DR 98-030
NORTHERN UTILITIES, INC.
1998 Summer Cost of Gas Adjustment
Order Approving the Cost of Gas Adjustment
and Monthly Adjustments
O R D E R N O. 22,917
April 30, 1998
APPEARANCES: LeBoeuf, Lamb, Greene, and MacRae by
Scott J. Mueller, Esq., on behalf of Northern Utilities,
Inc.; and Michelle A. Caraway, Robert F. Egan and Stephen P.
Frink for the Staff of the New Hampshire Public Utilities
Commission.
I. PROCEDURAL HISTORY
On March 11, 1998, Northern Utilities, Inc.
(Northern or the Company) filed with the New Hampshire
Public Utilities Commission (Commission) its Cost of Gas
Adjustment (CGA) for the 1998 summer period. Northern's
filing was accompanied by the pre-filed testimony and
supporting attachments of Michael J. Harn, Rate Analyst.
The filing proposed a 1998 Summer CGA credit of $0.0107 per
therm.
Northern informed customers of the impending
change by publishing a copy of the Commission's Order of
Notice in the Manchester Union Leader on March 21, 1998 and
in the Foster's Daily Democrat, Portsmouth Herald and
Lawrence Eagle Tribune on March 23, 1998. The Order of
Notice also notified the Company and its customers that the
Commission Staff (Staff) was recommending a change in the
CGA mechanism that would allow Northern to adjust the CGA
rate on a monthly basis.
On April 10, 1998, Northern filed with the
Commission a revised Cost of Gas Adjustment for the 1998
summer period. Northern's revised filing included a
supplier refund that had been inadvertently omitted in the
original filing and updated supplier prices as quoted in the
most recent Wall Street Journal. The April 10, 1998 filing
proposed a 1998 Summer CGA credit of $0.0093 per therm.
Apart from the Office of Consumer Advocate (OCA)
which is a statutorily recognized intervenor, there were no
intervenors in this docket. A duly noticed hearing on the
merits was held at the Commission on April 14, 1998.
II. POSITIONS OF THE PARTIES AND STAFF
Northern Utilities, Inc.
Northern witness Joseph A. Ferro, Rate Services
Manager, adopted the pre-filed direct testimony of Michael
J. Harn and explained the calculation of the CGA and its
impact on customer bills. Mr. Ferro also testified
regarding Northern's position with regard to monthly
adjustments to the CGA rate and how Northern would implement
such a change to the CGA mechanism.
A. Calculation and Impact of the Firm Sales CGA
The proposed 1998 summer CGA credit of $0.0093 per
therm was calculated by reducing the anticipated cost of gas
of $3,609,979 for net adjustments of ($208,221) and dividing
the resulting anticipated costs of $3,401,758 by projected
therm sales of 10,549,260 to arrive at a per unit cost of
gas of $0.3225 per therm, and then deducting the base summer
cost of gas of $0.3318 per therm.
Northern's proposed 1998 summer CGA is a credit of
$0.0093 per therm for Firm Sales customers, representing a
decrease of $0.0063 per therm from the 1997 summer CGA
credit of $0.0030 per therm.
The proposed firm sales CGA rate of ($0.0093) per
therm will reduce an average residential heating customer's
monthly gas bill by approximately $0.31, or 0.95%, from last
summer.
B. Monthly Adjustments to the CGA Rate
Staff recommended that Northern consider a change
in the CGA mechanism identical to that proposed by
EnergyNorth Natural Gas, Inc. in its 1998 summer CGA filing
(Docket DR 98-015) and approved by the Commission in Order
22,890 (March 31, 1998).
