20030613Jeff Brooks Comments.pdf.pdf

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Jeffiey C. Brooks
Advanced Energy Strategies, Inc.
1027 E. Cayman Drive
Meridian, ill 83642
[phone]
brooksic 1 ~aol. com
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BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF INTERMOUNTAIN GAS COMPANY
FOR AUTHORITY TO INCREASE ITS
RATES FOR SERVICE
CASE NO: INT-03-
COMMENTS OF INTERVENOR
JEFFREY C. BROOKS
ADVANCED ENERGY STRATEGIES, INC.
Comes now Intervenor, Advanced Energy Strategies (AES) by and through Jeffiey C.
Brooks of Advanced Energy Strategies, Inc (AES), in response to Notice of Modified Procedure
and Notice of Comment/Protest Deadline issued on May 14, 2003, regarding Intermountain Gas
Company s annual Purchase Gas Adjustment rate increase request.
Background
The price of natural gas, on the national scene, has nearly doubled in the past year and
this has prompted Intermountain Gas Company s (IGC) request for an annual PGA rate increase
for all but Transportation customers. AES believes and asserts that IGC has done little to
pro actively manage retail gas sales to mitigate the national price impacts of natural gas supplies.
AES asserts that this is action, or lack thereof, is a business strategy employed by IGC to
purposely allow and facilitate a rise in retail gas rates to rise in order to increase incremental
revenues ftom captive customers. Further, AES asserts that IGC operates its facilities and
marketing practices in such a way as to provide 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.
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June 13, 2003
Discussion
AES will discuss three topics that may lend a greater understanding on how
Intermountain Gas Company operates its business to maximize investor value. These three
general areas are:
Natural Gas Storage Facility Operation
IGC Marketing and Conservation Practices
Rate Structure vs. Profit Margin
Natural Gas Storage Facility Operation
The first issue that AES wishes to raise concerns the operation oflGC's natural gas
storage facilities in Nampa, and whether or not the strategies and practices employed at those
facilities have resulted in net benefits for captive ratepayers, or for Intermountain Industries
Owners.
In the recent past, when natural gas prices rose significantly (around 2000 2001) the IGC
storage facilities in Nampa were already filled to capacity with previously purchased, relatively
low cost natural gas. Following the PGA price increase that year, the stored natural gas was then
brought out of storage and sold to captive ratepayers at the newer, higher retail prices.
It is unclear whether the additional revenue which resulted ftom the sale of the stored
natural gas flowed through to the benefit of ratepayers-who paid for the storage facilities
through rate base-or did those increased marginal revenues flow through to Intermountain
Industries ownership, or was there a sharing of benefits between IGC ownership and ratepayers.
As stated, this issue remains unclear ftom the available information, however, during that
timeftame, IGC management made comments to certain audiences that IGC was making "good
money" by selling the lower priced stored gas at higher the retail rates, which had resulted ITom
national price signals that prompted approval of the annual PGA rate increase approvals during
2000 and 2001.
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June 13 , 2003
It was never conveyed publicly whether the increase in revenue benefits due to the sale of
lower-priced storage gas was being shared with ratepayers. The only communication was that
the Company s owners were "making good money." Uno benefit--due to storage inftastructure
investment-flowed through to ratepayers, then perhaps it is appropriate to revisit the records of
those transactions to examine the accounting practices employed and determine whether a
reallocation of funds is warranted.
This experience sheds light on the current 2003 PGA request now before the
Commission. Is IGC positioned to repeat the alleged practice of shifting the incremental benefits
of rate based inftastructure and gas price differentials to IGC ownership rather than to
ratepayers? What is the current volume of stored natural gas at the IGC Nampa storage facilities
and what was the purchase price? Moreover, can captive ratepayers reasonably expect to enjoy
any benefits, which may accrue due to the existence and prudent operation of the storage
facilities?
AES expects IGC to exerCISe every opportunity to provide ratepayer benefits in
accordance with their standing as a corporate citizen and steward, granted monopoly-operating
status. AES also expects IGC to be appropriately compensated and rewarded for prudent
operation of its gas distribution system and storage facilities on behalf of ratepayers. However
during the course of recent years we have witnesses alarmingly widespread wrongful and
deceptive accounting practices at many highly respected corporations in America, which prompts
a certain degree of skepticism. AES contends that is prudent to for the Commission to examine
IGC's current and past accounting practices to reassure the rate-paying public that their interests
are adequately considered. An investigation of this sort should not be overly difficult or
cumbersome, and could be completed within a two-week or less period by simply reviewing past
records.
