Public Utility Commission s17

PENNSYLVANIA PUBLIC UTILITY COMMISSION Harrisburg, PA 17105-3265

Public Meeting held July 12, 2017

Commissioners Present:

Gladys M. Brown, Chairman Andrew G. Place, Vice Chairman John F. Coleman, Jr. Robert F. Powelson David W. Sweet

Pennsylvania Public Utility Commission R-2017-2582461 Office of Small Business Advocate C-2017-2584158 Office of Consumer Advocate C-2017-2585444

National Fuel Gas Distribution Corporation

OPINION AND ORDER

BY THE COMMISSION:

Before the Pennsylvania Public Utility Commission (Commission) for consideration and disposition are the Exceptions of National Fuel Distribution Corporation (NFGD or the Company) filed on May 30, 2017, to the Recommended Decision (RD) of Administrative Law Judge Conrad A. Johnson (ALJ), which was issued on May 18, 2017, in the above-captioned proceeding. The Office of Consumer Advocate (OCA) filed Replies to Exceptions on June 6, 2017. For the reasons stated below, we shall deny NFGD’s Exceptions and adopt the ALJ’s Recommended Decision. I. Background NFGD’s filing in this case was made pursuant to Section 1307 of the Public Utility Code (Code), 66 Pa. C.S. § 1307. This is an annual filing that all large natural gas distribution companies (NGDCs) make and provides for the Company’s annual adjustment and reconciliation of its natural gas cost recovery rates. More specifically, Section 1307(f) governs recovery of natural gas costs and allows NGDCs with gross intrastate annual operating revenues in excess of $40,000,000 to file tariffs reflecting actual and projected increases or decreases in their natural gas costs, with the tariffs being effective six months from the date of filing. 66 Pa. C.S. § 1307(f)(1).

II. History of the Proceeding

In accordance with Section 53.64 of the Commission’s Regulations, 52 Pa. Code §§ 53.64-53.65, NFGD submitted materials in advance of its annual Purchased Gas Costs (PGC) filing under Section 1307(f) of the Code 66 Pa. C.S. § 1307(f), on December 30, 2016, at Docket No. R-2017-2582461. The Company’s pre-filing indicated a $0.4312 per Mcf increase in the projected gas cost for all classes of customers (except those receiving service under load balancing or natural gas vehicle service rate schedules). The Company’s projected cost of gas is $4.4754 per Mcf which represents an increase of $0.4312 per Mcf from the amount of $4.0442 per Mcf included in rates from November 1, 2016, through January 31, 2017, for the recovery of purchased gas costs.

On January 5, 2017, the Commission’s Bureau of Investigation & Enforcement (I&E) filed a Notice of Appearance in this proceeding. On January 13, 2017, the Office of Small Business Advocate (OSBA) filed a Notice of Appearance, Public Statement, and Complaint to NFGD’s filing at Docket No. C-2017-2584158. On January 19, 2017, the OCA filed a Notice of Appearance, Public Statement, and Complaint to NFGD’s filing at Docket No. C-2017-2585444.

2 On January 31, 2017, NFGD filed Supplement No. 180 to Tariff Gas – Pa. P.U.C. No. 9 and a tariff addendum. In accordance with Section 1307(f)(1) of the Code, Supplement No. 180 was issued to become effective on six months’ notice or on August 1, 2017.

A Prehearing Conference proceeded as scheduled on February 6, 2017. Counsel for NFG, I&E, the OCA, and the OSBA participated in the Prehearing Conference, which resulted in the establishment of a litigation schedule. On February 7, 2017, the ALJ issued a Prehearing Order confirming the litigation schedule and consolidating the Complaints filed in this proceeding with NFGD’s PGC filing at Docket No. R-2017-2582461.

On March 27, 2016, NFGD filed a Motion of National Fuel Gas Distribution Corporation for Protective Order (Motion). According to the Motion, the Parties had engaged in discovery. Thus, NFGD asserted that proprietary information within the definition of 52 Pa. Code § 5.365 had been presented and requested during the course of this proceeding, which justified the issuance of a Protective Order. After due consideration, the ALJ issued a First Interim Order Granting NFGD’s Motion For Protective Order on March 30, 2017.

On March 28, 2017, counsel for NFGD represented that the Parties had agreed to waive the cross-examination of all witnesses and to submit their pre-filed testimony by oral stipulation with accompanying verifications. As such, the Parties indicated that they did not intend to bring their respective witnesses to the hearing unless the ALJ had questions for them. On March 29, 2017, the ALJ responded to the Parties by informing them that the evidentiary hearing scheduled for March 30, 2017, would convene telephonically as the ALJ instructed the Parties that he had questions for NFGD’s witnesses, Donald N. Koch and Robert M. Michalski, and the OCA’s witness

3 Jerome D. Mierzwa. Therefore, these witnesses were to be present for the evidentiary hearing.

The evidentiary hearing convened as scheduled on March 30, 2017. NFGD, I&E, the OCA and the OSBA were represented by their respective counsel at the evidentiary hearing. NFGD’s counsel represented that in settlement negotiations the Parties resolved two of three outstanding issues: 1) the charges related to NFGD’s purchase of firm gas gathering services and 2) the Migration Rider which would be separately addressed in a tariff filing. Tr. at 28. The third unresolved issue concerned NFGD’s truncation methodology for gas sales volumes in order to calculate the C-Factor for quarterly gas cost filings. Id. The OCA counsel agreed that only NFGD’s truncation methodology was presented for adjudication. Id. Both I&E and the OSBA, through their respective counsel, did not take a position on this unresolved issue. Tr. at 29-20.

