Public Utility Commission s11

PENNSYLVANIA PUBLIC UTILITY COMMISSION Harrisburg, PA 17105-3265

Public Meeting held June 8, 2000

Commissioners Present:

John M. Quain, Chairman Robert K. Bloom, Vice Chairman Nora Mead Brownell Aaron Wilson, Jr. Terrance J. Fitzpatrick

Pennsylvania Public Utility Commission R-00994785 The Office of Consumer Advocate R-00994785C0001 Kenneth Springirth C-00993028

National Fuel Gas Distribution Corporation

T.W. Phillips Gas and Oil Co. National Energy Marketers Association

Pennsylvania Petroleum Association and Small Customer Marketer Coalition

Texas Eastern Transmission Corporation PECO Energy Company Reliant Energy Retail, Inc. AFL-CIO Gas Utility Caucus NFG Industrial Intervenors Community Action Association of Pennsylvania, and Independent Oil and Gas Association of Pennsylvania TXU Energy Trading Company, and Statoil Energy Services, Inc., Intervenors OPINION AND ORDER

2 BY THE COMMISSION:

Before the Commission for consideration and disposition are the Exceptions filed by various Parties to the Recommended Decision (R.D.) of Administrative Law Judge (ALJ) Larry Gesoff issued on April 6, 2000, in the above- captioned proceeding. Exceptions were filed by National Fuel Gas Distribution Corporation (NFGD) and also by the Office of Consumer Advocate (OCA). Reply Exceptions (R.Exc.) were filed by NFGD, the OCA, the Office of Trial Staff (OTS), and National Fuel Gas Industrial Intervenors (NFGII). ALJ Gesoff recommended the adoption of terms and conditions contained in the Joint Petition for Settlement of the Restructuring Filing with the exception of the monthly banking service options, which the ALJ recommended be reserved for resolution through the collaborative process. Additionally, the ALJ recommended that the resolution of NFGD’s back-up service for natural gas suppliers (NGSs) be resolved in a future Section 1307(f) proceeding. (66 Pa. C.S. §1307(f)).

3 I. HISTORY OF THE PROCEEDING

On October 1, 1999, NFGD submitted to the Commission its restructuring filing pursuant to the Natural Gas Choice and Competition Act, 66 Pa. C.S. §§2201-2212 (Act). An Initial Prehearing Conference was scheduled for October 22, 1999, and ALJ Larry Gesoff was assigned to preside over the proceeding and issue a Recommended Decision.

The following filed Petitions to Intervene or a Complaint: T.W. Phillips Gas and Oil Co. (T.W. Phillips); National Energy Marketers Association (NEMA); Pennsylvania Petroleum Association (PPA) and Small Customer Marketer Coalition (SCMC); Texas Eastern Transmission Corporation (TETCO); AFL-CIO Gas Utility Caucus (AFL-CIO); PECO Energy Company (PECO Energy); Reliant Energy Retail, Inc. (Reliant Energy); Community Action Association of Pennsylvania (CAAP); NFGII; Independent Oil and Gas Association (IOGA); Kenneth Springirth (Complaint docketed at C-00993028); TXU Energy Trading Company (TXU); and Statoil Energy Services, Inc. (Statoil). Additionally, the OTS and the Office of Small Business Advocate (OSBA) filed a notice of appearance.

Subsequently, on October 13, 1999, ALJ Gesoff issued the First Pre- hearing Order directing the Parties to file prehearing memoranda in advance of the Prehearing Conference. The OCA filed a Complaint, docketed as above, on October 15, 1999.

The Commission held a Prehearing Conference on October 22, 1999 resulting in the issuance of the Second Prehearing Order, also on October 22, 1999, setting forth a litigation schedule, granting several intervention petitions, and granting three (3) Motions Pro Hac Vice. The Third Prehearing Order, issued November 18, 1999, granted other interventions and directed CAAP, a corporation, to retain counsel to represent it. The Fourth Prehearing Order, issued December 2, 1999, granted other intervention petitions and consolidated the Springirth Complaint with this proceeding.

On December 16, 1999, the OTS, the OCA, the OSBA, CAAP, TETCO, TXU, and Statoil each filed written direct testimony.

The First Interim Order In The Nature Of A Rule To Show Cause (First Interim Order), issued December 21, 1999, directed CAAP to submit reasons by January 11, 2000 why its Petition to Intervene should not be stricken for failure to have counsel represent it. On January 11, 2000, at 4:59 p.m., ALJ Gesoff received an e-mail containing the Notice of Appearance of Joseph L. Vullo, Esquire, on behalf of CAAP. Additionally, he received an express-mailed copy of the Notice of Appearance on January 12, 2000.

On January 24, 2000, the Second Interim Order Denying Motion To Strike was issued denying the motion to strike portions of OCA witness Mierzwa’s testimony which NFGII filed on January 19, 2000, and which the OCA answered on January 24, 2000.

The Commission held a Public Input Hearing on January 25, 2000, in Erie. Eight (8) of the approximately eighty (80) people who attended testified.

Rebuttal testimony was filed on January 25, 2000 by NFGD, the OCA, and NFGII. Surrebuttal testimony was filed on February 8, 2000, by the OTS, the OSBA, CAAP, the OCA, and TETCO.

