INTG991.swm.doc

SCOTT WOODBURY
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 1895

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. )
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) CASE NO. INT-G-99-1

COMMENTS OF THE COMMISSION STAFF

COMES NOW the Staff of the Idaho Public Utilities Commission, by and through its Attorney of record, Scott Woodbury, Deputy Attorney General, and in response to the Application filed by Intermountain Gas Company (IGC; Company) on May 14, 1999, submits the following comments. Staff recommends that the Company’s Application and requested changes to tariffed rates with Staff”s adjustments be approved for an effective date of July 1, 1999.
Intermountain Gas Company in Case No. INT-G-99-1 has applied for authority to implement new rates for the Company’s annual Purchased Gas Cost Adjustment (PGA) tracker. The Commission Staff has reviewed the Company’s filing and performed a limited audit. Staff found that the Company: (1) has maintained transportation cost as part of the demand charges; (2) has continued to hedge the cost of gas supplies; (3) has pursued capacity release and segmentation (the capacity release of a segment of IGC’s transportation rights); (4) has stated that the $2,000,000 settlement from Williams Gas Pipelines FERC Docket No. RP96-367 passed to the customers in INT-G-98-4 was actually only $1,751,461.93 and of this amount only $983,936.81 should have gone to IGC with the remainder going to the affiliate IGI Resources, Inc (Resources); and (5) pays IGI Resources, Inc. a management fee to manage all gas supplies and transportation. Staff’s audit of gas supply, swaps, capacity release, tariff allocations and PGA changes revealed no irregularities.

