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Western Utilities Wrestle with Gas Volatility

With global wholesale natural gas prices decidedly volatile but much lower since mid-year, the reaction among a trio of western utilities is just as volatile. Portland, OR-based Northwest Natural Gas Co. has costs going down and retail rates up; Spokane, WA-based Avista Utilities has lowered even further a previously filed decrease; and Xcel Energy's Texas utility is lowering rates only until after the first of the new year.

Northwest Natural bucked the sharp recent wholesale price declines, asking state regulators in Oregon and Washington to approve 14% and 20% rate increases, respectively. Because of the recent price drop, Northwest said the increases are "significantly below" the amounts projected last July.

In spite of the recent declines, Northwest said it was seeking the increases because its wholesale natural gas costs are still higher than they were a year ago at this time. The natural gas-only distribution utility made the filing to the Oregon Public Utility Commission (PUC) and the Washington Utilities and Transportation Commission (WUTC). Northwest asked the regulators to make the rate changes effective beginning Nov. 1.

In July, Northwest Natural was one of the three major natural gas distribution utilities serving Oregon to warn state officials they expected retail natural gas prices to increase this winter in the range of 10-40%. The state's biggest distributor, Northwest, predicted hikes in the 35-40% range.

Northwest Natural told Oregon regulators at the time that it expected its retail rates to go up 35-40% this winter; Seattle-based Cascade Natural Gas, now a subsidiary of North Dakota-based MDU Resources, predicted its rates would go up 15-20%; and Spokane, WA-based Avista Utilities expects rates for its Oregon customers to rise 10-15%. Avista has subsequently refiled for a gas rate decrease (see related story).

In Texas, plunging wholesale natural gas prices since mid-summer will allow Xcel Energy to lower its retail electric utility charges in Texas at the outset of winter, the Minneapolis-based utility holding company said earlier in October, but other factors will offset those savings longer term. Unrecovered higher fuel costs from last winter and spring, along with a pending general rate increase request, may raise retail power rates later next year.

Xcel's Southwestern Public Service Co. filed two offsetting fuel cost-related proposals Oct. 7 with the Public Utilities Commission of Texas (PUCT) -- a winter fuel cost factor that would lower retail power rates, and a fuel surcharge to collect underrecovered fuel costs from earlier in 2008 that will raise rates.

"The two fuel charges reflect two different time periods -- the winter fuel cost factor will collect projected fuel costs from Nov. 1 to six months out, while the surcharge reflects actual fuel costs from a past period [October 2007 to August 2008]," an Xcel spokesperson said.

The winter fuel factor will lower retail power bills 8.86%, or $8.96/month, in November and December, but in January the surcharge would kick in to raise those same average power bills 6.17%, or $5.69/month.

Separately, the PUCT is reviewing Xcel's proposed increase in its base rates to cover increased operation and maintenance expenses. A decision in that case is not expected before the end of this year, the utility spokesperson said.

Noting that setting the various rates for its utility operations is a complex process, Southwestern CEO David Eves said that "fuel charges can be especially complex when commodity prices are volatile, and we are hopeful we can refine our system to iron out some of those highs and lows."

In Washington state, Avista acknowledged that wholesale gas prices have fallen considerably in the past two months, thus, last Monday the utility refiled its gas cost offset rate adjustment with Oregon regulators, seeking a 4.1% decrease effective Nov. 1 in place of an overall 2% increase it had originally sought last August.

If the request is approved by the Oregon Public Utility Commission (PUC), a residential customer using an average of 53 therms of natural gas monthly would see their monthly bill decrease by $3.28, or 4.1%, for a revised bill of $76.79, Avista said. Annual purchased gas adjustment (PGA) filings pass through changes in Avista's natural gas costs and do not impact company earnings.

Avista's refiling of the case at the Oregon PUC represents a complete turnaround from what utilities were predicting last July at an annual natural gas forum conducted by the state regulatory commission. At that time, the three major natural gas distribution utilities serving Oregon told energy officials and stakeholders to expect retail natural gas prices to increase this winter in the range of 10-40%, with the state's biggest distributor predicting hikes in the 35-40% range.

"Wholesale natural gas prices have fallen considerably since that time, enabling Avista to refile its request for a decrease," said Avista, stressing what has become an industry norm -- that wholesale gas prices fluctuate as a result of many factors, similar to the price of crude oil. "To manage price volatility, Avista pre-purchases about two-thirds of the gas needed to meet customer demand for the coming winter.

"While prices may fluctuate, the efficiency of natural gas remains constant, about 90%, especially when used directly in space and water heating systems," said the combination utility that operates in three Northwest states (Washington, its main state, along with and Idaho). Avista serves about 351,000 electric and 310,000 natural gas customers in the three states.

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