I GC Marketing and Conservation Practices
AES believes it is always prudent and wise to promote meaningful conservation of
resources. Energy efficiency and conservation of resources are an historical imperative that
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June 13, 2003
should not be allowed to wax or wane according to transitory market fluctuations. AES asserts
that the practices oflGC's conservation efforts warrant scrutiny by the Commission.
Intermountain Gas Company, in general, promotes energy efficiency, to a minimal
degree. IGC provides general educational information about appropriate thermostat settings
weather-stripping, and insulation levels. This is laudable but doesn t necessarily result in
significant, measurable or quantifiable energy savings resources.
IGC also offers some residential customers a rebate incentive of $200 for the installation
of a high efficiency natural gas furnace. That is, a furnace with an efficiency rating of 90 percent
or higher. However, IGC limits participation in the high-efficiency furnace rebate program to
only those customers who are switching ITom another heating fuel to natural gas. Thus, the
implementation strategy of IGC's rebate program is, in reality, a fuel-switching marketing
program designed to capture new customers and gain greater market share.
The bulk of the conservation potential resides within the existing population of natural
gas customers with aging equipment, and with new construction. Most of the existing stocks of
natural gas furnaces were marginally 80-percent efficient systems when new out-of-the-box.
With aging and system degradation, these same systems now have operational efficiencies that
range ftom forty- to sixty-percent depending upon installation and maintenance practices of
individual installers and owners. Moreover, the majority of new homebuilders continue to install
the marginally efficient eighty-percent units. The result is that there is that IGC does not promote
or practice energy conservation in a meaningful way that might help to mitigate the impacts of
aggregate energy consumption on the national market.
IGC's high efficiency furnace rebate program may or may not be a disingenuous
conservation" practice, and this depends upon whether or not IGC receives special accounting
treatment for rebate funds. If IGC ownership supplies monies for the rebate payments as a
marketing strategy, that may be a prudent business practice. However, if IGC receives special
accounting treatment for those funds and the rebate costs are funded by ratepayers, then AES
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asserts that the program should be available to all captive customers for participation. Here too
AES suggests that the details of this program s mechanics are worth a review to insure that this
conservation" practice is appropriately accounted for so that those who receive the benefits of
the program are those who support it financially.
Moreover, I GC could promote some other conservation measures to its customers. One
measure would be the use of zone heating systems. Natural gas fireplace technologies have
advanced to the point where they are highly efficient, and come prepackaged with thermostatic
controls. The energy saving potential is very high simply because these zone heating systems
by their very nature, do not rely on ductwork systems to deliver heating to the occupied space.
Typically, home ductwork systems are notoriously inefficient and have losses that average
twenty-five percent due to leaks and their placement outside the conditioned space. Thus, when
a central furnace system is used, the entire dwelling is heated--even unoccupied spaces-and the
system suffers and additional twenty-five percent loss, on top of the twenty-percent furnace
system loss. In contrast, high efficient zone heating systems (fire places) are now available in
the ninety-percent efficiency range, without any associated duct losses. Thus, if the zone heating
system can be located either in an area of high occupancy, or an area conducive to passive heat
transfer, a homeowner could realize substantial heating cost savings, and increased home equity
value.
Another practice that promotes inefficiency and increased natural gas sales has to do with
new home construction processes. Most new homebuilders are eager to get natural gas service to
the new structure to facilitate finish. It is a common practice for builders to utilize the new home
furnace and heating system to provide heating to dry out drywall mud, painted, and textured
surfaces. Typically, the furnace is allowed to force heated air throughout the home where it
facilitates evaporation of wet surfaces. Then the moisture and contaminant-laden air either
escapes through open doors and windows, or is drawn into the return air system. If done
improperly this is a great revenue enhancer for IGC. Not only does IGC get revenue ITom the
builder for natural gas used to dry the home, but if improperly done, and the homebuilder does
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not use appropriate filtering media to protect the home heating system, the furnace and duct
system become contaminated with construction byproducts.
The contamination of home heating system with construction byproducts has three
effects. First, the efficiency of the new heating system is immediately altered and reduced as the
heat exchangers become coated with contaminants which retards the systems ability to capture
and utilize the heat generated at the burner. This reduction in system efficiency, due to
construction byproduct contamination, lasts for the lifetime of the system so that the new
homeowner will pay higher gas bills to heat his home for the IS-year average life of the system.
