Planning (IRP) process in the
future.
2 Intermountain Gas response to Staff audit requests dated May 20, 2003.
DECISION MEMORANDUM
4. Lon!! Term Gas Purchases
Staff also voiced concerns related to the Company s recent decision not to seek
fonnal proposals for its long-tenn gas needs. The Company responded to Staff that long tenn
suppliers and producers are not responding to fonnal proposals any longer. Staff has not been
able to ascertain the validity or reasonableness of this position because there have been no
fonnal proposals for Staff to review. Staff believes it is reasonable to ask the Company to
perfonn at least the same level of due diligence for long-tenn contracts as it does when it looks
for short-tenn arrangements. Staff contends that reliability and credit worthiness should be a
part of the fonnal process documentation for long-tenn as well as short-tenn contracts. Thus
Staff recommends that the Company perfonn a fonnal Request for Proposals with closed bids
submitted to Intennountain Gas for independent evaluation when searching out new long-tenn
supply and transportation arrangements.
5. Demand Side Mana!!ement
Staff encouraged the Company to continue its current programs, mass media and
website activities to promote the efficient use of natural gas. These media activities provide all
customers with valuable conservation infonnation and provide individuals with ways to reduce
their own monthly energy bills. Staff also recommends that the Company continue to explore
new DSM opportunities for its customers.
6. Customer Notice
Staff found that customers were notified of the Company s Application by bill stuffer
and had until June 13 2003 to file comments with the Commission. Staff reviewed the customer
notice and press release and detennined both complied with the notice requirements of IDAP
31.21.02.102. The customer notice was mailed with cyclical billings beginning May 7 2003 and
ending June 4, 2003.
7. Customer Service
Based on past experience with increases in rates, Staff states that complaints and
inquiries regarding Intennountain Gas would increase significantly in 2003-2004. Similarly,
Intennountain Gas would see an increase in the number of customers that contact the Company
directly.During the 2001-2002 heating season, customers had a difficult time getting through
on the Intennountain Gas Customer Service telephone line. After reviewing Intennountain
Service Levels and Abandoned Call data, Staff is concerned about Intennountain Gas s ability to
DECISION MEMORANDUM
handle an increased volume of incoming telephone traffic that might be expected following
another major rate increase.
Staff notes that Intennountain Gas claims it has taken steps this year that will allow
them to handle the additional incoming calls generated as a result of the proposed price increase.
Since 2002, three additional full-time customer service representatives have been hired and two
full-time, temporary positions were created. Also, three representatives in outlying local offices
have been identified as remote agents who can step in and answer calls during peak times if
needed. Customers can also communicate with the Company through the Intennountain Gas
Web site at www.intgas.com. Intennountain Gas claims their e-mail response time is within 24
hours. Staff also suggested the Company use a facsimile machine for customers to submit
complaints and inquiries, who are unable to reach Intennountain by telephone during peak times.
This method could be employed when call volumes reach unacceptable levels by playing a
message while customers are waiting on hold giving them the option of sending a fax. This
would be in addition to reminding customers of Intennountain s Website.
Consumer Assistance Staff also suggests an additional Level Pay promotion be
offered in September of this year. A Level Pay promotion just before the winter would
encourage customers to sign-up for Level Pay in the fall and average their projected higher usage
winter bills over a longer period of time.Staff believed this would help to address
approximately one third of the comments from customers on fixed incomes who worried that
they could not afford a 38% increase in winter heating costs.
8. Staff Recommendations
Based on the foregoing comments, Staff recommends that:
1. The Company s proposed W ACOG of$.50305 be approved.
2. The proposed temporary surcharges and credits be approved.
3. The Company seek fonnal or infonnal proposals for long-tenn gas
supplies as well as short-tenn supplies.
4. The Company continues to increase its documentation regarding its
purchase and other decisions.
5. Intennountain continue to file its quarterly W ACOG reports for the
current gas year and also begin filing W ACOG projections for the
subsequent gas year as well.
DECISION MEMORANDUM
6. The Commission direct the Company to fonnalize its risk management
policy with special emphasis on managing reliability, price, service
quality, credit risk, and customer rate volatility and file this fonnalized
written policy within 90 days.
