THE FUTURE OF THE NATURAL GAS INDUSTRY

STATE OF NEW YORK DEPARTMENT OF PUBLIC SERVICE THE FUTURE OF THE NATURAL GAS INDUSTRY STAFF POSITION PAPER Prepared by: Gas and Water Division Consumer Services Division Office of General Counsel Office of Accounting and Finance September 4, 1997 This study was undertaken by the Policy Section of the Gas & Water Division, Sheila A. Rappazzo, Chief. Michael Scott served as coordinator of the effort and also as principal author. We acknowledge the contributions made by the Offices of Accounting and Finance and of Counsel, and the Consumer Services ivision in the preparation of this report. CASE 97-G-1380 TABLE OF CONTENTS EXECUTIVE SUMMARY INTRODUCTION THE NATURAL GAS INDUSTRY TODAY General New York State MAJOR TRENDS AFFECTING THE NATURAL GAS INDUSTRY Electric Restructuring Mergers, Acquisitions & New Market Entrants The Natural Gas Commodity Market Technology Improvements Regulatory Actions STAKEHOLDER VIEWS OF THE FUTURE OF: Local Gas Distribution Companies (LDCs) Marketers and Energy Service Companies (ESCOs) Pipeline Companies Producers Regulators Consumers STAFF’S ANALYSIS Emerging Trends - Impact on New York State LDCs Regulatory Challenges Staff’s Vision PROBLEM IDENTIFICATION AND POTENTIAL SOLUTIONS Threshold Issue - The Future of the Merchant Function Impediments to LDCs Exiting the Merchant Function The Future of Upstream Capacity Supplier-of-Last-Resort/Obligation to Serve Ensuring System Reliability Rate Design Issues Market Power Issues Customer Communications and Outreach Refocusing Regulation Funding of Social Programs Federal Actions Tax Inequity Issues RECOMMENDATIONS APPENDICES Issues Paper and Questions Roundtable Meeting Participants Summary of Stakeholder Input Acronym List 1 2 2 2 3 4 4 6 7 7 10 10 11 13 14 14 15 16 16 16 17 18 18 21 21 24 25 27 29 30 32 32 33 33 34 CASE 97-G-1380 EXECUTIVE SUMMARY Introduction The New York Public Service Commission has established a policy framework to encourage competition in all aspects of the regulated utility business where possible and feasible. The objectives are to achieve the benefits of a competitive environment--more choice and lower prices for customers -- while maintaining or improving service quality and reliability, and fostering innovation and efficiency. The purpose of this study is to identify and propose resolutions to existing and emerging issues in a manner consistent with evolving industry trends and competitive forces. About this Study Commission staff initiated this study to assess the future of the gas industry and the role of local distribution companies (LDCs). Staff prepared a discussion paper and distributed it to approximately 60 stakeholders representing producer, marketer, pipeline, LDC, consultant, customer and regulator interests. We held a series of 15 roundtable meetings with groups of those stakeholders to solicit views on the issues through informal and candid discussions. On the following pages we present staff’s analysis, conclusions and recommendations for the Commission’s consideration. The summary of parties’ comments at the roundtable discussions is included as Appendix C. This study does not specifically address how issues outside the purview of the Commission, such as those affecting interstate pipeline companies should be resolved, but we have identified the need to monitor those issues and intervene in the appropriate forum as necessary to protect the interest of New York customers. -i- CASE 97-G-1380 Current Status Last year, at the Commission’s direction, LDCs in New York put in place programs to provide all customers a choice of gas suppliers1. The Commission’s program provided for small customer aggregation programs2 for obtaining gas supply competitively; unbundling of rates; establishment of guidelines for marketers, including customer protections; and interim requirements for LDC affiliates marketing in their own franchise areas. The Commission further allowed, but did not require, LDCs to assign a pro rata share of pipeline capacity to customers migrating from sales to transportation, and for some LDCs, a limitation on the level of migration, both for up to three years. In subsequent orders, the Commission has approved unbundling of storage services for most LDCs. Progress has been steady but slower than expected. As of mid-1997, some 11,000 customers, comprising approximately 3% of small customer firm gas sales, have migrated to transportation under the program. Impact of Electric Restructuring We expect that competitive forces will continue to reshape the gas industry over the next few years, and believe that restructuring of the electric industry will have a significant impact. The focus of gas marketers may shift as the marketing of electricity expands. This may result in either a shift of focus to electricity marketing, or more aggressive marketing of both electricity and gas so that a marketer can meet a customer’s energy needs and increase market share. The possible retirement of generation capacity could 1 The Commission’s March 28, 1996 Order on Compliance Filings approved the implementation of unbundled service in Case 93-G-0932, culminating a three year effort which began when this proceeding was instituted on October 28, 1993. Large customers had a choice of suppliers available to them