From the pages of
Sublette Examiner
Volume 5, Number 49 - March 2, 2006
brought to you online by Pinedale Online

PNG interim gas increase goes to hearing

by Cat Urbigkit

Pinedale Natural Gas’ request to pass on a wholesale gas increase of $6.40 per decatherm to its customers is slated for public hearing before the Public Service Commission on Tuesday, March 7, at 10 a.m. in the PSC hearing room at 2515 Warren Avenue, suite 300, in Cheyenne.

According to the PSC’s order setting the hearing, last September, PNG filed an application seeking authority to pass on to its customers a net wholesale gas cost increase of $3.04 per decatherm. A decatherm is equal to one million British Thermal Units. One cubic foot of natural gas produces approximately 1,000 BTUs, so 1,000 cubic feet of gas is comparable to 1 million BTUs.

A month after filing its initial application, PNG amended its application to request pass on a cost increase of $6.40 per decatherm instead of the $3.04 requested earlier. The increase would be effective for usage on and after Oct. 13, 2005.

According to the order, PNG stated that gas prices were extremely volatile and the company had delayed the filing hoping to get a better read on what winter prices would be.

“Pinedale’s amended application represented September gas prices of about $8.25 per decatherm and October prices of $9.72 per decatherm,” the order noted. “Future prices indicated a winter strip price of $11.25 per decatherm.”

At an October PSC meeting, the Office of Consumer Advocate staff indicated their belief that PNG was overearning in its general rates. The staff had calculated a rate of return for PNG for 2005 and 2006 of 13.75 percent while the company’s authorized rate is 8.8 percent.

PSC approved PNG’s rate increase on an interim basis, although it set a hearing on this matter, which is the event set for next week. The rate increase was in effect from Oct. 13 through Jan. 19.

PNG had also argued that more appropriate results would be obtained through a general rate case.

The PSC decided: “The commission finds a full review of PNG’s financial results to determine if the company is over-earning is best ascertained with the filing of a general rate case. The commission further finds a general rate case will allow the company an opportunity to collect and use its 2005 financial results to produce the appropriate results needed to review appropriate inputs.”

The rate case is to be filed by the end of March, according to the PSC order. But the application to pass on the gas cost increase is the subject of next week’s hearing and testimony has already been filed in the matter.

PNG President Mickey Gilmer of Colorado testified that PNG purchases its gas through a local marketing company, Summit Energy LLC.

“We have attempted to purchase directly from local producers, but for various reasons, including issues involving low volumes and concerns about the risk of selling to a local distribution company, we have been unable to complete those arrangements,” Gilmer said.

As for the concern that his company was over-earning, Gilmer said: “The concern that we were over-earning really results from the use of improperly matched financial records. I believe that the perception that PNG was exceeding its allowable rate of return results from applying our projected 12 months volumes against our 2004 income tax profit and loss statement and comparing it to our last stipulated 2003 rate case. We disagree with this approach and take exception to it.

“Rather than simply using the appropriate financial information and reflecting the appropriate time period, the use of the incorrect financial information has caused the company a great deal of additional expense which ultimately falls on our customers,” Gilmer said.

Gilmer’s testimony criticized the Office of Consumer Advocate for providing the Sublette Examiner with a copy of its procedural motion regarding the allegation that PNG was over-recovering on its rates. Gilmer called it a “irresponsible action” that caused “irreparable harm to the company’s reputation and is a disservice to our customers.”

PNG Vice President Steve Shute pre-filed testimony in the case as well.

“Nobody could have predicted the explosive growth in Pinedale in 2004-05 from the natural gas drilling boom,” Shute said. “With up to 40 rigs running in the Jonah Field and Pinedale Anticline, the town’s population has swelled dramatically.”

Shute pointed out that PNG has been busy in meeting the demands of the boom, increasing its total investment since 2003 40 percent, with meter counts increasing 35 percent and a 36 percent increase in sales volume.

“The gains of 2004-05 cannot be extrapolated to even 2006,” Shute said. “Every ‘boom’ has its ‘bust’ and PNG doesn’t have deep pockets to sustain a protracted downslide in gas customers and volumes, as experienced by Casper in the mid-1980s.”

Shute testified, “We have no gas reserves. We are a winter-peaking, micro-user to most producers, with no ability to negotiate a favorable long-term price.”

Shute said, “PNG did nothing wrong to deserve this attack.”

Shute testified to the increased salary and benefits it is paying to its workers and the improvements it has made in the gas system for Pinedale, but added, “The outlook for 2006 is that we will not be as busy as we were in 2004-05.”

Shute suggested in his testimony that the allowable PNG return on equity be increased to 12.5 percent.

According to the prefiled testimony of Amy Zamora, a rate analyst with the Wyoming Office of Consumer Advocate, additional analysis since the case was filed “confirmed that PNG was exceeding its authorized rate of return by a 56-percent margin when the interim rates were approved. That equates to a total over-collection of $58,587.”

“Over-earning, by definition, indicates that rates are not just and reasonable,” Zamora said.

Zamora explained that regulation by the PSC is intended to prevent public utilities from abusing their monopoly power at the expense of customers by simulating the results that would be expected in a competitive environment.

Zamora explained: “A utility’s return is based on all of its revenues and expenses, which includes the revenues from gas sales as well as the costs to purchase the gas. Wholesale gas costs are an expense that the company pays as part of providing retail natural gas services, and an expense that is deducted from revenues to find the utility’s return.”

Zamora noted that her analysis made adjustments to revenues and expenses. “My first adjustment to PNG’s projected 2006 results was to include the sales receipts of $1,156,250 that correspond to the estimated sales of 125,000 decatherms. These are the estimated sales that were presented in the pass-on application.”

The Office of Consumer Advocate also made adjustments in PNG’s expenses as related to salaries. From 2003 to 2004, the two officers of the company received raises of five percent, to $84,000 each.

“Now PNG proposes to increase officers’ salaries by $20,000 (24 percent) to a total of $104,000 for 2005 and projects a level of $110,000 for 2006,” Zamora said. “These increases are unsupported and unreasonable as pro forma adjustments.”

Zamora suggested a more appropriate increase be 5 percent per year.

Zamora also testified that PNG is recovering more from rates than its cost of gas by adding interest to its under-collected balance “that essentially increases the costs that it seeks to recover from customers through the pass-on. This, in effect, enables PNG to recover more for its gas than what it paid; it recovers more than a dollar for every dollar spent on gas purchases.”

Zamora testified that PNG should refund $58,587 in excess earnings to customers on a volumetric basis since that is how they were charged.

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