DR 98-031 NORTHERN UTILITIES, INC. - Pelham division 1998 SUMMER COST OF GAS ADJUSTMENT Order Approving the Cost of Gas Adjustment and Monthly Adjustments O R D E R N O. 22,918 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 Pelham Division's Cost of Gas Adjustment (CGA) for the 1998 summer period. Northern's filing was accompanied by a cover letter and supporting schedules of Michael J. Harn, Rate Analyst. The proposed 1998 Summer CGA is a charge of $0.2164 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. 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, testified at the hearing 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 the proposed change in the CGA mechanism. A. Calculation and Impact of the Firm Sales CGA The proposed 1998 summer CGA charge of $0.2164 per therm was calculated by reducing the anticipated cost of gas of $9,661 by the prior period deficiency of $425 and related interest of $28 and dividing the resulting anticipated costs of $9,208 by projected therm sales of 16,796 to arrive at a per unit cost of gas of $0.5482 per therm, and then deducting the base summer cost of gas of $0.3318 per therm. Northern's proposed 1998 summer CGA is a charge of $0.2164 per therm for Firm Sales, representing a decrease of $0.0264 per therm from the 1997 summer CGA charge of $0.2428 per therm. The proposed firm sales CGA rate of $0.2164 per therm will reduce a commercial customer's monthly gas bill, using 200 therms, by approximately $5.28, or 3.23%, 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 in Order 22,890, dated 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 applied 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 Pelham Division's CGA rates are based on projected propane costs and volumes. Currently, Northern's Pelham Division 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, the Pelham customers do not pay the related increase or decrease until the following related season. Under the proposed CGA mechanism, customers would pay the majority of any increase or decrease within the current period. 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 recovery 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 responded 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 not reflected in the unit cost of gas as calculated in the CGA. 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 charge of $0.2164 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 fuel costs and price fluctuations associated with propane. 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 $0.2164 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 propane. Actual propane costs exceeded projections so drastically during the 1996/1997 winter period that Northern submitted a revised mid-winter CGA filing to avoid a substantial under recovery. 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 filing revised CGA's. The Pelham Division is served entirely by propane, and is the only such regulated system in New Hampshire. Propane prices may be extremely volatile, and non-regulated propane customers are accustomed to seeing prices fluctuate and may respond accordingly, either through cutting back when prices are high or purchasing supplies at a fixed price. Making customers aware of changes in fuel costs on a more timely basis will likely coincide with what is happening in the propane and oil markets and, therefore, be easier for customers to understand and respond accordingly. In addition, making the Pelham customers aware of the service and fuel costs required to serve them will enable those customers to better evaluate other energy and pricing options. 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 Sixteenth Revised Page 33, superseding Fifteenth Revised Page 33, N.H.P.U.C. tariff of Northern Utilities, Inc. - Pelham Division, providing for a Summer 1998 Cost of Gas Adjustment charge of $0.2164 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 $0.2164 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 $0.5482 per therm (or $0.0548 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 33 - 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 $0.5482 per therm (or $0.0548 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