since approximately 1984, and represent some 30% of the throughput in New York. -ii- 2 CASE 97-G-1380 accelerate the need for new power plants which are likely to be gas-fired, and therefore increase gas demand. Conversely, the possible renegotiation of contracts with independent power producers could reduce gas demand and affect the availability and price of pipeline capacity now used to serve these plants. Lower prices could increase the competitiveness of electricity relative to natural gas in certain commercial and industrial applications. Fundamental Conclusion Staff’s analysis concludes that the most effective way to establish a robustly competitive market in gas supply is to separate the merchant and distribution functions1. This would ensure that natural gas is universally provided on a competitive, deregulated basis. It would also resolve "level playing field" issues between LDCs and other merchants including any subsidies that are embodied in existing bundled sales services as well as tax inequities.2 The need to regulate LDC purchasing practices would be eliminated, substituting instead the discipline of the market to set gas prices. We believe that a five year period will be needed for LDCs to transition out of the merchant business. However, during the transition we expect that the LDCs will continue to provide the bulk of merchant service thereby requiring interim regulatory actions which will become unnecessary over the long term as LDCs phase out of the merchant function. For example, the Commission has recently issued orders requiring the LDCs to offer customers fixed price options and to review and change there portfolio of gas purchase contracts as needed to reduce price volatility, and has 1 This is parallel to FERC action which separated the merchant function from the transportation function in the pipeline industry. There are a variety of "level playing field" issues associated with taxes, including the state gross receipts tax, state and local sales taxes. While outside the purview of the Commission, staff is aware of several initiatives to address these inequities, particularly the gross receipts tax. -iii- 2 CASE 97-G-1380 instituted a proceeding to modify the gas adjustment clause to recognize, among other things, risk management costs1. Staff Recommendations 1. Eliminate impediments to LDCs exiting the merchant function. a. Upstream Capacity - LDCs should plan to eliminate or restructure any capacity contracts extending beyond five years so as to eliminate LDC obligation beyond that point except for capacity that may be required for supplier of last resort or operational considerations. Staff’s preferred approach is for the LDCs to sell the contracts at an auction(s).2 Such a plan would also involve treatment of stranded costs. The Commission previously directed LDCs to encourage development of the competitive supply market and customer migration so that they do not need to replace expiring capacity contracts.3 As a first step, LDCs may want to focus on encouraging firm commercial and 1 Marketers have argued, and the Commission recognizes, that requiring LDCs to offer fixed price options and allowing recovery of risk management costs removes advantages that marketers have in expanding the competitive market. This will provide a "market test" to determine marketer interest and establish the value of capacity as well as the magnitude of stranded costs. These plans could be structured with different objectives; to offer portions of capacity needed to serve specific geographic areas; to serve specific segments of LDC system load; to assure marketer presence in the small customer market; to serve a cross section of high and low volume and load factor customers; or on some other basis. The Commission recently clarified what information the LDC filings due in April, 1998 should contain and actions LDCs should be taking to avoid stranded costs (see Order Clarifying April, 1998 Excess Capacity Filing Requirement, Case 93-G-0932, issued September 3, 1997. -iv- 2 3 CASE 97-G-1380 industrial customers to switch to other 1 merchants . Supplier of Last Resort/Obligation to Serve2 The Commission should develop a policy to allow these obligations to be provided by any or all merchants who want to serve the market, provided that all statutory requirements are met. System Reliability - Prime reliance should be placed on market based solutions. The best way to assure system reliability is to establish a robustly competitive market. Providing opportunities for marketers to bid on and acquire the upstream capacity now under contract to LDCs and cooperative arrangements between LDCs and marketers can facilitate development of such a market. b. c. 2. Continue to review rate design issues to identify changes required to eliminate subsidies and promote a competitive market. Appropriate changes should be implemented on a company-by-company basis. Develop safeguards and monitoring mechanisms for market power issues. The Commission will increasingly face market power issues during and beyond the transition to a more competitive market (e.g. proposed mergers, changed corporate structures 3. 