STAFF ADJUSTMENTS
In INT-G-98-4 the Company gave the ratepayers a $2,000,000 credit for the FERC Docket No. RP96-367, William’s Gas Pipeline West filing as Northwest Pipeline (Northwest Pipeline, NWP) settlement refund. When the refund was received in August 1998, the Company realized part of the refund was for contracts owned by Resources. In addition, the actual refund was not $2,000,000 as estimated, but $1,751,4612. Therefore, with the two adjustments the actual amount to be refunded to the ratepayers was $983,937. As the Company refund based on the projected $2,000,000 produced $989,580 more than should have been refunded, the Company has calculated interest on the amount over refunded and included it in this PGA. Staff found the allocation of the FERC Docket No. RP96-367 settlement between IGC and Resources to be appropriate, but contends that customers should not be required to pay interest on the Company’s error in INT-G-98-4. The removal of interest would reduce IGC’s cost by $15,885. Additionally, since the Company filed in this case it has found that an additional $72,671 of the refund credit should be allocated to IGC. The Company has suggested that the $72,671 be deferred until the next tracker with interest. Staff proposes that if the Commission accepts the Staff changes for this tracker then it would be appropriate to also include the adjustment for the $72,671 in this tracker.
In examining the billings from Resources for the transportation Staff found that Resources did not routinely supply the Company with the Northwest Pipeline billing. The Company had to get permission and copies of NWP bills from Resources when Staff requested to see these bills. In examining the NWP bills and comparing these bills to the amount billed by Resources, Staff had several questions. The Company, with Resources’ help, has put together an analysis and explanations to answer Staff’s questions. Staff recommends that in the future IGC receive and review copies of all bills from NWP and any other transportation contracts for which it is responsible. It should also receive or prepare an analysis that reconciles the amounts paid to Resources with the therms billed under the contract. This is just good business practice and should be requested of any provider of service when the Company is responsible to a third party for payments. The Company has agreed that this is good business practice and will receive a copy of the gas bills and an analysis with each bill.
Staff also contends that the management or administrative fee paid to IGI Resources is unreasonable. IGC and Resources are affiliated companies, and transactions between IGC and Resources are not at arm’s length. Therefore, to characterize Resources as one of the Company's many providers is misleading. Normally, transactions with non-affiliates are presumed to be reasonable when the utility demonstrates that it actually incurred the expenditure. Parties challenging such non-affiliate transactions carry the burden to show that the expenditures were unreasonable or imprudent. In contrast, transactions between affiliated companies are to be subjected to closer scrutiny and the regulated utility has the burden of proving the reasonableness of its affiliated transactions. In this instance, Staff contends that IGC has the burden of proving the transactions with Resources were reasonable and cannot simply rely on the fact that expenditures were incurred. If the Company fails to produce substantial evidence of the reasonableness of its affiliate transaction, then the amount greater than a reasonable expenditure may be excluded. The Commission and Idaho courts have consistently followed this approach. Commission Order Nos. 16945, 16829; General Telephone Co. v. Idaho PUC, 109 Idaho 942, 712 P. 2d 651 (1986), Boise Water Corp. v. Idaho PUC 97 Idaho 832, 555 P. 2d 163 (1976).
One way to prove that a transaction between a regulated utility and its affiliate is reasonable is to show that the service provided to the regulated utility is at market rates. Staff requested information from the Company to demonstrate that the management fee was market-based and/or reasonable. The Company did not provide the information requested. In response to discovery asking for at least two current sales and purchase agreements between Resources and an unrelated party showing a management or administrative fee, the Company provided an outdated contract that had been canceled by Washington Water Power (Avista) in 1996. Staff does not consider this contract representative of current market conditions. Although the Company asserts the price is reasonable, without verifiable proof such as the cost of providing the service or some reliable measure such as a competitive bid process, it is impossible to determine that the price is reasonable. For the Company to say that the affiliate is the most reliable, responsive, and innovative provider is self serving and subjective. Staff believes that there are other providers of this service in the market and that to dismiss them all as unreliable and non-responsive is unreasonable.
This Commission in Order No. 27908, dated February 5, 1999, Case No. WWP-G-98-4, approved a proposed agreement between Washington Water Power (WWP) and Avista Energy. This order allows Avista Energy, the marketing affiliate, to supply gas, act as agent in regard to storage, and to manage existing transportation and supply contracts. For this service Avista Energy will receive an adder of .005¢ per therm. While this service seems much the same as that provided by Resources to IGC and appears to prove that Resources management fee is market based, Staff must point out some very big differences. WWP and IGC have completely different philosophies with respect to gas supply. WWP relies mainly on spot or very short term contracts while IGC relies on long term contracts with producers that are based on an index plus a premium. Avista Energy will provide firm gas service, will charge WWP a Weighted Average Cost of Gas (WACOG) based on market index prices and will bear the risk of procurement of supply at this price. If Avista Energy fails to get the supply at the calculated WACOG it will absorb the cost. Resources, on the other hand, bears no risk for the cost of gas as all costs for IGC’s supplies are directly passed to the customers through the PGA. This includes the long-term contracts that are at the index plus an adder to the producer in addition to the IGI management fee. Consider an example with an Indexed WACOG of .150¢ per therm; for WWP the cost of a therm would then be .155¢ per therm (.150¢ +.005¢) if Avista Energy had to pay .175¢ per therm for the gas the cost to WWP is still .155¢ per therm. For IGC the producer index price could be .150¢ per therm plus .005¢ per therm or it could be .175¢ per therm plus .005¢ per therm. Then Resources would add their .005¢ per therm for a total supply cost of .160¢ per therm or .185¢ per therm which would then be passed on to the ratepayer in the PGA (note this example is not based on actual costs to either company and does not show IGC hedges). The point of this example is not the cost, but that Resources has no risk for the cost while Avista Energy does.
Although the Commission could disallow all payments to Resources for administrative services because the Company has not met its burden of proof, the Avista adder could be used to judge whether the price paid for gas management services by IGC is reasonable. The risk assumed by Avista Energy must also be considered. Staff believes that a reasonable price for the service provided by Resources is between 0 and .005¢ per therm. Because we believe that there is value to the service, the reasonable cost should be greater than 0; but because there is no risk involved and no incentive for Resources to provide the lowest cost, the price should be less then .005¢. Staff believes the mid-point of .0025¢ is a reasonable price to impute for this service. This adjustment would reduce the temporary surcharge by $617,090 and the permanent charge by $552,763.