2 On February 8, 2000, NFGD announced by e-mail to certain Parties, including the OTS, the OSBA, IOGA, TETCO, TXU, Statoil and NFGII that they reached a settlement, in principle, of all issues in this proceeding.

Subsequently, the Commission held an Evidentiary Hearing on February 15, 2000 in Pittsburgh. The record closed on February 15, 2000.

On March 9, 2000, NFGD, the OTS, the OCA, and NFGII filed Main Briefs. Additionally, on March 17, 2000, NFGD filed a Joint Petitoin for Settlement of Restructuring Filing (Settlement) executed by the following Parties: the OTS, the OSBA, the OCA, NFGD, NFGII, Texas Eastern, TXU, and Statoil. SCMC and PPA were noted as not objecting. T.W. Phillips, an inactive Party, also signed the Joint Petition. Reply Briefs were filed on March 21, 2000, by NFGD, the OCA, and NFGII. On March 23, 2000, NFGD provided an additional signature page for the Settlement indicating that CAAP had joined in the Settlement. On March 24, 2000, counsel for PECO Energy indicated that her client did not object to the Settlement. The OCA and the OSBA filed statements in support of the Settlement. The Recommended Decision was issued April 6, 2000. Thereafter the Exceptions and Replies now before us were filed.

3 II THE SETTLEMENT

As discussed herein, all Parties to this proceeding, except the OCA, have either joined in the Settlement or have expressed no objection to it. NFGD, the OTS, TETCO, and the OSBA filed statements in support of the Settlement. The OSBA and the OCA filed separate statements. Said statements have been incorporated and appended to the Settlement.

Examples of the issues that are resolved in the Settlement include the following:

1. Procedures for year-round enrollment into NFGD’s System-Wide Energy Select Program are established, including procedures for transfer of gas in storage to or from suppliers in a manner that reduces potential for sales customers to be disadvantaged by effects of enrollment on purchased gas costs. Settlement, ¶A(1).

2. The provision for lost and unaccounted for gas for the System-Wide Energy Select Program is reduced from 3.25 percent to 2.5 percent. Settlement, ¶A(2).

3. The criteria for supplier groups are reduced to fifty (50) customers or annual consumption of 5,000 MCF. Settlement, ¶A(3).

4. A procedure for monitoring the development of a competitive market for small customers is established, which includes provisions for a collaborative to address issues affecting competition if a competitive market does not develop. Settlement, ¶B.

4 5. Permission for construction of facilities that, when completed and in service, will reduce NFGD’s need to retain capacity from Tennessee Gas Pipeline Company. Settlement, ¶C.

6. NFGD will retain control of facilities and resources needed to balance its system and to provide service during extremely cold periods. Settlement, ¶D.

7. A format for bills to customers has been established. Settlement, ¶E.

8. NFGD will develop an Operational Procedures Manual for use by suppliers. Settlement, ¶G.

9. NFGD will study and report on the possibility of expanding its Low Income Residential Assistance program. Settlement, ¶H.

10. NFGD will provide annually in Section 1307(f) proceedings information concerning reliability of service. Settlement, ¶J.

11. Procedures for compliance with Commission Orders on gas restructuring are established. Settlement, ¶¶K and L.

ALJ Gesoff found the Settlement to be in the public interest. Further, he determined that it resolved all issues in the proceeding, except those raised by the OCA and enumerated in the Recommended Decision. In addition, the Settlement saves the Parties and the Commission significant resources, which would have been spent in fully litigating the issues.

5 III. DISCUSSION

We note that, although the ALJ did not make specific findings of fact, he did reach six (6) conclusions of law. Additionally we note that ALJ Gesoff made findings throughout his Recommended Decision. We incorporate those herein by reference, unless modified or reversed, either expressly, or by necessary implication, by this Opinion and Order.

We further note that any issue or exception not specifically addressed has been duly considered and will be denied without further discussion. It is well settled that we are not required to consider expressly or at length each contention raised by the parties. (Consolidated Rail Corporation v. Pennsylvania Public Utility Commission, 155 Pa. Cmwlth. Ct. 537, 625 A.2d 741 (1993); see generally, University of Pennsyl- vania v. Pennsylvania Public Utility Commission, 86 Pa. 410, 485 A.2d 1217, 1222 (1984).

It should be noted that, for those matters which were not subject to Exceptions and for which we do not modify or reject the ALJ’s analysis or conclusions, we are adopting the recommendations of the ALJ.

We also want to emphasize that it is this Commission’s policy to encourage settlements, pursuant to our Regulations, at 52 Pa. Code §5.231. We have stated that “the results achieved from a negotiated settlement or stipulation, or both, in which the interested Parties have had an opportunity to participate are often preferable to those achieved at the conclusion of a fully litigated proceeding.” (52 Pa. Code §69.401). The general benchmark for determining the acceptability of a settlement is whether the proposed terms of the settlement promote the public interest. (Warner v. GTE North, Inc., Docket No. C-00902815 (Order entered April 1, 1996); Pennsylvania Public Utility Commission v. C S Water and Sewer Associates, 74 Pa. PUC 767 (1991)). We have

6 recognized that, as a compromise of the signatory Parties’ position, a settlement arguably fosters the public interest. (Pennsylvania Public Utility Commission v. Philadelphia Electric Co., 60 Pa. PUC 1 (1985)).