1 While we believe that all customers should be encouraged to migrate to other suppliers, we also recognize that the number and complexity of issues that need to be addressed with these customers make them easier migration candidates. This study has been conducted as the Commission’s electric "Competitive Opportunities" proceeding has been unfolding. We recognize that this and perhaps other fundamental issues to be addressed are common to both industries, and we expect that they will be resolved in conjunction with the "Competitive Opportunities" proceeding. -v- 2 CASE 97-G-1380 and affiliate transactions). These issues will require the adoption of appropriate safeguards and careful monitoring to assure that no player garners undue market power. 4. Continue staff review and monitoring of LDC and marketer customer education programs to identify the potential barriers and develop a systematic plan of action for greater accessibility to information and options about choices. LDCs should employ customer research as a basis for developing or continuing customer communications activities. Customer communication and outreach campaigns are essential to ensure customer awareness of the changes in the natural gas market and to encourage active customer participation in the assessment and selection of energy service providers. Refocus regulation as the industry evolves (e.g., market power issues will become much more important, while increased reliance on market forces will reduce the need for traditional regulation). Regulation must become more streamlined and flexible. The performance of new market entrants must be assured without stifling competition. A review of the appropriate treatment of business sensitive information in a more competitive environment is needed. Develop a mechanism for funding social programs1. These programs should be reviewed to identify possible cost savings opportunities and appropriate legislative changes. Alternative approaches, such as 5. 6. 1 Again we expect that this issue to be resolved in conjunction with the "Competitive Opportunities" proceeding. -vi- CASE 97-G-1380 LDCs sharing these responsibilities and/or costs with other merchants (e.g. bidding, risk pools, and payment options) should be developed and market tested before full scale implementation. 7. Continue staff monitoring of evolving Federal policies. The Commission should intervene as appropriate to assure that an open, fair, reliable and competitive upstream market exists. Summary - Staff’s Vision In staff’s vision of the future, the merchant function1 will be provided by non-regulated entities -- local gas distribution companies (LDCs) will be completely out of the merchant business2. These non-regulated entities will share the Supplier-of-Last-Resort and Obligation-to-Serve responsibilities, and along with the LDCs, they also will share the cost of social programs3. A robustly competitive market will emerge as LDCs exit the merchant role and as distribution service rate structures are modified to meet the needs of the competitive marketplace. LDCs will collaborate with marketers to develop informative and meaningful customer choice programs which greatly facilitate customer willingness to select new suppliers4. System reliability will be assured because LDCs and marketers will cooperate to preserve it and because competition underscores the importance of reliable deliveries to a marketer’s reputation. Finally, with the deregulation of the electric industry, Energy Service Companies 1 A gas merchant sells gas; LDCs sell gas through a bundled service which includes interstate transportation, storage, and distribution. They may have unregulated affiliated marketing entities. E.g., Home Energy Fair Practices Act (HEFPA) protections, lowincome assistance programs, uncollectible accounts. Those not making a choice will be assigned to marketers or a risk pool. -vii- 2 3 4 CASE 97-G-1380 (ESCOs) and other entities will offer, on a competitive basis, many of the services now performed by LDCs. Admittedly, this is an idealized view. There are a number of barriers to achieving this model that must be addressed, and most likely, additional issues will arise along the way. -viii- CASE 97-G-1380 INTRODUCTION Natural gas unbundling and small customer aggregation programs were initiated last year in New York State. These programs have raised a number of issues which must be addressed to expand and sustain the emerging multi-provider competitive environment. Moreover, major emerging forces and issues both within and outside of the gas industry are likely to have an even more dramatic impact on LDCs and must be addressed. In light of these developments, staff of the Department of Public Service1 (DPS) initiated a study to assess the future of the natural gas industry and the role of LDCs. Our goal was to identify regulatory and legislative actions needed to increase competition and expand customer choice. Staff prepared and distributed a discussion paper and set of questions on the issues to approximately 60 representatives of producer, marketer, pipeline, LDC, consultant, customer and regulator stakeholder groups (the discussion paper and questions are provided in Appendix A). A series of 15 roundtable meetings were held with groups of these stakeholders to solicit views on the issues through informal and candid discussions. A list of the participants is provided in Appendix B, and a summary of the comments received is provided in Appendix C. This report reflects staff’s analysis of the issues with the benefit of these comments. Not surprisingly, the stakeholders views on many subjects were diverse and the issues upon which they agreed were limited. The sections of this report which follow contain discussions of the: natural gas industry today; major trends affecting the gas industry; stakeholder views on the future of industry players and their roles; and finally, staff’s analysis of issues and options along with its recommendations, including proposed action steps. 