Staff proposed that Northern have the ability to
adjust the approved CGA rate upward or downward monthly,
based on the Company's calculation of the projected over or
under collection for the period and to apply the adjustment
on a bills rendered basis. The adjusted CGA rate would not
increase or decrease by more than plus or minus 10% of the
approved unit cost of gas. Should the projected over or
under calculation for the period exceed 10% of the approved
total anticipated cost of gas, the Company would file with
the Commission for a change in the CGA rate. The filing
would be contingent upon Staff's determination that the
ensuing procedural schedule would allow for an order to be
issued by the Commission prior to the first day of the last
month of the CGA period.
During cross-examination, Mr. Ferro agreed that
the proposed change to the CGA mechanism would better match
gas cost revenues with actual gas costs, thereby minimizing
over and under recoveries that are carried forward into
subsequent periods. Reducing the administrative burden
associated with changing the approved CGA rate will enable
Northern to make more accurate and timely adjustments, as
the Company will be able to wait longer before filing and,
therefore, have more actual costs and more timely projected
cost information. Having the ability to change the rates on
a monthly basis would more accurately reflect market prices,
reduce carrying costs, reduce inter-generational subsidies
and reduce price swings in CGA's due to the carry forward of
over and under recoveries.
Mr. Ferro explained that the CGA rates are based
on projected gas costs and volumes. Currently, Northern's
customers are assigned a fixed rate for the period and
unless there is a substantial projected over or under
collection and Northern files for, and receives, Commission
approval of a revised CGA, customers do not pay the related
increase or decrease until the following related season.
Mr. Ferro noted that if the proposed CGA mechanism had been
in place for the 1997/1998 winter period, Northern's average
residential heating customer would likely have experienced a
$32 savings, or 4.2%, over the winter period, and the over
collection to be carried forward would have been $14,697
rather than the anticipated $1,206,956.
Mr. Ferro also indicated that the refund or
recovery of any over or under collection also includes
carrying costs, which can be substantial on large over or
under collections. These carrying costs exaggerate the
increase or decrease in the CGA rate associated with over
and under collections.
Under questioning from Staff, Mr. Ferro indicated
that over and under collections that are carried forward
result in inter-generational subsidies. Customers that have
contributed to the over or under collection and leave the
system do not contribute to the recovery or receive a
refund. Similarly, new customers either pay for costs that
were not incurred on their behalf or receive an unearned
benefit through a refund. Reducing over and under
recoveries will reduce these subsidies.
Mr. Ferro agreed with Staff that the price of gas
remains the same under either the current CGA mechanism or
the proposed monthly CGA mechanism and that the proposed
mechanism could potentially result in more changes of less
magnitude, whereas the current mechanism may result in
larger inter-seasonal swings. Mr. Ferro noted that Northern
does not intend to change the monthly rate if the projected
over or under collection is not significant. If the
projected over or under collection becomes substantial, the
Company would make a correction in the following month,
thereby recovering a portion of the projected over or under
recovery during that month. If in a later month the 10%
trigger mechanism is exceeded, the Company would have
already refunded or recovered a portion of the projected
over or under recovery which will reduce the amount to be
recovered or refunded over the remaining months. Under the
current CGA mechanism, the entire projected over or under
collection would have to be recovered over the remaining
months.
Mr. Ferro expressed reservations regarding the
implementation of the revised CGA mechanism; i.e., monthly
rate adjustments. Mr. Ferro pointed out that while frequent
changes to the CGA rate would more accurately reflect the
propane and natural gas market prices, gas utilities have
traditionally offered customers seasonal price stability and
he believes that price stability is something Northern's
customers like and have come to expect. Therefore, Northern
intends keeping tariff changes to a minimum.
Mr. Ferro expressed his belief that Northern has
effectively managed over and under recoveries in the past
with mid-season adjustments and his concern that future CGA
over and under recoveries may be treated differently by the
Commission in light of the revised CGA mechanism, to the
detriment of the Company. However, he did not object to the
proposed change.