On April 7, 2017, NFGD and the OCA filed Main Briefs. On April 13, 2017, Reply Briefs were filed by NFGD and the OCA. The OSBA and I&E did not file any briefs. After having received the Parties’ Reply Briefs, the ALJ issued an Interim Order Closing the Hearing Record as of April 17, 2017.

On May 18, 2017, the Commission issued the Recommended Decision of ALJ Johnson, which recommended, inter alia, that NFGD’s truncation methodology for calculating the C-factor in quarterly updates be rejected. As noted, Exceptions to the Recommended Decision were filed by NFGD on May 30, 2017, and Replies to Exceptions were filed by the OCA on June 6, 2017.

4 III. Discussion

As a preliminary matter, we note that any issue that we do not specifically delineate shall be deemed to have been duly considered and denied without further discussion. The Commission is not required to consider expressly or at length each contention or argument raised by the parties. Consolidated Rail Corp. v. Pa. PUC, 625 A.2d 741 (Pa. Cmwlth. 1993); also see, generally, University of Pennsylvania v. Pa. PUC, 485 A.2d 1217 (Pa. Cmwlth. 1984).

In his Recommended Decision, the ALJ made thirty-one Findings of Fact and reached ten Conclusions of Law. R.D. at 8-14, 26-27. The Findings of Fact and Conclusions of Law are incorporated herein by reference and are adopted without comment unless they are either expressly or by necessary implication rejected or modified by the Opinion and Order.

A. Legal Standards

Section 332(a) of the Code, 66 Pa. C.S. §332(a), provides that the party seeking a rule or order from the Commission has the burden of proof in that proceeding. It is axiomatic that “[a] litigant’s burden of proof before administrative tribunals as well as before most civil proceedings is satisfied by establishing a preponderance of evidence which is substantial and legally credible.” Samuel J. Lansberry, Inc. v. Pa. PUC, 578 A.2d 600, 602 (Pa. Cmwlth. 1990), alloc. denied, 529 Pa. 654,602 A.2d 863 (1992). The term “preponderance of the evidence” means that one party has presented evidence that is more convincing, by even the smallest amount, than the evidence presented by the other party. Se-ling Hosiery v. Margulies, 364 Pa. 45.70 A.2d 857 (1950). In this instance, NFG has the burden of proof.

5 B. Least Cost Fuel Procurement Policy

As discussed, supra, Section 1307(f) of the Code governs recovery of natural gas costs and allows natural gas distribution companies with gross intrastate annual operating revenues in excess of $40,000,000 to file tariffs reflecting actual and projected increases or decreases in their natural gas costs, with the tariffs becoming effective six months from the date of filing. 66 Pa. C.S. § 1307(f)(1). Section 1307 further provides that the Commission, after a hearing, shall determine the portion of the Company’s natural gas distribution costs in the previous twelve-month period that meet the standards set out in Section 1318 of the Code. 66 Pa. C.S. § 1307(f)(5). Section 1318 provides that no rates for a natural gas distribution utility shall be deemed just and reasonable unless the Commission finds that the utility is pursuing a least cost fuel procurement policy, consistent with the utility’s obligation to provide safe, adequate and reliable service to its customers. 66 Pa. C.S. § 1308(a).

In determining whether NFGD is pursuing a least cost fuel procurement policy under Section 1318 of the Code, specific findings must be made as follows:

(1) The utility has fully and vigorously represented the interests of its ratepayers in proceedings before the Federal Energy Regulatory Commission.

(2) The utility has taken all prudent steps necessary to negotiate favorable gas supply contracts and to relieve the utility from terms in existing contracts with its gas suppliers which are or may be adverse to the interests of the utility's ratepayers.

(3) The utility has taken all prudent steps necessary to obtain lower cost gas supplies on both short-term and long-term bases both within and outside the Commonwealth, including the use of gas transportation arrangements with pipelines and other distribution companies.

6 (4) The utility has not withheld from the market or caused to be withheld from the market any gas supplies which should have been utilized as part of a least cost fuel procurement policy.

66 Pa. C.S. § 1318(a).

In addition, Section 1318(b) of the Public Utility Code provides as follows:

In any instance in which a natural gas distribution company purchases all or part of its gas supplies from an affiliated interest, as that term is defined in section 2101 (relating to definition of affiliated interest), the commission, in addition to the determinations and findings set forth in subsection (a), shall be required to make specific findings with regard to the justness and reasonableness of all such purchases. Such findings shall include, but not be limited to findings:

(1) That the utility has fully and vigorously attempted to obtain less costly gas supplies on both short-term and long- term bases from nonaffiliated interests.

(2) That each contract for the purchase of gas from its affiliated interest is consistent with a least cost fuel procurement policy.

(3) That neither the utility nor its affiliated interest has withheld from the market any gas supplies which should have been utilized as part of a least cost fuel procurement policy.

66 Pa. C.S. § 1318(b).

Section 1317 of the Code, 66 Pa. C.S. § 1317, requires the submission of certain information to enable the Commission to make a least cost fuel procurement finding. The Commission has promulgated regulations pursuant to the statutes that include extensive filing requirements that also govern such filings. See, 52 Pa. Code §§ 53.64 (filing requirements for natural gas distributors with gross intrastate annual

7 operating revenues in excess of $40 million) and 53.65 (special provisions relating to natural gas distributors with gross intrastate annual operating revenues in excess of $40 million with affiliated interests). The ALJ concluded that NFGD complied with these requirements. R.D. at 1, 26-27.