Retained Capacity Cost Recovery

In April of 1999, NFGD implemented a program design for customer choice (Energy Select Program). This pilot program expanded NFGD’s transportation program to provide all customers the opportunity to choose a NGS other than NFGD. The Energy Select Program assigns to NGSs most of the interstate pipeline transportation and storage capacity that NFGD uses to provide service to its small customers. NFGD retains certain capacity to balance deliveries by NGSs and customer consumption, to provide service to isolated markets, and to ensure reliability.

NFGD’s restructuring filing modifies the Energy Select Program. Currently, NFGD retains upstream capacity, which it makes available for use by all NGSs, and charges the cost of the retained capacity to small customers. In this proceeding, NFGD proposes to retain the upstream capacity, not release it to NGSs, and charge the cost of the retained capacity to small customers (Small Aggregation Transportation Customers (SATC)) through a retained capacity component of its purchased cost gas (PGC) rates.

In its Exceptions, the OCA argues that NFGD’s proposal to allocate costs associated with the capacity discussed herein to SATCs is discriminatory and therefore inconsistent with the Act. (OCA Exc., p. 5). We disagree.

As ALJ Gesoff noted in the Recommended Decision, the Commission’s rulings in the prior Section 1307(f) proceedings must control the outcome of the issue the OCA has raised until and unless it makes new and convincing arguments in this

7 proceeding related to the purposes of the Act. See R.D., citing Pa PUC v. National Fuel Gas Distribution Corporation, Docket No. R-00922499 (Order entered July 22, 1993), Pa. PUC v. National Fuel Gas Distribution Corporation, Docket No. R-00932885 (Order entered July 29, 1994), and Pa. PUC v. National Fuel Gas Distribution Corporation, Docket No. R-00953487 (Order entered July 31, 1996).

Further, as noted in the Recommended Decision, Paragraph 7(C) of the Settlement reserves the issue of allocation of the costs for new capacity for a future Section 1307(f) proceeding. (See R.D., p. 26, citing Settlement, at 7(C)). As such, we find that the Exception of the OCA is denied.

Monthly Balancing Service Options

The OCA argued that NFGD should provide its smaller customers with the same monthly balancing option that is available to its larger transportation customers. (R.D., p. 26, citing the OCA’s M.B. at 20-24, R.B., pp. 23-27). The OCA’s position is that the we should delay requiring a monthly balancing option until the collaborative process on new and renewed capacity, but that we should determine, now, that undue discrimination results unless the smaller class of customers have the same option as large transportation customers. (R.D., p. 26).

NFGD argued that the OCA’s assertion was premature and that disposition of the issue should be reserved for the collaborative process. ALJ Gesoff concluded that no discrimination occurred and that the issues should be reserved for the collaborative process. We agree.

Specifically, NFGD’s monthly balancing service offered to large customers is not a firm service because gas is only deliverable to the customer to the extent it is delivered to NFGD. (R.D., p. 29, citing NFGD Ex. No. 4, p. 79.) If NFGD offered this

8 service on the same terms to the small customer classes, it would not comply with Section 2203(2) of the Act which prohibits an NGS or distribution company from offering interruptible service to any essential human needs retail gas customer or to any residential gas customer. In contrast, NGSs serving small customers are assigned storage so they will have the assets necessary to meet requirements of customers in excess of volumes deliverable under the assigned upstream capacity. (R.D., p. 29, citing NFGD St. No. 202, p. 5-7). Discrimination among customer classes is allowable as long as it is not unreasonable or undue. We have held that “there may be discrimination between classes of customers, provided that it is not unreasonable and that it rests on sound basis of fact.” (See R.D., citing United Natural Gas Co. v. Pa. PUC, 22 A.2d 752, 757 (Pa. Super. 1943); see also Rydal-Meadowbrook Ass’n v. Pa PUC, 98 A.2d 481, 485 (Pa. Super. 1953). Different classes of customers necessarily receive different types of service. (Application of PECO Energy Co., for Approval of Restructuring Plan, Docket No. R-00973953 (Order entered December 23, 1997), p. 175. (Citation omitted).

In its Exceptions, the OCA asserts that the discrimination alleged is neither reasonable nor rested on sound basis of fact. For the reasoning set forth herein above, we disagree. The OCA’s Exceptions on this issue are denied.

System Maintenance Orders (SMO’s)

1. Issue

To implement the Act, NFGD proposed to assign to NGSs most of its interstate pipeline transportation and storage capacity that NFGD previously used to service small volume customers. (See NFGD M.B., p. 4. As a result of this assignment, NFGD proposed to apply SMOs to the NGSs that are assigned this capacity to ensure firm service for Energy Select Program customers by directing where these customers’

9 supplies enter the system. NFGD represented that it would apply such direction only when necessary. (NFGD M.B., pp. 21-22).

Under NFGD’s Rate Schedule SATS, Energy Select suppliers are subject to SMOs, which are intended to ensure that supplies enter NFGD’s system where and when they are needed. (Proposed Tariff, Original Page 83AP). NFGD argued before the ALJ that each time it chooses to issue an SMO, Energy Select suppliers must deliver gas to specific points on NFGD’s system, National Fuel Gas Supply Company (Supply’s) system, and pipelines with whom NFGD has retained upstream capacity, to deliver additional gas to or from storage, or all of the above, as directed by NFGD, on four (4) hours’ notice. NFGD proposed not to impose SMOs on larger volume customers.