GAS RESEARCH INSTITUTE (GRI)
Pursuant to Part 154 of the regulations of the Federal Energy Regulatory Commission, and in compliance with the terms of the Stipulation and Agreement Concerning GRI Funding approved April 29, 1998 William Gas Pipeline (Northwest Pipeline, NWP) offered a tariff sheet that included a “check the box” mechanism that allowed customers to voluntarily contribute funds to GRI in addition to the amounts collected by NWP through the GRI surcharges. In February 1999 at the NARUC Winter Committee Meeting the Committee on Gas issued a “Resolution Encouraging Continued Support for Research and Development” that broadly supports continued full funding of GRI’s R & D. Therefore, IGC has made the election to voluntarily contribute to GRI at the high load factor of 26¢/Dth demand charge and 0.88¢/Dth commodity charge. This contribution to R&D is included in the 1999 transportation charges. The cost to the ratepayers would be approximately $70,000. This money will go to a project of IGC’s choice. IGC has yet to determine which project it will support.
Staff has made no determination as to the appropriateness of the contribution to GRI but notes it is a contribution, not payment of a filed rate under NWP’s FERC tariff. If the Commission approves the contribution to GRI, Staff believes that the Company should submit the project to the Commission for its approval. This would assure that all ratepayers receive a benefit from the project.

TRACKER IMPACT
The overall effect of the IGC proposed changes would be an increase in Idaho revenues of $9,637,020. Staff’s recommended changes would reduce this by $1,258,409 to an adjusted total increase in Idaho revenues of $ 8,378,611. The net increase is made up of:
Permanent Adjustments:
INT-G-98-4 Elimination of Temporary Surcharges/credits ($644,603)
Change in WGP-W Rates/Charges 1,963,300
Change in Storage Costs 457,385
Cost of Gas Supply 5,677,983
Staff Adjustment Management Fee (552,763)

Temporary Surcharges or Credits
Deferred Gas Costs (IGC PGA Acct 186)
NWP Refund Docket No. RP93-5 ($649,565)
Market Segmentation (2,189,891)
Storage Credit (465,603)
Over Refund NWP Docket No. RP96-367 989,579
Staff Adjustment to Interest RP96-367 (15,885)
Company Adjustment Allocation RP96-367 (72,671)
Fixed Gas Cost Misc (280,540)
Variable Cost Collection Adjustment (417,248)
Uncollected Gas Costs 5,195,949
Staff Adjustment Management Fee (617,090)
Rounding for Therms 274
Net Adjustments $8,378,611
Any over/under collections will be trued up in the next tracker.

Staff recomputed the annualized increase/(decrease) by class of service per therm in the following manner:
Average Average Average
Incremental Incremental Proposed Price
Gas Sales Revenue ¢/Therm % Change /Therm

RS-1 Residential $1,012,764 2.854¢ 4.73% $0.63195
RS-2 Residential $4,361,766 4.296¢ 8.80% $0.53140
GS-1 General Service $2,793,440 3.322¢ 7.31% $0.48762
T-1 Transportation $ 162,231 0.349¢ 4.05% $0.08959
T-2 Transportation* $ 48,410* 6.825¢* 9.21%* $0.03661
*Increase on demand only.

PERMANENT ADJUSTMENT
The tracker permanent adjustment reflects a decrease by the elimination of temporary surcharges or credits from last year’s tracker, Case No. INT-G-98-4, an increase in charges for transportation, a large increase in the WACOG, and a decrease to the WACOG for Staff’s adjustment to the management fee. These four items add up to an increase of $6,901,302.

TEMPORARY SURCHARGES OR CREDITS
The temporary surcharges/credits reflect the true up of prior period costs deferred in Intermountain Gas Company’s PGA 186 accounts. The surcharges/credits are broken into fixed gas and transportation costs, variable gas and transportation costs, shared revenue, interest, transportation refunds, the removal of the prior year temporary adjustment and the sale of segmented space under IGC’s transportation agreements.
The largest adjustment contributing to the increase in costs is the uncollected gas costs (costs above the WACOG in INT-G-98-4) at $5,195,949. Staff notes that the second largest contribution to the increase in cost for the temporary surcharges is the over refund of NWP RP96-367 from INT-G-98-4 in the amount of $989,579 (see Staff’s prior discussion). The largest factor to holding costs down were the Market Segmentation of transportation at ($2,189,891). The net temporary adjustments add up to an increase of $1,477,309.

CONCLUSION
The Company’s Application and requested changes to tariffed rates should be approved with Staff proposed changes and an effective date of July 1, 1999.

DATED at Boise, Idaho, this day of June 1999.

___________________________________
Scott Woodbury
Deputy Attorney General

Technical Staff: Madonna Faunce

SW:MF:va:gdk/comments\intg991.swm

STAFF COMMENTS 1 JUNE 23, 1999