1 Staff participants included representatives of the Gas & Water and Consumer Services Divisions, and the Offices of Accounting & Finance and General Counsel. CASE 97-G-1380 THE NATURAL GAS INDUSTRY TODAY General The gas industry has changed dramatically since a new Federal regulatory paradigm was implemented beginning in late 1992. The Federal Energy Regulatory Commission (FERC) Order 636 restructured the gas industry by requiring that interstate pipeline companies unbundle services to create a competitive commodity market. As a result, interstate pipelines withdrew from the merchant function1, and the responsibility for gas supply acquisitions was transferred to LDCs. Since that time, there have been several major developments including the trend of mega-mergers and acquisitions (see Major Trends Affecting the Natural Gas Industry, below), expanded marketer activity, the increased and more flexible use of pipeline capacity, and the development of unbundling and pilot programs in other states. Some eleven states, including California, Illinois, Ohio, Pennsylvania, Maryland, New Jersey, and Massachusetts have pilot or other programs for unbundled service down to the residential level for one or more LDCs. Moreover, many stakeholders believe that the most significant development is the nationwide effort to restructure the electric utility industry and establish retail electric competition. This will likely result in convergence of the gas and electricity markets and could shift the focus of marketers as they become "energy suppliers". This development will have implications for corporate structures and strategies as well as the overall competitiveness of natural gas. New York State In New York, industrial and larger commercial customers have had a choice of gas merchants since the mid-1980’s. Marketers 1 Interstate pipeline companies now simply transport customerowned gas; the merchant function that they previously served is now served, in part, by their marketing affiliates. -2- CASE 97-G-1380 now supply gas to many of these customers and LDCs provide transportation service for this customer-owned gas. Last year, at the Commission’s direction, New York LDCs implemented unbundled small customer aggregation programs to expand competition and provide all customers with the ability to choose a gas merchant. Experience with these programs has revealed a number of issues which must be addressed. In particular, New York LDCs’ existing contracts for upstream pipeline capacity will soon begin to expire. The Commission has allowed LDCs to assign upstream capacity to firm customers converting from sales to transportation service for a period of three years. Prior to the start of the third year, LDCs must demonstrate efforts to relieve themselves of "excess" capacity1. The unbundling of gas services for small customers is still in its infancy in New York. As of July, 1997, there were approximately 11,000 small transportation customers in New York State, with thirty-five percent of these being residential customers2. Staff is working to expand access to storage services, resolve rate and administrative issues, and educate customers in order to provide meaningful choice for all customers throughout the State. More work must also be done to remove barriers to a reduced merchant role for LDCs and an expanded merchant role for marketers. MAJOR TRENDS AFFECTING THE NATURAL GAS INDUSTRY The major forces that will shape the gas industry are electric restructuring, mergers, acquisitions and new market entrants, technology improvements, customer perspectives and regulatory action. 1 See Order Clarifying April, 1998 Excess Capacity Filing Requirement, Case 93-G-0932, issued September 4, 1997. There are approximately 4.4 million gas customers in New York State, 4.0 million of which are residential customers. 3 2 CASE 97-G-1380 Electric Restructuring Most stakeholders believe that restructuring of the electric industry will be the most significant near-term development impacting the gas industry. The marketing of electricity is expected to expand dramatically and the attention of markets may shift away from the marketing of natural gas, as electricity may offer more profitable opportunities, at least initially. It is also possible that electric restructuring will have the opposite result; marketers may more aggressively market both electricity and gas to meet all customer energy needs and to increase market share. The introduction of competition to the generation market may result in the retirement of uneconomic or inefficient fossil or nuclear generation capacity and increase the need for new efficient gas-fired combined-cycle generation facilities, thereby increasing gas demand. Renegotiation of contracts for the sale of electricity