DR 98-029
EnergyNorth Natural Gas, Inc.
Natural Gas Price Stability Plan
Approval to Adopt a Natural Gas Price Stability Plan
O R D E R N O. 22,953
June 8, 1998
APPEARANCES: McLane, Graf, Raulerson, and
Middleton by Steven V. Camerino, Esq. and James T. Lombardi,
Esq. for EnergyNorth Natural Gas, Inc. and Michelle A.
Caraway and Stephen P. Frink for the Staff of the New
Hampshire Public Utilities Commission.
I. PROCEDURAL HISTORY
On March 6, 1998, EnergyNorth Natural Gas, Inc.
(ENGI) filed with the New Hampshire Public Utilities
Commission (Commission) its Petition for Approval to Modify
its Natural Gas Price Risk Management Policy (Hedging
Policy) and to Adopt a Natural Gas Price Stability Plan
(PSP). On April 2, 1998, the Commission issued an Order of
Notice which bifurcated the Hedging Policy from the PSP,
scheduled a Prehearing Conference and proposed a procedural
schedule for the PSP.
In accordance with the Order of Notice, a
Prehearing Conference and technical session were held on
April 21, 1998 regarding the PSP. There were no Motions to
Intervene filed. The Office of the Consumer Advocate (OCA)
is a statutorily recognized intervenor.
On April 30, 1998, the Commission issued Order
Nos. 22,914 and 22,915. Order No. 22,914 approved the
procedural schedule for the PSP. Order No. 22,915 approved
ENGI's modified Hedging Policy with the following provision
pending a final order on the PSP: ENGI may hedge up to 80%
of its Gulf Coast and Canadian index-priced gas supplies.
The use of Exchanging Futures for Physicals to hedge the
remaining 20% of supplies would be evaluated during the PSP
proceeding.
Commission Staff (Staff) and the Office of the
Consumer Advocate (OCA) issued data requests and a second
technical session was held on May 14, 1998. On May 18,
1998, Staff reported that it supported ENGI's proposed PSP
and filed a request with the Commission to reschedule the
hearing to an earlier date than approved in the procedural
schedule to allow ENGI additional time to take advantage of
potential lower prices in the natural gas commodities
market. On May 20, 1998, the Commission approved a change
in the hearing date to May 28, 1998.
The hearing was held on May 28, 1998 before a
Hearings Examiner. Testimony in support of the filing was
offered jointly by ENGI's witnesses Mark G. Savoie, Rate
Analyst, and Donald E. Carroll, Vice President of Gas
Supply. On June 4, 1998, the Hearings Examiner issued his
report recommending that the Commission approve the PSP as
filed.
II. POSITIONS OF THE PARTIES AND STAFF
A. ENGI
ENGI's petition for approval of the PSP requests
authority for ENGI to offer a set price to customers who
elect to participate in the plan based on commodity prices
that have been locked in ahead of time with ENGI's
suppliers. The PSP will not guarantee lower prices than
those available under the traditional Cost of Gas Adjustment
(CGA). It will simply ensure a set price during the winter
period for customers who desire price certainty.
Mr. Savoie testified that the PSP only affects the
gas commodity component of the customer's bill and is
consistent with the current CGA mechanism in that the cost
of gas is passed through to the customers on a
dollar-for-dollar basis. ENGI does not make a profit or
incur a loss on its gas costs.
ENGI will set the PSP price prior to the start of
the winter period; that price will remain in effect
throughout the period for participating customers.
Enrollment in the PSP will be completed prior to November 1,
1998 and participating customers will be required to remain
in the plan until March 31, 1999, unless the customer
terminates service with ENGI during the period.
When ENGI sets the PSP price, it will know
essentially all of the pricing information necessary to
serve those customers. ENGI will hedge the Gulf Coast and
Canadian index-based supply portion of the volumes approved
under the PSP by locking into a price, or series of prices,
with one or more of its suppliers. This is known as
Exchanging Futures for Physicals (EFPs). Although the EFP
is similar to purchasing a futures contract, there are no
margin requirements or brokerage fees associated with an
EFP. Additionally, unlike purchasing options, there are no
premium costs incurred with EFPs.
The PSP price will not include prior period
adjustments or margins for non-firm, emergency, capacity
release and the non-retained portion of
transportation-related margins for the months of September
1998 through March 1999, as these margins cannot be
accurately forecasted at the time the PSP price is
determined. The 1998/1999 winter PSP price will include a
credit for the 1997/1998 winter period over-collection so
that the CGA rate and the PSP price will be on an equal
footing at the inception of the plan. If offered in
subsequent years, the PSP price will not include a charge or
credit for the prior period's over or under-collection of
gas costs.
Mr. Savoie testified that there could be a
difference between the PSP revenues and the costs to serve
those customers, primarily due to weather variances and the
impact those variances may have on the supply mix. Firm
sales CGA customers (non PSP participants) are subject to
potential monthly rate adjustments and over or
under-recoveries which are included in the calculation of
the subsequent winter's CGA rate, with applicable carrying
costs. Any over or under-collection associated with the PSP
will be credited or charged to the firm sales CGA customers
through the CGA mechanism.
Mr. Savoie summarized his response to Staff Data
Request No. 1-13 that describes the worst case scenario in
which additional costs are charged to the firm sales CGA
customers. He explained that by using the coldest winter
over the past thirty (30) years and applying it to the
1997/1998 winter period, a $10,000 under-collection would
have resulted. Mr. Savoie also summarized his response to
Staff Data Request Nos. 1-12 which detailed the margins
earned during the months of September through March over the
past three (3) years and for which PSP customers will not be
credited; the results ranged from $420,000 to $1,000,000.