The OCA argued before the ALJ that there is no sound basis for NFGD to make this distinction between Energy Select suppliers and larger volume transportation customers. The OCA also argued that NFGD should apply the same SMOs to larger customers as well as NGSs on the same basis.

NFGD argued that the purpose of SMOs is to ensure firm service for Energy Select Program customers. (NFGD St. No. 203, p. 16). The OCA countered that NFGD has not shown that any one type of customer imposes greater risks on NFGD’s system such that different types of customers should be held to stricter standards for delivery. NFGD’s system consists of a number of isolated NFGD systems which are interconnected only by Supply’s transmission facilities. (Tr., p. 103).

NFGD argued that all gas delivered to the system is important to the service of all customers because the system “works” by displacement, with the result that some of the gas entering the system from local production will serve core customers and some of the gas delivered by Energy Select suppliers will serve larger customers. (Tr., pp. 132- 136).

10 2. ALJ’s Recommendation

The ALJ proffered the following recommended resolution of this issue:

In my opinion, it is reasonable for NFGD to maintain separate service requirements for NGSs serving small customers and for large transportation customers. MMT customers have not been assigned any of the EFT capacity to be used by Energy Select customers. Although MMT customers are required to use EFT capacity to deliver their supplies to the citygate, this capacity is not necessarily obtained from NFGD. NFGD M.B. at 22. The capacity used by MMT customers is not the capacity to which SMOs apply. Accordingly, there is no need for large transportation customers to be subject to SMOs. NFGII R.B. at 16.

Additionally, MMT customers are subject to OFOs [Operation Flow Orders]. OFOs ensure that MMT customers will bring gas to the citygate where it is needed to prevent operating contingencies on NFGD’s system. Moreover, while NFGD can use SMOs to ensure firm service to Energy Select customers, an OFO does not guarantee a large transportation customer’s receipt of service since such customers have a lower priority of service. NFGD M.B. at 22. As a result, SMOs provide Energy Select Customers with an assurance of firm service. If large transportation customers were subject to SMOs, they would not have that same assurance. In my opinion, NFGD’s SMO procedure is not discriminatory

(R.D., p. 32)

3. Exceptions

In its Exceptions, the OCA argues that NFGD’s SMO provisions violate the Act’s prohibition against unreasonable discrimination. (See 66 Pa. C.S. §2203(4)). The OCA argues that the beneficial impact of SMO’s is not, and cannot be, limited to Energy

11 Select customers since gas flows by displacement. The OCA asserts that SMO’s give as much assurance of firm service to larger customers as smaller transportation customers, since there is no way of knowing whether gas will flow to an Monthly Metered Transportation Service (MMT) customer or an Energy Select customer. (OCA Exc., p. 22).

According to the OCA, NFGD has not provided any evidence that smaller transportation customers pose a greater risk to system integrity than larger transportation customers. The OCA submits that system reliability is just as adversely affected when a large transportation customer’s gas does not arrive as when an SATC customer’s gas does not arrive. (Id).

The OCA argues further that NFGD requires Energy Select suppliers and MMT customers to use Enhanced Firm Transportation (EFT) Capacity to deliver their supplies to NFGD’s citygate. The OCA continues that SATC customers currently have no choice, whereas larger transportation customers have the option to obtain EFT capacity from a source other than NFGD. Therefore, the OCA submits that MMT customers have the benefit of flexibility in obtaining EFT and then use that flexibility to excuse those customers from meeting the same standards imposed on Energy Select suppliers. (OCA Exc., p. 23).

NFGD contends that the OCA has failed to note the distinction between the nature of the service offered to its Energy Select customers and its larger transportation customers. NFGD continues that, pursuant to tariff modifications, which became effective on December 19, 1999, large transportation customers are subject to OFO’s. Accordingly, NFGD states that there is no SMO requirement for larger customers because these customers do not hold the capacity to which an SMO would apply. (NFGD R.Exc., pp. 15-16).

12 NFGD argues further that SMO’s are intended to ensure firm service for Energy Select customers by directing where these customers’ supplies enter the system, when such direction is necessary. NFGD adds that it can use SMO’s to ensure firm service to Energy Select customers because it has assigned transportation and storage capacity to NGSs serving such customers. NFGD concludes that its large transportation customers do not have the same priority of service and, therefore, should not be subject to the same rules as NGSs serving Energy Select customers. (NFGD R.Exc., p. 16).

4. Disposition

Our review of the finding and recommendation of the ALJ, the Exceptions of the OCA, and NFGD’s replies thereto leads us to adopt the finding and recommendation of the ALJ.

Our review of the record before us leads us to conclude that the ALJ correctly found that the proposed SMO procedure is not discriminatory. The OCA’s Exceptions do not refute the findings made by the ALJ to support his conclusion that NFGD’s SMO procedure is not discriminatory.

We agree with the ALJ that it is reasonable to maintain separate service requirements for small customers and for large transportation customers. As noted by the ALJ and NFGD in its Reply Exceptions, the capacity used by the large transportation customers is not the capacity to which SMO’s apply.