In response to Staff's request that Northern
revise customer bills to delineate gas-only costs on monthly
bills, Mr. Ferro stated that Northern had the capability to
do so but preferred to wait until rates were redesigned to
more accurately identify those costs. As presently
designed, some gas supply costs are included in base rates
and are not reflected in the base unit cost of gas. On
cross-examination, Mr. Ferro did state that the gas costs
included in the non-gas component of base rates were not
significant and that using the per unit cost of gas as
calculated in the CGA to determine a customer's gas costs
would be a fair representation of the energy portion of a
customer's bill.
Staff
After a review of the filing and subsequent
discovery, Staff indicated at the hearing that it believes
Northern's gas purchasing policies are sound and reasonable.
Staff also believes that the proposed 1998 summer CGA credit
of $0.0093 per therm is reasonable and should be approved.
Staff recommended that Northern be directed to
adjust the CGA rate on a monthly basis in order to minimize
any over or under recoveries and better match gas cost
revenues with actual gas costs. Staff stated its position
that the Company bear the responsibility of deciding if and
when to make monthly adjustments, but that given the ability
and relative ease in doing so, Staff expected over and under
recoveries to be limited. Staff also noted that more
frequent price changes would more accurately reflect market
prices and result in less "rate shock" than instituting a
single adjustment later in the period when over or under
collections would likely be greater and have to be recovered
over fewer therm sales.
Staff also recommended that Northern redesign
customer bills at this time to clearly identify gas costs.
Combined with rates that more closely match the market,
customers bills that clearly identify gas costs will enable
ratepayers to better recognize those costs and the inherent
price risks.
OCA
While unable to attend the hearing, the OCA asked
Staff to read the following statement into the record on its
behalf: "Although the OCA has not been heavily involved in
this Northern CGA filing, we understand Staff's proposal to
be an automatic, albeit minor, self-correcting trigger
mechanism subject to reconciliation. As such, we generally
support it as a trial as long as changes are only made when
significant over or under collections are anticipated."
III. COMMISSION ANALYSIS
After having reviewed the record, we conclude that
Northern's proposed 1998 Summer CGA is appropriate and
consistent with its previous performance relative to
minimizing gas costs. Accordingly, we accept and approve
Northern's proposed 1998 Summer CGA rate of ($0.0093) per
therm. We also find that the proposed revision to the CGA
mechanism is reasonable and in the public good.
Allowing the Company the ability to make monthly
adjustments to the CGA rate, within a ten percent (10%)
limit, better serves the purpose for which the cost of gas
adjustment was first implemented; i.e., to more accurately
reflect seasonal use patterns and costs and prevent
continuous rate increase filings. Gas costs remain
unchanged and continue to be passed through to ratepayers on
a dollar-for-dollar basis under each mechanism; however, the
primary difference is the timing of those recoveries. By
enabling the Company to pass along fluctuations in gas costs
on a monthly basis, the Company will be better able to match
those costs with the appropriate customers and to minimize
the over and under collections and associated carrying
costs.
In recent years, the commodities market has
experienced dramatic price fluctuations in natural gas.
Actual gas costs exceeded projections so drastically in two
of the last three years that Northern submitted revised
mid-winter CGA filings to avoid substantial under
recoveries. Even in seasons where the over or under
recoveries have not approached ten percent, substantial over
and under recoveries have resulted in large inter-seasonal
swings. We believe that allowing monthly adjustments to the
CGA rate will help stabilize gas prices by reducing
inter-seasonal swings, carrying costs and the rate impact on
customers when mid-season revised CGA's are implemented.
Natural gas prices are extremely volatile and
often reflect the oil and propane markets. Making customers
aware of changes in gas costs on a more timely basis will
likely coincide with what is happening in other energy
markets and, therefore, be easier for customers to
understand and to respond accordingly.
We agree with Staff that customer bills should
clearly reflect gas costs. Customer bills that delineate
gas costs, combined with pricing that more accurately
reflects period costs, will help educate customers as to
what their gas costs are and the volatility of those costs.