The second effect is a health consideration ITom the dust and chemicals that now coat the inside
of the ducts and furnace components. The third effect is that this practice, if detected, voids the
warranty ofthe new furnace for the unsuspecting new homebuyer.
Of course, Intermountain Gas is not responsible for the practices of unethical
homebuilders and trade allies. However, they are aware of the practice, they knowingly facilitate
it by rushing to set meters specifically in response to builders request for construction heat.
There is an economic and trade-ally incentive for IGC to allow this practice to continue, and
therefore are they are complicit.
These factors, whether the failure to promote efficient furnaces or zone heating systems
or enabling of poor and unethical building practices result in unnecessarily high future gas bills
and potential health hazards. Further, these practices result in increased energy use that
contributes to and exacerbates the demand for natural gas and increased natural gas prices.
These practices, or lack thereof, constitute negligence on the part oflGC to properly conduct its
business in a manner responsible to its customers and to society, and to the benefit of IGC
ownership through increased sales.
Rate Structure vs. Profit Margin
Let us now turn our attention to gas rates and profitability. If energy rates are based upon
cost-of-service, with an equal profit percentage applied to those costs for various customer
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classes, then there is an incentive for increased cost-of-service and increased energy costs. The
math seems simple. For ease of discussion let us assume the approved profit margin is nine
percent per unit of energy-in this case a therm of natural gas. In addition, let us also assume
that, due to all the various aggregated impacts affecting energy use and supply nationwide, the
cost per unit of energy rises ftom SO cents, to a dollar per thermo Under these assumptions, it
appears that the local gas utility will see a doubling of their profit margin ITom 4.5 cents per
therm to 9 cents per therm; even though the notion exists that the cost increase of the PGA is
simply a pass-through of higher energy costs, over which we have no control, and which
provides no additional profit for IGc.
This may not be the appropriate proceeding to consider IGC's approved rate of return
ceiling. But IGC's internal hurdle rate of 12.S percent represents an enviable investment
opportunity available to only a very few over the past three years.
Conclusion
AES has attempted to raise some of the issues that impact the cost of natural gas globally,
and locally, and some of the practices Intermountain Gas employs in its own behalf that may not
represent the best interests of its captive customers. For the reasons and issues detailed, AES
believes this PGA rate request presents an opportunity to examine more closely some aspects of
IGC's practices. AES believes and asserts that such examination will provide insights to
counterbalance IGC's arguments in support of their PGA rate increase request, and perhaps
correct some previous accounting errors or omissions
Recommendations
AES recommends that the Commission:
1. Examine data ITom past operation ofthe Nampa natural gas storage facility, prices paid for
the gas, prices the gas was sold at, and whether any extra marginal benefit was
appropriately distributed to ratepayers;
2. Request information on current factors of operation of the Nampa gas storage facility to
determine what benefits may now be due to ratepayers;
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3. Determine whether rebate program accounting practices employed by IGC are
appropriate; whether any modification of program operation is warranted; and whether
any accounting adjustments are warranted;
4. Require IGC to pro actively intervene on behalf of customers to insure that reasonable
expectations of homebuyers are met regarding homebuilder practices and home heating
system integrity;
S. Require IGC to provide educational customer information literature regarding potential
building practice hazards, mitigation opportunities, and efficient central and zone space
heating options so customers may make informed gas appliance purchase decisions.
AES provides these comments in the belief that they hold insight and value for the
Commission and the customers of Intermountain Gas Company. If the Commission does find
that the comments provided herein represent a unique value to the Commission and to IGC
customers, AES would like to apply for Intervenor funding to support its ongoing efforts.
Respectfully submitted this 13th day of June 2003.
AES COMMENTS
INT-03-
June 13, 2003
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that on the day of June 2003, I caused to be served a true and
correct copy ofthe forgoing by the method indicated below, and addressed to the following:
John Hammond
Deputy Attorney General
Idaho Public Utilities Commission
472 W. Washington Street (83702)
O. Box 83720
Boise, ID 83720-0074
7 copies
S. Mail Fax By Hand Email
Michael Huntington, Vice President - Marketing & External Affairs
Intermountain Gas Company
SSS S. Cole Road
O. Box 7608
Boise, ID 83707
S. Mail Fax By Hand E mail
Morgan W. Richards Jr.
Moffatt, Thomas, Barrett, Rock & Fields CHTD
US Bank Plaza Bldg 10th Floor
101 S. Capitol Blvd.
Boise, ID 83701-0829S. Mail Fax By Hand Email
AES COMMENTS
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June 13, 2003