Also unrefuted was the ALJ’s finding that SMO’s provide Energy Select customers with an assurance of firm service and that, if large transportation customers were subject to SMO’s, they would not have that same assurance.

13 Consistent with the foregoing discussion, we adopt the ALJ’s finding and recommendation on this issue. We deny the Exception of the OCA.

Cash-Out rules on Natural Gas Suppliers

1. Issue

NFGD proposed to provide to NGSs serving Energy Select customers an aggregated daily deliver quantity (ADDQ) for the NGSs’ group of customers, based upon NFGD's estimate of the amount of gas that NGSs’ customers will consume on that day. Pursuant to the plan, NGSs are required to deliver the ADDQ but are permitted a 2% tolerance in daily deliveries. At the end of each month, NFGD compares the actual deliveries by the NGS to the consumption of the NGSs’ customer groups. The difference represents the "burner tip" imbalance.

NFGD proposed to provide NGSs two (2) options to resolve the burner tip imbalance. First, NGSs may "rollover" the imbalance to the next month and either reduce or increase deliveries, as necessary, to eliminate the imbalance. This, according to NFGD, is a "no cost" option.

Second, an NGS would be permitted to "cash-out" the burner tip imbalance at the end of the month by buying gas from NFGD if it has underdelivered its groups' consumption or by selling gas to NFGD if it has overdelivered. NFGD has priced these purchases and sales at different rates in order to protect its sales customers from increases in costs that might result from cash-out of NGS’s imbalances. NFGD St. No. 201, p. 29, Heine Rebuttal).

For underdeliveries, NFGD proposed to charge suppliers the higher of $7.00/Mcf or 110% of the market price of gas. For overdeliveries, NFGD would

14 purchase gas at the lowest price NFGD offers for spot gas during the month.

The OCA argued before the ALJ that the proposed cash-out provisions are unreasonable because they penalize suppliers for imbalances that are largely outside of their control. The OCA argued that NFGD, not the supplier, estimates each SATC customer’s consumption and determines that customer’s Daily Delivery Quantity (DDQ), then adds all of the supplier’s DDQs together to determine the supplier’s ADDQ. The supplier is required to deliver the ADDQ to NFGD’s citygate. Thus, NFGD estimates the supplier’s customers’ consumption. The OCA argued that, when NFGD’s estimate differs from the actual consumption, the supplier is punished for the imbalance. (OCA St. No. 1, p. 33).

To eliminate what it alleged to be a punitive aspect of NFGD’s cash-out provision, the OCA recommended that the cash-out price be set at 100 percent of the average market price of gas during the cash-out month. (OCA St. No. 1, p. 33). The OCA submitted that this price reasonably estimates the costs suppliers would have incurred to serve their customers had they known the customers’ actual consumption. The OCA further recommended that NFGD consider annual reconciliation procedures to “mitigate the impact which unbilled volumes may have on consumption and delivery imbalances.”

NFGD responded before the ALJ that these provisions are designed to avoid increases in gas costs to its sales customers. For example, if purchases of excess deliveries from an NGS displaces spot purchases by NFGD at a lower price, sales customers' costs will increase. Similarly, NFGD argued that, if it is required to sell gas to a supplier to meet an underdelivery, the cost should reflect NFGD's highest incremental cost of gas. (NFGD M.B., p. 24).

15 NFGD countered the OCA assertion that its cash-out provisions are unnecessarily onerous because marketers are either receiving less than or paying more than the market price of gas and because the imbalance is created by forecasts provided by NFGD. (OCA St. No. 1, p. 33). NFGD continued that, while the price paid or received at a particular moment may be more or less than the instantaneous market price of gas, the analysis is not that simple, because purchases of overdeliveries, for example, may displace opportunities to purchase gas at other times at more favorable prices. Also, NFGD argued that, while it sets the ADDQ, the imbalance is also created by the 2% tolerance around the ADDQ that is provided to NGSs. NFGD insisted that, if such a tolerance is provided, care must be taken to avoid NGSs from abusing the tolerance. (NFGD M.B., p. 24).

NFGD also disputed the OCA’s proposal to set the cash-out price equal to the average “market price” for the month. Although the OCA did not explain the method of determining this price, NFGD assumes it is its average cost of purchases for the month. NFGD pointed to the cross-examination of the OCA witness as illustrating that use of the average market price may encourage marketers to underdeliver the ADDQ when prices are rising during the month and overdeliver when prices are falling.

NFGD opined that the reason is that the market price at any time will be either above or below that for the month. For example, according to NFGD, when prices are rising during a month, NGSs would have an incentive to underdeliver late in the month and simply pay the average for the month to NFGD through a cash out. NFGD continued that, by doing this, an NGS can avoid paying the currently-higher price and, instead, pay the average price for the month. When prices are falling, NGSs would have an incentive to overdeliver late in the month. In the instance of falling prices, NGSs can buy gas at the lower price, overdeliver to NFGD and receive a cash-out under the OCA's proposal at the average price for the month. (NFGD M.B., p. 25).

16 2. The ALJ’s Recommendation

The ALJ recommended adoption of the proposed cash-out procedures. The ALJ found that NFGD’s proposed cash-out provisions are reasonable. The ALJ also noted that a cash-out is voluntary because of the rollover option described herein above.