7. The Company allow customers to ask questions and seek service through
facsimiles as well as over the phone and through the Internet.
8. Intennountain perfonn an additional Level Pay promotion in September
to allow customers the opportunity to sign up before the winter heating
season. Customers would be encouraged to sign-up for Level Pay in the
fall and average their projected higher usage winter bills over a longer
period of time.
D. Intermountain Gas Reply Comments
First, the Company states that it will continue to seek both fonnal and infonnal
proposals for gas supplies and will continue to document its efforts. However, the Company
reiterated that no long tenn producer or supplier who sells to Intennountain is willing to directly
negotiate a fixed price. Thus, fonnal proposals are not feasible. In addition, the Company states
that it continues to ensure that its supplies are aligned with secure, reliable, reputable and credit
worthy producers and suppliers who it is comfortable will always provide finn, uninterrupted gas
supply for its core market needs. The Company also states that the ability of its long-tenn
suppliers to meet the benchmarks for creditworthiness and ability to deliver finn, uninterrrupted
supplies have all been established in the market and thus, need not be tested through a fonnal
RFP process. The Company also states that it will continue to file its quarterly W ACOG reports
for the current gas year and can also begin filing W ACOG projections for the subsequent gas
year as well.
The Company also states that it has a fonnal Gas Management Risk Management
Policy and will continue to review and discuss gas management strategies that incorporate
Staff s recommendations.However, the Company states because it is a Policy and not a
Procedure Manual it needs to be flexible while still providing general direction. To this end the
Company states that within 90 days it is willing to make documentation available to Staff
regarding these strategy reviews and the outcome of these reviews as it pertains to any action
taken by the Commission.
The Company also states that it has begun the process to implement using the
facsimile machine to respond to customer inquiries and anticipates providing such a service
DECISION MEMORANDUM
within the next several weeks. Intennountain Gas also states that it will perfonn a September
Level Pay promotion.
Intennountain Gas also responded to AES' s comments. The Company states that
AES's assertions wrongly speculate that Intennountain Gas is engaged in questionable activities.
The Company also points out that AES did not attend any of the workshops or hearings and did
not submit any data requests to the Company.
Intennountain Gas asserts that contrary to AES' s comments it is not profiting in any
way by a rise in retail natural gas prices as demonstrated by the Company s practices and
documented findings by the Commission Staff. The Company also asserts that contrary to
AES's comments that it promotes several avenues for the wise and efficient use of natural gas
and that these are documented in the Company Integrated Resource Plan.Finally,
Intennountain Gas asserts that contrary to AES's comments that the Company does not receive a
rise in its profit margin due to any Commission authorized upward change in its W ACOG.
Intennountain Gas states that the comments provided by AES provide little or no
value to its customers and in fact provide "misleading, if not slanderous, infonnation" to any
who read them.
COMMISSION DECISION
1. Does the Commission wish to approve the Company s proposed temporary
surcharges and credits contained in its PGA Application?
2. Does the Commission wish to approve the Company s proposed W ACOG
50305?
3. Does the Commission wish to require the Company to seek fonnal or infonnal
proposals for long-tenn gas supplies as well as short-tenn supplies?
4. Does the Commission wish to direct the Company to continue to increase its
documentation regarding its gas purchases and other decisions?
5. Does the Commission wish to require Intennountain Gas to continue to file its
quarterly W ACOG reports for the current gas year and also begin filing W ACOG projections for
the subsequent gas year as well?
6. Does the Commission wish to direct the Company to fonnalize and file its risk
management policy with special emphasis on managing reliability, price, service quality, credit
risk, and customer rate volatility, within 90 days?
DECISION MEMORANDUM
7. Does the Commission wish to require the Company to allow customers to ask
questions and seek service through facsimiles as well as over the phone and through the Internet?
8. Does the Commission wish to require Intennountain Gas to perfonn an additional
Level Pay promotion in September to allow customers the opportunity to sign up before the
winter heating season?
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DECISION MEMORANDUM