As the industry moves further towards competition, customers
will be better prepared to assess other pricing and supply
alternatives that may become available to them.
We believe that use of a monthly CGA mechanism is
consistent with New Hampshire statutes and administrative
rules. Because the rate can not exceed 10% above the rate
in effect at the start of the CGA period, there is no danger
that ratepayers would be subjected to a new, higher rate
without the opportunity for notice and hearing as provided
for in RSA 378:3. Similar capped rates have been approved
for other utilities for many years by the Commission,
notably rates for interruptible sales and 280 day service.
In addition, N.H. Admin. Rules, Puc 1203.02(f)
provides for CGA rates to be adjusted as frequently as
determined by the Commission. While the practice has been
that there be two CGA changes per year, the Commission
envisioned the possibility of a CGA rate being set more
frequently. A monthly adjustment to the CGA, therefore, is
consistent with the Commission's statutory obligations and
administrative rules.
Lastly, the CGA mechanism is reviewed at least
twice a year. Once the revised CGA mechanism has been
implemented and observed over a reasonable period of time,
it will be re-evaluated to determine if it is achieving the
desired results and should be continued.
Based upon the foregoing, it is hereby
ORDERED, that Northern's Twenty-fifth Revised Page
32, Sheet No. 1, superseding Twenty-fourth Revised Page 32,
Sheet No. 1, N.H.P.U.C. tariff of Northern Utilities, Inc.
providing for a Summer 1998 Cost of Gas Adjustment credit of
$0.0093 per therm for the period May 1, 1998 through October
31, 1998 is hereby approved; and it is
FURTHER ORDERED, that Northern may adjust the
approved CGA rate of ($0.0093) per therm upward or downward
monthly based on Northern's calculation of the projected
over or under collection for the period, but the cumulative
adjustments shall not exceed ten percent (10%) of the
approved unit cost of gas of $0.3225 per therm (or $0.0323
per therm); and it is
FURTHER ORDERED, that Northern will provide the
Commission with its monthly calculation of the projected
over or under calculation, along with the resulting revised
CGA rate for the subsequent month, not less than five (5)
business days prior to the first day of the subsequent
month. Northern shall include a revised tariff page 32 -
Calculation of Cost of Gas Adjustment for firm sales and
revised firm rate schedules if the Company elects to adjust
the CGA rate; and it is
FURTHER ORDERED, that the over or under collection
shall accrue interest at the Prime Rate reported in the Wall
Street Journal. The rate is to be adjusted each quarter
using the rate reported on the first date of the month
preceding the first month of the quarter; and it is
FURTHER ORDERED, that should the monthly
reconciliation of known and projected gas costs deviate from
the ten percent (10%) trigger mechanism, Northern shall file
a revised CGA; and it is
FURTHER ORDERED, that the projected over or under
collection in the calculation does not include any increases
or decreases in revenues resulting from prior monthly
adjustments; and it is
FURTHER ORDERED, that filing a revised CGA is
contingent upon the Commission's determination that the
ensuing procedural schedule would allow for an order to be
issued prior to the first day of the last month of the CGA
period; and it is
FURTHER ORDERED, that pending a Commission order
revising the CGA rate, the Company may adjust the CGA rate
to the extent that the rate shall not deviate more than ten
percent (10%) from the approved unit cost of gas of $0.3225
per therm (or $0.0323 per therm); and it is
FURTHER ORDERED, that Northern shall revise
customer bills to clearly identify the gas costs for the
month; and it is
FURTHER ORDERED, that Northern shall file properly
annotated tariff pages in compliance with this Order no
later than 15 days from the issuance date of this Order, as
required by N.H. Admin. Rules, Puc 1603.
By order of the Public Utilities Commission of New
Hampshire this thirtieth day of April, 1998.
Douglas L. Patch Bruce B. Ellsworth Susan S.
Geiger
Chairman Commissioner Commissioner
Attested by:
Claire D. DiCicco
Assistant Secretary