3. Exceptions

The OCA, in its Exceptions, argues that NFGD’s proposed cash-out punishes SATS suppliers unnecessarily because it pays suppliers less or charges suppliers more than the market price of gas. The OCA maintains that the cash-out price should be set equal to 100% of the average market price of gas during the cash-out month. (OCA Exc., pp. 25-26).

The OCA continues that the mere existence of a rollover has no bearing on the reasonableness of cash-out rates. The OCA submits that an SATS supplier who is forced to choose the rollover may not escape punishment because it may pay a higher price to purchase make-up supplies if the price during the make-up period is higher. (Id).

In its Reply Exceptions, NFGD maintains that purchases of overdeliveries may displace opportunities to purchase gas at other times at more favorable prices. NFGD also points out that, while it sets the ADDQ, the imbalance is also created by the 2% daily tolerance around the ADDQ that is provided to the NGSs. NFGD asserts that, if such a tolerance is provided, care must be taken to prevent NGSs from using that tolerance to their economic advantage and to the corresponding disadvantage of sales customers. (NFGD R.Exc., p. 19).

With regard to the OCA proposal to set the cash out price equal to the average “market price” for the month, NFGD points out that the method of determining

17 this price is not explained by the OCA, but is presumed to be NFGD’s average cost of purchases for the month. NFGD argues that the use of an average price may encourage marketers to underdeliver the ADDQ when prices are rising and overdeliver when prices are falling. (Id).

4. Disposition

Upon our careful consideration of this issue, we shall adopt the ALJ’s recommendation to approve NFGD’s cash-out provisions. We are persuaded this disposition of the cash-out issue is appropriate for several reasons.

First, we agree with the ALJ that the rollover option makes the cash-out voluntary. As the ALJ noted, differences can be created not only by the 2% tolerance allowed NGSs with regard to delivery of the aggregated ADDQ, but also by differences between customers' actual consumption and the ADDQ as set by NFGD. We agree with the ALJ’s admonition to the NGSs that the cash-out option should be reserved for extraordinary circumstances and that care should be taken not to permit increases in the cost of gas for sales customers. (R.D., p. 37).

Second, as noted by the ALJ, pursuant to the SB Rate Schedule, MMT customers that underdeliver in the winter pay NFGD's retail commodity rates plus 25% and pay a 10% increase in the summer, to the extent that the customer has not elected standby service. Further, overdeliveries in excess of a 10% tolerance are subject to additional charges. The 10% tolerance permitted MMT customers is paid for through the balancing charges contained in MMT rates. (Tr. 103). The ALJ found that the OCA's contentions that MMT customers are given a greater tolerance ignores the fact that they pay for storage in their rates while NGSs serving Energy Select customers are assigned storage and, therefore, arguably should have no tolerance.

18 Consistent with the foregoing discussion, we adopt the ALJ’s recommendation and deny the Exceptions of the OCA.

Storage Transfer Provisions

1. Issue

NFGD allows NGSs to take a quantity of storage in anticipation of obtaining customers, fill that storage in the summer, and then seek to return the gas to NFGD if they fail to obtain sufficient customers. NFGD pays the NGS its lowest monthly price for gas during that summer to avoid any increase in customer costs charged to its sales customers.

The OCA argued before the ALJ that, as with NFGD’s cash-out proposal, suppliers receive less value for gas than they would have received if the gas were sold at market price. The OCA asserted that these storage inventory transfer provisions penalize suppliers unnecessarily. The OCA argued that NFGD prescribes storage inventory levels consistent with levels NFGD would maintain to serve the supplier’s customers had they remained on sales service. The OCA concluded that whether NFGD or an NGS is acting as the supplier, gas will be purchased, injected, and withdrawn on relatively the same basis, and costs will be similar.

The OCA recommended that the storage inventory transfer price be based on NFGD’s weighted average commodity cost of gas during the storage injection period for transfers which occur before the winter heating season (November 1). (OCA St. No. 1, p. 34). For transfers occurring after the winter heating season (April 1), the OCA recommended that the price be based on the lower of either NFGD’s weighted average commodity cost of gas during the previous storage injection period, plus the associated variable costs, or 100% of the market price of gas for that day. The OCA claimed that

19 the use of the lower of these two (2) prices will ensure that NFGD’s customers are not harmed by a supplier’s acquisition of gas supply to fill storage and will deter a supplier from attempting to game the system by selling gas inventory at a higher price than it was purchased.

2. The ALJ’s Recommendation

The ALJ proffered the following finding and recommendation:

I do not recommend adoption of OCA’s proposal that Distribution should pay NGSs its average price for the summer if an NGS returns gas to Distribution after taking storage in anticipation of obtaining customers and then returning it for failing to obtain customers. As Distribution points out, R.B. at 13, no NGS is required to take storage before it obtains customers. NGSs may take storage as they acquire customers and purchase gas in storage from Distribution (NFG Ex. No. 4, p. 83AJ, Item C.1.c) to the extent that storage has already been filled by Distribution. NGSs can choose either approach. However, if they choose to take storage in advance of customers, they should be required to ensure that failure to obtain customers will not harm sales customers.

(R.D., p. 39).