C. Calculation of the C-factor in Quarterly Updates

As noted, supra, the sole litigated issue remaining for disposition in this proceeding involves NFGD’s methodology utilized to change the way it calculates the Cfactor component of its PGC rate in its quarterly update filings. The C-factor represents the purchased gas cost component in the Company’s PGC rate.

1. Burden of Proof

a. ALJ’s Recommendation

In his Recommended Decision, the ALJ stated that in this proceeding, NFGD is seeking Commission approval of its 1307(f) filing and therefore, has the burden of proof. Citing Pa. PUC v. National Fuel Gas Distribution Company, Docket No. R2013-2341534 (Order entered July 22, 2013) (2013 NFGD Order). R.D. at 14. The ALJ concluded that NFGD failed to carry its burden of proving that the continued use of its truncation methodology to calculate the C-Factor of its PTC is just, reasonable and in the public interest. Conclusion of Law No. 10, R.D. at 27.

b. Exceptions and Replies

In its Exceptions, NFGD states that the ALJ’s Conclusion of Law No. 10 that the Company has the burden of proof as to the contested issue in this proceeding is in error. The Company opines that it does not have the burden of proving that its truncation

8 methodology continues to be reasonable as this methodology was approved by the Commission in the Company’s 2013 PGC proceeding and is set forth in its tariff. According to NFGD, it is the OCA who has the burden of proving that the truncation methodology is unreasonable now that it has been approved by the Commission. NFGD Exc. at 6. NFGD argues that contrary to the OCA’s assertions, tariff provisions are deemed to be just and reasonable and since OCA is proposing to change the Company’s tariff provisions, the OCA and not NFGD has the burden of demonstrating that NFGD’s tariff provisions are not just and reasonable. According to NFGD, a party challenging Commission-approved tariff provisions bears the burden of demonstrating that the tariff provisions are no longer reasonable. Citing Brockway Glass Company v. Pa. PUC, 437 A.2d 1067 (Pa. Cmwlth. 1981); Shenango Township Board of Supervisors v. Pa. PUC, 686 A.2d 910, 914 (Pa. Cmwlth. 1996). NFGD Exc. at 6.

Additionally, NFGD states that in Pa. PUC v. Columbia Gas of Pennsylvania, Inc., Docket No. R-2010-2215623, 2012 Pa. PUC LEXIS 420, 26, Order entered March 15, 2012, the Commission stated as follows:

As the proponent of a Commission order with respect to its proposals, PCOC bears the burden of proof as to proposals that Columbia did not include in its filing. Columbia’s CAP- Plus provisions are deemed just and reasonable because those tariff provisions previously were approved by the Commission. Therefore, PCOC, as the party challenging a previously-approved tariff provision, bears the burden to demonstrate the Commission’s prior approval is no longer justified.

NFGD Exc. at 7.

9 NFGD also cited to a similar Commission decision in Pa. PUC, et al. v. Duquesne Light Company, Docket No. R-2013-2372129 (Order entered April 23, 2014) wherein the Commission stated that the NRG Companies, as the party challenging a previously-approved tariff provision, bear the burden to demonstrate the Commission’s prior approval is no longer justified. NFGD Exc. at 7.

NFGD avers that the ALJ provided no analysis supporting his conclusion that the Company bears the burden of proof as to its previously-approved tariff provision regarding the truncation methodology other than to state that NFGD is seeking approval of its 1307(f) filing. As such, NFGD asserts that the ALJ erred in his conclusion to place the burden of proving that the truncation methodology is no longer just and reasonable on NFGD since it is the OCA that is proposing to revise an existing tariff provision that previously was deemed just and reasonable by the Commission. NFGD Exc. at 8.

The OCA rejoins that the ALJ correctly concluded that the burden of proof rests with NFGD to show that its proposed rates are just and reasonable in accord with the Code. The OCA submits that NFGD, and not the OCA, has the burden of proof with regard to its rates and must demonstrate that each and every element of its rates is just and reasonable. Citing 66 Pa. C.S. § 1301, 1307 and 1318. The OCA asserts that the issue in this case is not simply a tariff provision in the Company’s filing like those identified in the cases cited by NFGD. Rather, the OCA maintains that the issue here is whether the rates developed by the Company through its PGC filing are just and reasonable. The OCA opines that the ALJ correctly determined that the rate volatility inherent in the Company’s PGC filing did not meet the legal requirements. OCA R. Exc. at 2-3.

The OCA claims that, critical to the ALJ’s analysis, the Commission explicitly identified the truncation methodology for continued evaluation in PGC proceedings. Citing 2013 NFGD Order at 42. The OCA asserts that while the Company

10 is correct that it has followed the truncation methodology approved in the 2013 NFGD Order, that Order did not simply approve the truncation methodology and pronounce that it was just and reasonable to continue to use the truncation methodology in perpetuity. The OCA explains that in the 2013 1307(f) proceeding, the Commission approved a proposal by NFGD to calculate its quarterly PGC rates using reduced sales volumes at each successive quarterly period in the PGC year. The OCA points out that in the 2013 NFGD Order, the Commission explicitly recognized the potential need for further review of the truncation methodology and stated that:

After observing the operation of NFG’s proposed truncation methodology during the upcoming PGC year, parties are encouraged to provide testimony in NFG’s next Section 1307(f) PGC rate proceeding regarding the accuracy and effectiveness of this methodology, and whether further changes can produce even better outcomes.