Mr. Savoie explained that these margins will not be included
in the calculation of the PSP price not only because of
their speculative nature but also to serve as a "cushion" to
protect firm sales CGA customers should the PSP generate an
under-collection. The failure to credit these margins to
the PSP also gives a form of a "premium" to those customers
as a collateral consequence of having a guaranteed price for
gas. Customers who feel that the PSP is over-priced may
continue as firm sales CGA customers and will receive the
benefit of non-firm and miscellaneous transportation-related
margins incurred from September through March.
Under the PSP, ENGI will make available up to
twenty percent (20%) of the 1997/1998 weather normalized
winter period therm sales. The PSP offering will be
available to two pools of customers based on their pro-rata
1997/1998 therm sales: (1) residential and (2) commercial,
industrial and large volume. Separate pools will insure
that the commercial, industrial and large volume sales
customers will not dominate the volumes available under the
PSP. The volumes of gas offered will be contingent upon
several factors such as customers' anticipated interest in
the PSP and the natural gas prices ENGI is able to lock into
during the spring and summer. Customers will be enrolled
on a first-come, first-served basis and prior PSP customers
will not receive preferential treatment should the plan be
offered in subsequent years.
Unlike the "pre-buy" option available to oil
customers, the PSP does not require participants to purchase
a specified volume of therms at the fixed price. Mr. Savoie
testified that ENGI was concerned that such a requirement
might prevent some customers, who otherwise may have
enrolled in the plan, from participating and would be unduly
burdensome to administer. Mr. Savoie stated that ENGI would
consider instituting such a requirement in future PSPs.
Mr. Savoie also testified that once the winter
period actual results were available, as detailed in ENGI's
response to Staff's Data Request Nos. 1-5, ENGI would
determine any over or under-collection caused by the PSP.
While it is anticipated that any associated over or
under-collection would be minimal, the actual results of the
1998/1999 PSP will be reviewed and evaluated prior to filing
for a continuation of the current plan or a revised PSP.
ENGI elected to limit the therms available under the initial
PSP offering given the uncertainty of customer interest and
lack of empirical evidence regarding the effectiveness of
such plans.
Mr. Savoie noted that the PSP provides another
mechanism to manage fluctuations in gas costs in conjunction
with the approved Hedging Policy. Hedged gas not needed by
PSP participants will be considered to be part of ENGI's
overall gas supply portfolio and will be used to satisfy the
needs of firm sales CGA customers.
B. Staff
Staff did not file testimony in this proceeding.
At the hearing, Staff recommended that the Commission
approve the PSP as filed and its effects on the approved
Hedging Policy.
C. OCA
While unable to attend the hearing, the OCA asked
Staff to convey its recommendation that the PSP be approved
as a pilot or test for this coming winter. The OCA also
asked that should the PSP be approved and offered in
subsequent years, that current PSP customers not be given
preferential treatment for participating in the plan.
III. COMMISSION ANALYSIS
We have reviewed the filing and the Report of the
Hearings Examiner. We agree that the proposed Price
Stability Plan is reasonable and in the public good.
The PSP is consistent with prior Commission orders
that directed gas companies in New Hampshire to mitigate
natural gas price volatility at a minimal cost. Although
that is the objective of ENGI's Hedging Policy, the Hedging
Policy does not eliminate price fluctuations. The PSP will
eliminate price fluctuations due to gas costs without the
costs associated with futures or options. The PSP is
similar to fixed price plans offered in the competitive
market by oil and propane dealers, as well as natural gas
marketers, that ensure a set price for the winter period to
customers who desire price certainty.
Variances in the revenues and costs associated
with the PSP are likely, as usage and supply mix are based
on normalized weather, but any resulting over or
under-collection should not be significant and should be
more than offset by margins that will be credited to the
firm sales CGA customers. In a market where prices
typically rise during the winter, both PSP and non-PSP
customers should likely benefit as PSP participants pay a
price based on natural gas supplies locked in during the
summer and the non-participants retain margins which would
normally be spread over all firm sales CGA customers.
With the recent change in the CGA mechanism, which
permits monthly changes to the CGA rate to more accurately
reflect market prices, the PSP offers an alternative to
customers who do not want to be subject to the volatility of
market prices. Enrollment in the PSP will commence when
ENGI files for its winter CGA rate, enabling customers to
better evaluate the risks. The availability of two pricing
options will allow firm sales CGA customers to decide the
level of price risk they wish to tolerate while providing
better price signals to the marketplace.
We agree that as an initial offering the plan
should be limited and we believe that twenty percent (20%)
of the 1997/1998 weather normalized winter period therm
sales is a reasonable amount to be offered for the coming
winter. Combined with ENGI's current Hedging Policy,
permitting twenty percent (20%) of the Gulf Coast and
Canadian gas supply to be purchased under the PSP with EFPs
allows ENGI to effectively hedge one hundred percent (100%)
of its index-based supplies. If the PSP is undersubscribed,
the supplies purchased with EFPs will be deemed to be
additional volumes hedged for the firm sales CGA customers.
We agree with the OCA that the PSP should be
treated as a pilot or test for the 1998/1999 winter period.
The plan should be closely monitored and the results
reviewed and evaluated to serve as a basis for continuing
and improving the plan going forward.
Based upon the foregoing, it is hereby
ORDERED, that the proposed Price Stability Plan is
hereby APPROVED; and it is
FURTHER ORDERED, that ENGI may hedge up to twenty
percent (20%) of its Gulf Coast and Canadian index-priced
gas supplies using EFPs.
By order of the Public Utilities Commission of New
Hampshire this eighth day of June, 1998.
Douglas L. Patch Bruce B. Ellsworth Susan S. Geiger
Chairman Commissioner Commissioner
Attested by:
Thomas B. Getz
Executive Director and Secretary