The ALJ also recommended that OCA’s proposal that NFGD pay the lower of the average cost for the injection period, plus variable transportation, or 100% of the market price for that day for purchases from NGSs at the end of the winter season for gas remaining in storage be rejected. (R.D., p. 40).

3. Exceptions

In its Exceptions, the OCA argues that the proposed storage inventory prices penalize suppliers unnecessarily by giving them less value for their gas than the supplier would have received if the gas were sold at the market price. The OCA submits

20 that its proposed inventory transfer rates will not cause any increased costs to retail sales customers. (OCA Exc., pp. 29-30).

NFGD, in its Reply Exceptions, points out that, when an NGS takes on an Energy Select customer, it assigns a proportional amount of its storage capacity to the NGS so that it can serve the heat-sensitive peak and seasonal needs of the customer. NFGD points out that an NGS may elect to take capacity in the spring in anticipation of signing up customers. If the NGS does not obtain the customers, NFGD would buy back the gas in storage so that it may serve its sales customers during the winter. NFGD continues that it purchases the gas at its lowest monthly gas cost for the summer. (NFGD R.Exc., p. 20).

NFGD disagrees with the OCA’s recommendation that to use the average cost of gas during the summer period ignores that prices may vary significantly in the summer. NFGD argues that, if it had retained the storage capacity, it could have filled it when prices were favorable. (Id).

4. Disposition

Upon consideration of this issue, we shall adopt the finding and recommendation of the ALJ. We reach this conclusion for several reasons. First, we find that the Exceptions of the OCA do not rise to a level that would cause us to modify or reverse the finding or recommendation of the ALJ on this issue. We agree with the ALJ that the OCA has not demonstrated that NFGD’s storage procedures are unreasonable or discriminatory. Although the OCA claims that its recommended transfer cost, based upon the average price for summer if an NGS returns gas to NFGD, after taking storage in anticipation of obtaining customers and returning it for failure to retain customers, will ensure that NFGD’s customers are not harmed. The OCA has not demonstrated that this would be the case. We find that the OCA’s argument on this point was refuted by

21 NFGD’s argument that prices may vary significantly during the summer, and had NFGD retained the storage capacity, it could have filled it when prices were favorable.

Moreover, we also agree with the ALJ’s recommendation to reject the OCA’s proposal that NFGD should be required to pay the lower of either NFGD’s weighted average commodity cost of gas during the previous storage injection period, plus the variable costs, or 100% of the market price for that day.

The premise of the OCA’s proposal was that NGSs should not be penalized by receiving less than the market value for their gas. As NFGD points out, the OCA provided no reason to require it to buy the NGS’ gas at any price when the NGSs are free to sell that gas to third Parties.

Accordingly, we deny the Exceptions of the OCA and adopt the finding and recommendation of the ALJ.

Consumer Education Cost Recovery

NFGD proposes to recover its local education costs through the automatic adjustment clause established by this Commission to recover statewide education costs: Creation and Implementation of a Statewide Consumer Education Program for Gas Competition, Docket No. M-00001326 (Order entered February 10, 2000) (Consumer Education Order).

In its Exceptions, the OCA asserts that the General Assembly did not see the deferral and future base rate recovery of consumer education costs provided for in Section 2211(c) as inconsistent with the language in section 2206(e), which provides for such a recovery mechanism. We disagree.

22 Section 2206(e), however, specifically requires the Commission to establish: … a non-bypassable competitively neutral cost recovery mechanism that fully recovers the reasonable cost of such [education] programs.

It is to be a separate "mechanism" that "fully recovers" costs. It is an automatic adjustment provision, not a "typical" base-rate item recovered with all other base-rate costs. Furthermore, education starts immediately on approval of the restructuring plan, and any base rate case is prohibited by the base-rate cap under Section 2211. (Distribution R.B., p.15).

Additionally, the OCA excepts to the ALJ not addressing its recommendation that a separate line item for consumer education costs need not be included on customers’ bills. (See OCA M.B., p. 38; OCA R.B., p. 38). While we agree with the ALJ’s disposition on the substance of the issue, we find that the OCA is correct that the recovery of local consumer education costs should not be included as a separate line item on customers’ bills. This would be inconsistent with how we have directed the recovery of statewide education costs. In our Consumer Education Order, we concluded that “Recovery shall be reflected in a bundled distribution charge on an on-going basis subject to the Commission’s regulatory oversight. There shall be no line-item surcharge.” As such, the OCA’s Exception on this issue is granted, in part.

Back-Up Service for NGSs

1. Issue

The ALJ observed that, in its filing, NFGD noted that it is appropriate to obtain backup arrangements to provide gas supplies in the event NGSs serving Energy Select customers fail to deliver (NFGD Ex. No. 2, Sch. B.2., p. 7; Sch. C, p. 2). The ALJ

23 further observed that, although it sought Commission guidance on the issue, NFGD did not propose a specific quantity of backup service because the level of customer participation is not certain.

The OCA argued before the ALJ that NFGD’s proposal should be rejected as premature. Specifically, the OCA argued that there were few details regarding NFGD’s proposal to obtain back-up supplies and that there are no actual acquisitions. Accordingly, the OCA recommended that the reasonableness and appropriateness of any back-up supply acquisitions, as well as recovery of the associated costs, including cost allocation, should be addressed in future Section 1307(f) proceedings. (OCA St. 1, p 31.

