Rates Will Increase for Avista Customers

A year ago last week, on April 30th, 2015, Avista Corp, which supplies natural gas to customers in Oregon, filed with the Oregon Public Utility Commission (PUC) to increase annual revenue requirement by $8.6 million. This means that, on an annual basis, Avista proposed to raise bills for customers in Oregon by a sum total of $8.6 million dollars per year. On a percentage basis, this is a proposed 16% increase in base rates (this excludes the pass through cost of gas), after the Company had just finished a rate case earlier in 2015 with increases of 5.2% for residential customers.

The most recent rate case is now resolved. CUB, the PUC, Commission Staff, and the NW Industrial Gas Users (NWIGU) took issue with this rate hike and contested many components of it. In particular, one might question, in a time of record low gas prices, how gas bills could go up so dramatically. CUB finds this particularly disturbing, as the double digit increases are, at the moment, tempered by incredibly low natural gas wholesale prices (below 20 cents per therm or $2/dekatherm). What will happen to customer bills if gas returns to prior levels of $4 or even $8?

In particular, when digging into the drivers behind these cost increases, CUB found that the Company could not present sufficient cost benefit analysis demonstrating why some investments needed to be made right at this time. Avista is committing more infrastructure growth than at any time in recent history. CUB could not find why this was necessary, especially in the face of continued conservation and a current IRP which argued that several of these investments were not needed until 2019. PUC staff challenged these investments asking for analysis and business cases assessment.

In short, Avista is baking its pie too large for the customers it serves, and customers have to come up with the money to pay for the pie. Then there is the question of how to slice the pie. Not all customers are created equal, and the question of which customers pay for which upgrades and increases is an important question. In addition, CUB found in this rate case that many of the costly upgrades and investments were driven by large customers, while residential customers are using less. From a residential customer perspective, the system is overbuilt and oversized. The basis for charging industrial customers less while raising rates for residential customers is fundamentally flawed. This was a contentious issue.

CUB disagreed with Avista, PUC Staff and NWIGU on which customers should receive increases in their bills if the company was awarded more revenue by the Commission on an annual basis. Avista, PUC Staff and NWIGU all proposed that residential and general service customers should pay more and that large industrial customers should actually receive a discount, or a decrease. The idea that residential customers should be paying to improve the bottom line of industrial companies through their gas bills is preposterous to CUB. If gas costs are going up, then everyone should bear some of that burden.

Some issues were not as contentious and partial settlements were achieved, reducing the Company’s annual request by $1.8 million, and an additional reduction for depreciation of $675 thousand. In addition, parties came together around energy efficiency investment, including a decoupling mechanism which protects the utility from losses due to customers investing in energy efficiency.

In the end, the Commission approved a little more than half of the Company’s request or an increase of $4.46 million per year, or an increase in base rates of 4.9%. The Commission reduced the authorized return on equity (profit margin) from 9.5% to 9.4%, recognizing that the decoupling mechanism reduces risk to shareholders.

CUB appreciates and agrees with the Commission’s acknowledgment that the parties did not have enough opportunity to respond on the record to Avista’s claims that it needed to make millions of dollars of new capital investment. CUB also is encouraged by the Commission’s re-affirmation of last year’s decision stating that it has a “longstanding policy of not reducing rates for some customers where rates are increased for other customers” absent compelling evidence. That standard was upheld here.

CUB is both frustrated and surprised at the Commission’s ruling which approved all of the capital investments. CUB feels that consumers should not be held hostage to a utility’s imprudence, and therefore, it is Avista’s burden of proof to demonstrate that its investments are prudent and in the best interest of its customers. Concerning plant additions, or investments that CUB, PUC Staff, and NWIGU challenged, the Commission awarded Avista full recovery:

Although we approve full recovery of these capital additions, we share some of Staff’s and the intervenor’s concerns about Avista’s management and analyses of these projects. First, as Avista has implicitly acknowledged, both the East Medford and Ladd Canyon distribution systems have been capacity deficient for some period of time. We urge Avista to maintain up-to-date analyses to ensure adequacy of supply to customers and timing of these projects.

Second, we expect the company’s proposed system upgrades to be thoroughly vetted in the IRP process and that changes in circumstance should immediately be conveyed to parties and to the Commission and taken up in IRP updates. Avista’s 2014 IRP showed that East Medford and Ladd Canyon should be upgraded later in the decade. Soon after they released that IRP, Avista revised its analyses and its need dates without alerting parties and the Commission, depriving the parties the opportunity to scrutinize its new analyses in an IRP update.

Finally, as part of the IRP-vetting process and subsequent rate proceedings, we expect that Avista conduct and present comprehensive analyses of its system upgrades. Such analyses should provide: (1) a comprehensive cost-benefit analysis of whether and when the investment should be built; (2) evaluation of a range of alternative build dates and the impact on reliability and customer rates; (3) credible evidence on the likelihood of disruptions based on historical experience; (4) evidence on the range of possible reliability incidents; (5) evidence about projected loads and customers m the area; and (6) adequate consideration of alternatives, including the use of interruptibility or increased demand-side measures to improve reliability and system resiliency.

In this language, it’s clear that the Commission would like the Company to be more thorough, efficient, and transparent in its proceedings. However, these are expectations that the Company should have always understood to be present. CUB is pleased to see that the bar to which Avista will be held is clear, and on paper. However, CUB does not see why the Company was allowed to slip one under the wire this time.

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