2013 NFGD Order at 42. OCA R. Exc. at 3-4.

The OCA further asserts that the ALJ specifically cites to the 2013 NFGD Order in support of his determination that the Company has the burden of proof. The OCA maintains that the overwhelming evidence of record demonstrates that the truncation methodology has increased rate volatility. The OCA submits that the Company has failed to meet its burden of proof that its PGC rates, as developed utilizing the truncation methodology, produces just and reasonable rates. According to the OCA, as a result, NFGD has failed to sustain its burden of proof that its PGC rates approved as part of this filing will be just and reasonable. OCA R. Exc. at 4-5.

11 d. Disposition

Based upon our review of the record of evidence and applicable law, we shall grant the Exceptions of NFGD, consistent with the discussion herein.

Once approved, a utility’s Commission-approved tariff has the force of law and is binding on the utility and its customers. Brockway Glass Co. v. Pa. PUC, 437 A.2d 1067 (Pa. Cmwlth. 1981); Pennsylvania Electric Co. v. Pa. PUC, 663 A.2d 281(Pa. Cmwlth. 1995). To the extent, the truncation methodology has been embodied in a Commission-approved tariff, it is entitled to a presumption of reasonableness.

As the OCA notes, in the 2013 NFGD Order, we explicitly recognized the potential need for further review of the truncation methodology. However, absent any specific language directing the modification of the methodology as a part of NFGD’s existing tariffs, the methodology, until so modified, is, prima facie, reasonable. And, the OCA should have received the burden of coming forward with the evidence to establish that the methodology is no longer reasonable as a result of, e.g., changed or other circumstance.

While the OCA is correct that the utility has the overall statutory burden of proving the justness and reasonableness of its rates, the specific truncation methodology, as a Commission-approved component of NFGD’s prior Section 1307(f) proceedings, has, itself, been the subject of specific findings pursuant to Section 1317, 66 Pa. C.S. § 1317, that the utility is pursuing a least cost fuel procurement policy, consistent with its obligation to provide safe and adequate service.1

1 We note that these findings are subject to a subsequent audit.

12 Therefore, the OCA had the burden of coming forward with the evidence concerning the truncation methodology. Therefore, we shall grant the Exceptions of NFDG on this issue, consistent with this discussion.

2. Truncation Methodology

a. Positions of the Parties

NFGD explained the Company’s truncation methodology as follows: Beginning with August 1st, our PGC rates are set for the year, and included in the August 1st rates is a full projection of gas costs that set our rates for the year.

Per our tariff, we’re allowed quarterly updates to those PGC rates set on August 1st. And with the method of truncation, beginning in the November 1st quarter, we update those projected gas costs and the change in those projected gas costs are no longer divided by a full projected sales volume. Since we’re in the November quarter, we eliminate the first three months of those volumes to come up with nine months’ volume to update our projected C-Factor rate.

And then we move along to our next quarterly update which is the February 1st quarterly update, and we do another projection of gas costs, and now there’s only six months to recover those projection of gas costs, so we eliminate another three months’ worth of volumes to calculate the C-Factor rate, so we now have six months of volumes.

And then finally in the next quarter, in the May 1st rate, we do another update to our projected gas costs. And for that change in the projection of gas costs, since there’s only three months of volumes left for that PGC year, to avoid further volatility, we just continue to use the six month volumes of the consumption for the purchase of the rate.

Tr. 33-34.

13 NFGD submits that its truncation methodology is preferable to the historic method for several reasons. By calculating the C-Factor in quarterly updates, adjustments can be made to rates to reflect changes in projected annual gas cost more closely in time to the period in which the changes in gas costs occur in order to pass back or collect the costs to or from customers. “Having rates that track purchased gas cost in the current application period thereby reduces over and under recoveries of purchased gas costs that are recovered or passed back through the E-Factor in the following annual application period.” NFGD M.B. at 8. According to NFGD, the truncation methodology more accurately reflects the current cost of gas because the rates are adjusted for changes in gas costs in a more timely fashion. Id. at 8. According to NFGD, reverting to the historic methodology, that is, rates based upon a full twelve-month projected sales volumes, pushes the recovery of over/under collections into the next year because as you near the end of annual application period (the May to July quarter) there is less and less sales volumes to recover any change in gas costs. Tr. at 43.

The OCA’s opposition to NFGD’s truncation methodology is based upon its position that NFGD’s recent PGC rates have been exceedingly volatile when compared to other NGDCs [natural gas distribution companies] during the same period. The OCA explained that the Company’s use of the truncation methodology was a significant factor in the experienced rate volatility. The OCA’s witness explained as follows:

On August 1, 2016, NFGD’s PGC rate increased by $2.5011 per Mcf, from $1.9196 per Mcf to $4.4207 per Mcf, or by 130 percent. This significant increase was attributable to a number of factors, one of the most significant of which was NFGD’s practice of truncating sales volumes in its quarterly PGC rate calculations. Rate volatility of this magnitude is inconsistent with sound regulatory policy and ratemaking practices. Therefore, I recommend the Commission require

14 NFGD to eliminate its current practice of truncating sales volumes in its quarterly PGC rate calculations.

OCA St. 1 at 3. By way of comparison, the OCA pointed out that of the 142 PGC annual and quarterly changes since 2013, only five have been above 30%, with the second highest being 37%. OCA St. 1 at 11. According to the OCA, this is far less volatility than the 130% increase in NFGD’s rate in August of 2016. The OCA stated that the Company’s experienced rate volatility in 2016 is not reasonable and efforts should be made to reduce such dramatic swings in PGC rates. The OCA maintained that without the use of truncation, NFGD’s PGC rates would have been substantially more stable. For example, the OCA noted that the PGC rate would have only increased by 48% between May 1, 2016, and August 1, 2016. The OCA recommended that the Company should eliminate the use of the truncation methodology because truncation unnecessarily increases the volatility of the Company’s PGC rates and provides no discernible benefit. The OCA asserted that the Company should return to its pre-2013 “historic” rate methodology. OCA M.B. at 3.