The OCA also argued before the ALJ that the costs of back-up supply should be charged to those suppliers who do not perform. The OCA argued as follows:

Up until this time, it has been unnecessary for National to enter into backup arrangements to provide service to sales customers. Any such arrangements will be for the purpose of providing service to customers whose supplier does not perform. Since non-performing suppliers will cause National to incur these costs, any associated costs should be assessed to the suppliers who fail to perform.

(OCA St. No. 1-S, pp. 10-11).

2. ALJ’s Recommendation

The ALJ agreed with the OCA that the issue is premature. The ALJ recommended that this issue be addressed in the 2000-§1307(f) proceeding or in a later §1307(f) proceeding. (R.D., p. 42).

24 Although the ALJ recommended delaying consideration of this issue, he addressed the merits of the issue in the event that the Commission might not adopt his recommendation.

The ALJ noted that the OCA recommended that the costs of back-up supply should be charged to those suppliers who do not perform. The OCA argued against the proposal to allocate costs of back-up supplies to retail customers.

NFGD argued before the ALJ that it must be prepared to provide service if an NGS fails and must have the assets to do so. NFGD maintained that it is appropriate to charge all small customers for such assets because all customers can choose an NGS, and sales customers would benefit from such source if another source of supply fails.

The ALJ agreed with the OCA that NFGD should charge only the NGSs that fail to deliver. The ALJ reasoned that, under the OCA’s proposal, suppliers would benefit because they would not bear the full consequences of their failure to perform, while all small customers would pay the costs under NFGD’s proposal. (R.D., p. 43).

3. Exceptions

NFGD, in its Contingent Exceptions, points out that it does not except to the ALJ’s recommendation to defer this issue until its §1307(f) proceeding when more information would be available concerning the specifics of the back-up service. NFGD excepts to the ALJ’s recommendation that, if the Commission should address the issue in the instant proceeding, NFGD should charge only the NGSs that fail to deliver.

NFGD argues that the ALJ’s recommendation does not recognize the need to provide service from high deliverability storage facilities on very short notice if it is necessary to back-up deliveries which an NGS failed to make. NFGD continues that, for

25 the storage to operate, NFGD would have to purchase the storage services and cause gas supplies to be injected into the storage assets for later withdrawal in the event of an NGS failure. (NFGD Exc., pp. 2-3).

NFGD contends that the provider of high deliverability storage services would require payment for such services year in and year out regardless of whether an NGS failed to make its required deliveries. Thus, NFGD argues that a source of revenues must be provided on a constant basis for high deliverability storage whether or not any NGS fails to make required deliveries in a particular year. (NFGD Exc., p. 3).

In its Reply Exceptions, the OCA asserts that NFGD has not yet taken steps to acquire back-up supplies. The OCA asserts further that this fact may indicate that current arrangements are sufficient to ensure the reliability of the system. (Id).

3. Disposition

We shall not adopt the recommendation of the ALJ to defer consideration of this issue until a future §1307(f) proceeding. We find that Section 2207(a) of the Act requires NFGD to serve as the Supplier of Last Resort and that the recall of assigned capacity and adequate bonding requirements are appropriate interim measures to deal with any NGS’ non-performance. We find that the appropriate forum for addressing both the supply and cost recovery issues is in the new and renewed capacity working group provided for in the Settlement.

Consistent with the foregoing discussion, we deny the Contingent Exception of NFGD, and we do not adopt the finding and recommendation of the ALJ on this issue.

26 Conclusion

Based on our analysis of the record in this proceeding, we will adopt the ALJ’s recommendation that we accept the Joint Petition for Settlement. The Exceptions of the Parties are granted, in part, and denied, in part; THEREFORE;

IT IS ORDERED:

1. That the Exceptions of the Office of Consumer Advocate and National Fuel Gas Distribution Corporation are granted, in part, and denied, in part, to the extent consistent with this Opinion and Order.

2. That the Recommended Decision of Administrative Law Judge Larry Gesoff is modified to adopt the terms and conditions, with minor modifications, contained in the Joint Petition for Settlement of Restructuring Filing filed March 17, 2000, by National Fuel Gas Distribution Corporation, at Docket No. R-00994785, except to reserve the resolution of National Fuel Gas Distribution Corporation’s monthly banking service options for the collaborative process, and to reject the recommendation to defer the resolution of the issue of back-up service for natural gas suppliers to a future Section 1307(f) proceeding.

3. That, with the exception of its monthly banking service options, National Fuel Gas Distribution Corporation is authorized to file the tariff attached to its Joint Petition for Settlement of Restructuring Filing on one day’s notice to the Commission.

4. That, with respect to the recovery of Consumer Education Costs discussed herein, there shall be no separate line item charge on customer’s bills.

27 5. That the Complaint of the Office of Consumer Advocate against National Fuel Gas Distribution Corporation, at Docket No. R-00994785C0001, is sustained, in part.

6. That the Complaint of Kenneth Springirth against National Fuel Gas Distribution Corporation, at Docket No. C-00993028, is dismissed.

BY THE COMMISSION,

James J. McNulty Secretary

(SEAL)

ORDER ADOPTED: June 8, 2000

ORDER ENTERED: