Semstream Seeks 26-Percent Boost In Propane Rates

Filing with corporation commission says company lost money in 2010, higher surcharges requested

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Come January, SemStream wants a rate increase that will boost the average propane bill in Payson by about 26 percent, according to testimony before the Arizona Corporation Commission (ACC).

The company lost nearly $300,000 in 2010 and the proposed increase would boost revenues by an estimated $1.56 million, according to testimony by company officials at the hearing.

The increase would raise the year-round average monthly bill for a homeowner connected to the in-ground system from $60 a month to $76 a month, according to testimony by a consultant hired by SemStream to sell the rate increase to the commission.

One of four propane companies operating in Rim Country, Payson SemStream has 7,700 customers connected to propane pipelines and about 2,000 customers who buy propane from the company to fill tanks. The corporation commission regulates only the in-ground pipe system rates.

SemStream also sought permission to more than double the surcharge it can slap on bills to make up for the rise in propane prices above its base rate.

Those existing surcharges caused a furor two years ago when the company tripled the monthly bills for many customers in the face of a sharp run-up in oil prices worldwide.

The corporation commission launched an investigation into those price increases in 2009, but concluded the company followed the rules in imposing the surcharges. However, investigators did reproach SemStream for failing to communicate effectively with its customers.

The issue was complicated in 2009 by the bankruptcy of its national parent company, which faced investigations and lawsuits as a result of its alleged effort to corner the propane market and boost prices nationally. Since then, the parent company has emerged from bankruptcy.

SemStream Payson is now asking for the first increase in its base rate in 14 years. In that time, the cost of a barrel of oil has risen from $21 to $105. At the end of trading Monday, the price of oil was $87.56 Most propane is a byproduct of oil production and so its cost mirrors the cost of oil.

The new proposed rate structure would increase average bills for big commercial customers by 12.5 percent, but the filing said the company makes a much better profit margin now on those commercial customers. The base rate for schools would jump 20 percent.

In addition, the monthly connection fee would rise from $25 to $30 under the proposed rates. Commercial customers would for the first time pay a flat, $30 monthly fee. The average commercial customer’s bill would rise from about $152 to about $184.

The proposal would also increase the hourly charge for repairs and service from $25 an hour to $30 an hour, or $60 an hour after regular business hours.

The filing said propane costs 10 times as much as natural gas, partly because it’s a byproduct of oil refining but also because it’s often hauled to towns like Payson in trucks rather than delivered in pipelines. It would cost an estimated $100 million to build a natural gas pipeline into the Rim Country, according to the filing.

The company said it needs the 26 percent increase in its base rate to compensate for a steady, 2 percent annual decline in gas consumption by the average customer. Per-capita propane use in Payson has declined by 27 percent in the past 14 years, according to the company’s filings. However, the number of customers has more than doubled since 1997.

“The impact of the conservation and efficiency increases has been to significantly reduce the margin per customer and, accordingly, the return to SemStream,” Payson SemStream General Manager Douglas Mann told the commission.

Two years ago, the abrupt rise in bills due to the surcharges spurred public hearings, letters of protest and a campaign led by Payson Mayor Kenny Evans to convince the corporation commission to reverse or modify the surcharges. However, the corporation commission’s investigation came down on the side of the company.

This time, SemStream’s request for a big hike in the base rate and a doubling of the surcharge has attracted little attention.

The filings with the corporation commission included accounts of the sometimes-complex adjustments to both revenue and expenses the company used to support its request for a rate increase that will hit homeowners hardest. The requested change in the rules for when it can impose a surcharge will likely make bills rise much more quickly when oil prices spike.

The budget summary submitted with the rate increase request indicated the company spent $6.7 million but collected only $6.4 million. If the rate increases requested now had been in effect last year, the company would have collected nearly $8 million.

Instead of a 4 percent loss, the company would have recorded an 18 percent return on revenues.

The budget included a $640,000 “management fee,” presumably paid to the parent company. That’s about double the loss reported for 2010. The budget also included $4.3 million to purchase gas and $436,000 for salaries and benefits.

Accounting Manager Kathy Wolverton worked her way through many of those adjustments in dense accounting terms in her testimony before the corporation commission.

For instance, she said last year was on average about 10 percent colder than usual. As a result, the company sold an unusual amount of propane. She said this amounted to a $335,000 adjustment in the revenue when it came time to calculate the base rate.

She also detailed other adjustments used to discount various revenues including an extra $94,000 paid to the parent company for a study, an $98,000 adjustment because of a “vaporizer” that got counted twice and a $213,000 adjustment because the financial statements understated certain gas costs in previous years.

She also made the case for changes in the use of surcharges to ensure the company can recover the cost of buying fuel above its established base rate. Those surcharges caused most of the controversy in 2009 when many people protested the abrupt doubling and tripling of their monthly bills.

The current rules allow the company to impose a surcharge of up to 24 cents per therm whenever its cost for buying gas gets above $120,000 more than it can charge for that gas using its base rates. By the same token, the system requires the company to start giving credits or refunds any time propane prices fall so low that it has collected at least $120,000 too much.

Back in 2009, the company ended up over collecting $652,000 from Rim Country customers, which it then refunded in lower rates during the winter of 2009.

The company now wants to impose the surcharge as soon as it starts paying above the base rate instead of waiting until the underpayments hit $120,000. Moreover, it wants those surcharges to rise to as much as 60 cents per therm, instead of stopping at 24 cents per therm. On the other hand, the company doesn’t want to have to start providing refunds or reduced rates until it has over collected $265,000 instead of $120,000.

Those changes will benefit the customers by smoothing out the big swings in the monthly bill and by ensuring consumers have a better idea how much they’re ultimately paying for propane, Wolverton insisted in her testimony.

The changes will “send more accurate pricing messages to consumers and smooth rate shock. In a competitive market such as we face in Payson,” said Wolverton. “It is important that consumers receive accurate pricing signals so they can make informed decisions regarding whether to change providers.”

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