In support of returning to the historic methodology, the OCA emphasized that the Commission invited further review of the truncation approach during the approval of this method in 2013 as follows:

After observing the operation of NFG’s proposed truncation methodology during the upcoming PGC year, parties are encouraged to provide testimony in NFG’s next Section 1307(f) PGC rate proceeding regarding the accuracy and effectiveness of this methodology, and whether further changes can produce even better outcomes.

2013 NFGD Order at 42.

15 Thus, the OCA urged the Commission to revisit NFGD’s truncation methodology because experience has demonstrated that this process adds unnecessary volatility to the rate and does not reflect market price. OCA M.B. at 6.

To demonstrate the impact truncation had on the rate change, the OCA developed the following table, designated Table 1:

Table 1. Comparison of PGC Rates Truncation Historic Filing Date Rate Change Rate Change ($/Mcf) (%) ($/Mcf) (%) August 1,2015 3.2868 N/A 3.2868 N/A November 1, 2015 2.9513 (10%) 2.9773 (9%) February 1, 2016 2.3438 (21) 2.7988 (6) May 1, 2016 1.9196 (18) 2.8318 (1) August 1, 2016 4.4207 130 4.4207 56 November 1, 2016 3.9885 (10) 4.0734 (8) February 1, 2017 4.5818 15 4.3715 7

OCA St. 1 at 10. As illustrated by this table, the OCA asserted that truncation increased the volatility of the rate changes between the quarters. For example, the OCA asserted that with the truncation method, the PGC rate decreased by 21 percent from November 1, 2015, to February 1, 2016; however, if the historic method had been used, that change would have only been 6 percent. OCA M.B. at 8.

The OCA further stated that under the actual operation of the truncation methodology, NFGD’s C-Factor commodity cost was out of step with market projections. According to the OCA, the truncation methodology did not result in the PGC rate tracking the actual cost of gas more closely, did not lead to a more accurate price to compare, and did not send the proper price signal. Rather, the OCA opined that the truncation methodology artificially decreased the May 1, 2016, PGC rate which then lead to the volatility in the PGC rate on August 1, 2016. OCA M.B. at 7.

16 b. ALJ’s Recommendation

In his Recommended Decision, the ALJ found that the Company failed to establish that continued use of its truncation methodology to calculate its Natural Gas Supply Charge is just and reasonable as required by Sections 1301 and 1318(a) of the Code. 66 Pa. C.S. §§ 1301 and 1318(a). The ALJ recommended that the truncation methodology be discontinued, and that the Company return to its historic method in order to achieve less volatility in gas costs. R.D. at 1.

The ALJ stated that he arrived at this conclusion starting from the premise that sound ratemaking practices should promote stability and predictability of rates. The ALJ concluded that by applying these principles to the truncation methodology, the OCA’s position on this issue is convincing. The ALJ noted that while the fluctuation in gas prices cannot be eliminated, NFGD’s truncation practice has unnecessarily increased the price volatility. The ALJ referenced the OCA’s Table 1 which indicated that from August 1, 2015, to February 1, 2017, PGC rates increased by a greater percentage under truncation than the percentage that would have occurred had the historical method been used by NFGD. Also, the ALJ notes that in part, NFGD introduced the truncation methodology to recover gas costs within the year purchased, thereby eliminating or further reducing the E-factor from going into the next purchased gas cost year. However, the ALJ referenced the OCA position that the impact of the E-Factor in the price to compare (PTC) is no longer a concern because of Act 47 which required the removal of the migration rider. Furthermore, the ALJ maintained that he did not find NFGD’s argument convincing that returning to the historic method would create larger over/under collections and a larger E-Factor. R.D. at 22-24.

Finally, the ALJ stated that this is the first instance where the Commission has had the opportunity to examine NFGD’s experience in implementing its truncation

17 methodology since 2013 because the Company’s 1307(f) filings made in 2014, 2015 and 2016 resulted in black box settlements. Now that this methodology is at issue, the ALJ states that he is compelled to note the Commission directive that the Parties were encouraged to provide testimony in subsequent proceedings regarding the accuracy and effectiveness of the truncation methodology and whether further changes can produce even better outcomes. Citing 2013 NFGD Order at 42. As such, the ALJ concluded that NFGD’s truncation methodology over time has not produced a better outcome and recommended that the Company return to the historic method for calculating the rate for the C-Factor. R.D. at 25.

c. Exceptions and Replies

In its Exceptions, NFGD first contends that the ALJ’s analysis is flawed because it over-emphasizes rate stability to the detriment of a sound rate design that recovers costs on a more current basis. NFGD asserts that one of the most fundamental rate design criteria is that customers should pay for the service that they use and that costs to provide service to one customer should not be borne by other customers. Citing Lloyd v. Pa. PUC, 904 A.2d 1010. 2006 Pa. Cmwlth. LEXIS 438 (Pa. Cmwlth. 2006) (Lloyd). NFGD opines that the truncation methodology more closely follows this fundamental rate design principle than the historic methodology proposed by the OCA because the historic methodology pushes more costs out for future recovery. According to NFGD, when costs are pushed into later recovery periods, customers can avoid these costs by electing a natural gas supplier. NFGD explains that historically, natural gas customers that elected to shop were subject to a migration rider for a one-year period that charged them for prior period under-collections or refunded them prior period over-collections. NFGD points out that recently, NGDCs, including NFGD, have eliminated the migration rider pursuant to Act No. 47 of 2016. NFGD Exc. at 8-9.

18 NFGD states that the truncation methodology more appropriately recovers actual costs on a current basis so that customers who elect to shop pay as close as possible to the current costs of gas prior to electing to shop. The Company maintains that this is a fundamental rate design principle that supports continuation of the truncation methodology. NFGD asserts that the ALJ’s analysis claiming that minimizing the EFactor in the PTC is no longer a concern because customers no longer pay the migration rider is flawed because the Efactor should be minimized so that customers pay as close as possible to actual gas costs incurred to serve them. According to NFGD, the truncation methodology recovers current costs more accurately in the current period and the historic method distorts the current cost of gas which can negatively impact the PTC by making it less reflective of market prices. NFGD Exc. at 9-10.

Next, NFGD asserts that the OCA significantly over-states the impact of the truncation methodology on rate volatility. NFGD notes that the OCA’s primary concern about rate volatility relates to the August 1, 2016, annual PGC rate change where the PGC rate increased from $1.92 per Mcf to $4.42 per Mcf. NFGD explains that this 130 percent increase was driven in large part by historically low gas prices. NFGD posits that because the May 1 rate was so low, any rate increase would be a higher percentage than if the May 1 rate had been higher. Also, NFGD notes that the August 1, 2016, rate change was the Company’s annual rate filing which is not affected by truncation and would have been $4.42 under both the truncation methodology and the historic methodology. NFGD further asserts that all of the quarterly rate changes as shown on OCA Table 1 are lower than 25 percent except for the August 1, 2016, annual rate change. NFGD Exc. at 10-11.

NFGD claims that the OCA’s argument is contrary to the best interests of residential customers when it complains that the February 1, 2016, rate decrease was too large. NFGD avers that this rate decrease became effective during the middle of winter and certainly was not adverse to residential ratepayers because they enjoyed a more

19 significant rate decrease (i.e., 21 percent as opposed to 6 percent) under the truncation method at a time when gas usage is at its highest. As such, NFGD opines that this rate change was beneficial and not adverse to customers. According to NFGD, the truncation method has not harmed its customers since many of the rate changes under the truncation method resulted in greater rate decreases than would have existed under the historic method. NFGD Exc. at 11-12.

NFGD states that the 25 percent cap on quarterly rate changes due to truncation still applies and that this cap protects customers from significant volatility in quarterly changes due to truncation. NFGD explains that the only time that the 25 percent cap does not apply is for the annual PGC rate change on August 1 of each year. According to NFGD, this rate change cannot be capped in order to allow Distribution to set its annual rate to recover its projected costs for the next year. However, NFGD asserts that residential customers have very little gas usage from August 1 through October 31 of each year which mitigates any volatility associated with the August 1 rate change. NFGD Exc. at 12.

Next, NFGD claims that the truncation methodology promotes competition as it provides a more accurate PTC for marketers. The Company maintains that as part of its efforts to promote customer choice for both electric and gas customers, the Commission notes that the PTC “lies at the heart of retail choice.” Citing Revised Final Rulemaking Order, Docket No. L-2008-2069114 at 21 (Order entered June 23, 2011). NFGD notes that the Commission has also stated that the PTC should accurately reflect market prices. Citing Petition of PPL Electric Utilities Corporation for Approval of a Default Service Program and Procurement Plan, Docket No. P-2012-2302074 at 61 (Order entered January 24, 2013). According to NFGD, consistent with this policy, its truncation methodology maximizes accurate cost recovery in the C-Factor adjustments which are included in the PTC. NFGD avers that if current costs are not included in the C-Factor, they are recovered in the next PGC year in the E-Factor. NFGD opines that

20 this distorts the future PTC by reflecting the effects of current market prices in the next application period. NFGD further asserts that one of the primary reasons that the Commission allowed the Company to adopt the truncation methodology in the first place was because it increased the accuracy of the PTC. Citing 2013 NFGD Order at 42. NFGD posits that the ALJ’s recommendation in this proceeding is contrary to the 2013 NFGD Order. NFGD Exc. at 12-13.

Next, NFGD states that the ALJ erred in concluding that ratepayers pay more for the cost of gas under the truncation methodology. NFGD asserts that under both methods, ratepayers pay the same gas costs, other than differences for interest because the historic methodology pushes more costs for later recovery. NFGD explains that all of the Company’s gas costs are reconciled with recoveries from customers under the Company’s 1307(f) PGC rate. According to NFGD, there is no support in the record for the ALJ’s conclusion that ratepayers pay more for the cost of gas under the truncation methodology than the historic methodology and the ALJ provided no basis for this conclusion. NFGD Exc. at 13-14.

Finally, NFGD states that the ALJ erred in concluding that the Company’s truncation methodology has not produced a better outcome for customers. NFGD asserts that the truncation methodology has allowed the Company to recover more costs in the CFactor, thereby reducing the E-Factor. According to NFGD, recovering costs in a current manner increases the accuracy of the PTC which is better for natural gas suppliers. Also, NFGD asserts that the truncation methodology has frequently resulted in lower rates during higher use periods. As an example, NFGD notes that the November 1, 2015, rate under the truncation methodology was $2.9513 per Mcf as compared to $2.9773 per Mcf under the historic methodology. Also, NFGD notes that the February 1, 2016, rate under the truncation methodology was $2.3438 per Mcf as compared to $2.7988 per Mcf under the historic methodology. According to NFGD, it is reasonable to assume that customers prefer lower gas rates during the winter months when usage is

21 higher to minimize higher bills and spread costs more evenly over the year. NFGD Exc. at 14-15.

In its Replies to Exceptions, the OCA states that the ALJ correctly assessed the negative impact of the truncation methodology on gas prices and competition. The OCA further claims that the ALJ correctly determined that rate stability and predictability are essential to sound ratemaking principles and that the Company itself has recognized the importance of rate stability. Also, the OCA states that NFGD’s methodology does not recover costs on a more current or reasonable basis. According to the OCA, the ALJ correctly identified that NFGD’s own filing recognized the importance of developing PGC rates that offer stability for customers. Citing R.D. at 22-23 and PGC Exh. No. 33. The OCA submits that NFGD’s truncation methodology does not conform to the Company’s own identified principles and result in stable rates that are just and reasonable. OCA R. Exc. at 5-6.

In response to NFGD’s argument that the OCA overstates the impact of the truncation methodology on rate volatility, the OCA submits that the flaw in NFGD’s argument is that the period in which truncation has been in place has seen relatively stable natural gas prices. The OCA references a chart it included within its reply brief that provides the Henry Hub natural gas Spot Price over the past twenty years. The OCA submits that a review of the wholesale pricing shown on this chart reveals the relative stability of recent gas prices. The OCA asserts that, as such, the Company’s increased rate volatility is not a result of a more volatile market. According to the OCA, this conclusion is underscored by the fact that no other NGDC has had an increase of over 37 percent in any quarterly period since truncation was implemented. Yet during this same period, the OCA avers that NFGD experienced an increase of 130 percent in August of 2016. OCA R. Exc. at 6-7.

22 The OCA asserts that, as the ALJ correctly identified, the central problem is not the historically low natural gas prices, but instead the problem is that the truncation methodology creates rates which are more volatile than the historic mechanism. The OCA explains that its witness demonstrated that truncation was a major factor in the unique PGC rate volatility experienced by NFGD and that this methodology consistently increased the volatility of the rate changes between quarters. According to the OCA, in a time of low, stable wholesale natural gas prices, the Company’s experienced rate volatility is not reasonable and efforts should be made to reduce such dramatic swings in the PGC rate. The OCA opines that a return to the historic method of calculating the C- Factor will provide more consistent and stable ratemaking. OCA R. Exc. at 8-9.

Next, the OCA states that the truncation methodology sends the wrong price signal to consumers because it distorts the PTC. Contrary to the claims of NFGD that the truncation methodology supports competition, the OCA asserts that the record evidence demonstrates that truncation has not brought PGC rates closer to market pricing. The OCA maintains that the truncation methodology does not allow the Company to reflect actual, current market prices of natural gas in its PTC as the Company argues. Furthermore, the OCA opines that the Company’s truncation methodology actually has the perverse impact of moving the costs included in the PTC further from the current, actual cost that NFGD is paying for gas in the market. The OCA cites to an example offered by its witness as follows:

NFGD’s PTC rate in effect prior to August 1, 2016 went into effect with the Company’s quarterly filing on May 1, 2016. That rate was based on a projected commodity cost of gas of $1.80 per Mcf. This projection was fairly reflective of NFGD’s actual commodity cost of gas for the quarter beginning May 1, 2016. Under NFGD’s current PGC rate calculation method that utilizes truncation, however, the CFactor commodity cost of gas reflected in the PGC rate effective May 1, 2016 was only $1.16 per Mcf. Without truncation, the C-Factor commodity cost of gas in NFGD’s

23 PGC rate would have been higher, in fact, the C-Factor would have been $1.80 per Mcf. As such, the market price of gas at the time of NFGD’s quarterly rate that became effective May 1, 2016 was more than 50 percent higher than the CFactor commodity cost of gas reflected in NFGD’s PGC rate.

Citing OCA St. 1-S at 2 and OCA M.B. at 9-11. The OCA points out that in this example, the truncation methodology charged customers $1.16 per MCF, when the Company was actually paying $1.80 per Mcf. As such, the OCA submits that truncation has not produced rates that are more reflective of market prices. OCA R. Exc. at 9-11.

The OCA points out that the Company claims that the truncation methodology allows more gas costs to be recovered in the current gas year, maximizes cost recovery in the C-Factor and creates fewer costs to be recovered in the E-Factor in the following year. Citing NFGD Exc. at 8-10. The OCA notes that the ALJ concluded that the error in NFGD’s argument is that it only looks at the impact of the truncation methodology on the E-Factor and does not look at the significant impact that truncation has on the C-Factor. Citing R.D. at 24. The OCA explains that both the E-Factor and the C-Factor are included in the PTC and a distortion of the C-Factor impacts the accuracy of the PTC. The OCA opines that truncation did not result in the PGC rate tracking the actual cost of gas more closely, did not lead to a more accurate price to compare and did not send the proper price signal. Rather, the OCA maintains that truncation artificially decreased the May 1, 2016, PGC rate which then led to the volatility in the PGC rate on August 1, 2016. OCA R. Exc. at 11-12.

Next, the OCA references that NFGD used Lloyd to argue that without the truncation methodology, sales customers are paying the costs of customers that elect to shop and vice versa, and therefore, the historic method would allow customers to avoid costs by electing a natural gas supplier. The OCA notes that NFGD claims that with the

24 elimination of the migration rider in Act 47 of 2016, shopping customers would avoid paying for their gas costs under the historic method. The OCA asserts that the flaw in NFGD’s argument is that truncation would bear the same result since with the elimination of the migration rider, once a customer switches, they pay no reconciliation whether truncated or not. The OCA reiterates that the truncation methodology would have sent the wrong price signal to shopping customers that the cost of gas was $1.16 per Mcf when it was actually $1.80 per Mcf. OCA R. Exc. at 12.

Next, the OCA references NFGD’s argument that the truncation methodology resulted in “lower gas rates during the winter months when usage is higher and spreads costs more evenly over the year.” The OCA asserts that the 130 percent increase that occurred in August of 2016 is not the result of prices that are “more evenly spread over the year” and but for the truncation methodology, the increase would have been 48 percent. According to the OCA, artificially decreasing the gas costs in the winter distorts the market signal to customers. Also, the OCA reiterates that in each instance cited by the Company, the percentage change in the PGC rates from quarter to quarter was more significant under the truncation methodology than the historic methodology. The OCA maintains that increasing the price volatility and sending an inaccurate price signal to customers in the winter does not provide a benefit to residential ratepayers. The OCA opines that when gas prices fluctuate, particularly in the winter, customers should be given an accurate price signal so that they will conserve or pursue an alternative supplier and further opines that the historic method will provide that more accurate price signal. OCA R. Exc. at 12-13.

d. Disposition

Based upon our review of the evidence of record, we are in agreement with the ALJ that NFGD’s continued use of the truncation methodology to calculate the quarterly adjustments of the C-Factor component of NFGD’s purchased gas cost rates is

25 not just and reasonable. We conclude that the OCA has met its burden of proof and burden of coming forward with evidence that the truncation methodology should be discontinued. We find that the evidence submitted by the OCA in this proceeding convincingly demonstrates that the truncation methodology did not result in the PGC rate tracking the actual cost of gas more closely, did not lead to a more accurate PTC, and did not send proper price signals to enable natural gas customers to make intelligent and informed purchasing decisions in the competitive marketplace. We further agree with the ALJ’s premise on which he reached his recommendation that sound ratemaking practices should promote stability and predictability of rates. However, as shown by the OCA in this proceeding, the truncation methodology, as experienced by the customers of NFGD, has resulted in the exact opposite result, that being the more extreme volatility of PGC rates. Simply stated a methodology which resulted in a 130 percent increase which occurred during a relatively stable period for natural gas prices is unacceptable, unsustainable and should not be continued.

Significantly, we note that, as pointed out by the OCA, none of the other NGDC’s in the Commonwealth experienced the same magnitude of change in the PGC rate during this time period as experienced by the customers of NFGD. According to the OCA’s analysis, only five filings since 2013 have resulted in rate changes greater than 30 percent, and the highest of those was 37 percent while NFGD customers experienced an increase on August 1, 2016, of 130 percent. We conclude that based upon the experience since our 2013 NFGD Order, which demonstrates that the truncation methodology needlessly increases the volatility of the PGC rate, we shall adopt the ALJ’s recommendation that NFGD revert back to the historic methodology of computing quarterly PGC adjustments.

Accordingly, we shall deny the Exceptions of NFGD on this issue and adopt the recommendation of the ALJ.

26 IV. Conclusion

Based upon the evidence presented in this proceeding, we find that National Fuel Gas Distribution Corporation is pursuing a least cost fuel procurement policy pursuant to 66 Pa. C.S. §§ 1318(a)(1)(4) and (b)(1)(3). Accordingly, we shall adopt the ALJ’s Recommended Decision, as modified, consistent with this Opinion and Order. Additionally, we shall grant, in part, and deny, in part, the Exceptions of National Fuel Gas Distribution Corporation; THEREFORE:

IT IS ORDERED:

1. That the Exceptions filed by National Fuel Gas Distribution Corporation to the Recommended Decision of Administrative Law Judge Conrad A. Johnson are granted, in part, and denied, in part.

2. That the Recommended Decision of Administrative Law Judge Conrad A. Johnson, issued on May 18, 2017, is adopted, as modified, consistent with this Opinion and Order.

3. That National Fuel Gas Distribution Corporation’s 2017 annual purchased gas cost filing is approved, consistent with this Opinion and Order.

4. That National Fuel Gas Distribution Corporation is pursuing a least cost fuel procurement policy pursuant to 66 Pa. C.S. §§ 1318(a)(1)-(4) and (b)(1)-(3).

5. That National Fuel Gas Distribution Corporation’s proposal to continue to use its truncation methodology for calculating the C-Factor in quarterly PGC filings is disapproved.

27 6. That National Fuel Gas Distribution Corporation use the historic method for calculating the rate for the C-Factor by using a fully projected year of sales volumes.

7. That National Fuel Gas Distribution Corporation be permitted to file a tariff supplement, on at least one day’s notice to the Commission, containing changes in rates to provide for the recovery of its costs of purchased gas, consistent with this Opinion and Order.

8. That upon the filing of a tariff supplement by National Fuel Gas Distribution Corporation, acceptable to the Commission as conforming with this Order, and the Commission’s approval thereof, the purchased gas cost rates established therein become effective for service rendered on and after August 1, 2017.

9. That upon acceptance and approval by the Commission of the tariff supplement and supporting data filed by National Fuel Gas Distribution Corporation, as being consistent with this Order, the inquiry and investigation at Docket No. R-2017- 2582461 shall be terminated and the docket marked closed; and that the dockets be marked closed at Docket No. C-2017-2584158 and Docket No. C-2017-2585444.

BY THE COMMISSION,

Rosemary Chiavetta Secretary

(SEAL)

ORDER ADOPTED: July 12, 2017

ORDER ENTERED: July 12, 2017