by independent power producers may decrease gas demand for power generation in the near-term and also impact the availability and price of the firm natural gas pipeline capacity that is currently used to serve most of these plants. To some extent, lower electricity prices resulting from electric restructuring will increase the competitiveness of electricity vs. natural gas, especially in commercial and industrial applications. Electric restructuring may result in more competitive electricity prices in the residential sector in other states/regions (e.g. the south) where electricity prices are already more competitive with gas. However, the overall impact of electric restructuring on the gas market is not clear, given the magnitude and opposing direction of the various potential effects. Mergers, Acquisitions and New Market Entrants Companies can eliminate duplication, reduce overall costs, diversify into new products and markets, and establish market share and name recognition through mergers, acquisitions, and new alliances. This trend toward larger size appears to be 4 CASE 97-G-1380 based on achieving such economies, the need to "bulk-up" to increase chances for survival, and the need to offer an expanded array of "branded" services. A few examples follow: Enron Corporation recently acquired Portland General Corporation, an electric utility based in Portland, Oregon, providing Enron access to the western electric grid. Enron’s stated goal is to become the largest marketer of electricity and natural gas. Duke Power Company and PanEnergy Corporation recently merged to form Duke Energy Company. This was the largest deal yet between an electric utility and a natural gas pipeline, creating one of the largest marketers of gas and electricity. Numerous mergers between electric utilities and natural gas or combination utilities have been proposed. The recent acquisition of Tenneco Energy by El Paso Energy Corporation created one of the largest gas pipeline systems in the nation, linking gas markets in the east with relatively lower cost gas in the San Juan Basin and Rocky Mountains. Concentration in the marketing of natural gas will increase significantly. Recently completed and currently proposed mergers and acquisitions will reduce the number of major gas marketers and nearly double the market share for the five largest companies.1 It appears that major marketers will focus on the 1 In 1994, average sales in BCF/D for the top five marketers were: Amoco 5.4; Natural Gas Clearing House 3.7; Associated Gas Services 3.6; Western Gas Marketing 3.2; and Enron Capital & Trade Resources 3.0. After recently completed and proposed mergers the top five will be: Natural Gas Clearing House 10.0 (merger of NGCH/Chevron); Pan Energy 7.6 (merger of Mobil/Associated); name to be announced 7.0 (merger of Coastal/West Coast); name to be announced 6.5 (merger of Tenneco/El Paso); and Coral Energy Resources 4.5 (merger of Shell/Tejas). Source: Natural Gas 1996 Issues and Trends, DOE/EIA, December 1996. 5 CASE 97-G-1380 wholesale market, while smaller companies will focus on retail markets. New alliances are being formed to address emerging business opportunities. For example, Chevron recently formed an alliance with Nimod Natural Gas (Tulsa, Oklahoma) to market its gas in the Chicago area; Columbia Gas Systems Inc. and Sabre Decision Technology (a company with airline computer reservations technology experience) formed a joint venture to create a real-time physical and financial trading system for wholesale and retail gas capacity and gas and electricity commodities. New market entrants -- Energy Service Companies (ESCOs) - are expected to market both electric and gas, energy services including fuel management, equipment services, efficiency improvements, and according to some observers, consumer services such as home security systems, cable TV service, and a host of other consumer products. This will increase the substitutability of fuels so that consumer needs can be met in a more flexible and cost efficient manner. It will also further the convergence of the gas and electricity markets. Many observers believe that the metering/billing function is the key to customer access. The Natural Gas Commodity Market Most New York natural gas purchase contracts are tied, either directly or indirectly, to a market index such as the New York Mercantile Exchange (NYMEX) natural gas futures contract which has become a prime benchmark for natural gas commodity purchase contracts on the East Coast. The use of the NYMEX futures and options contracts to hedge purchases and create various pricing options for customers has expanded. At the same time, it appears that the amount of price speculation has increased. This factor, in combination with 6 CASE 97-G-1380 regional strategies1 of maintaining leaner storage inventories has led to increased price volatility. Natural gas has become one of the most heavily traded commodities. Price volatility is likely to be a permanent feature of a deregulated commodity market. Volatile prices present marketing challenges for some customers which may be addressed through hedging strategies2. Technology Improvements Technology developments are expected to continue to improve the economics and efficiency of finding and producing gas. Over the long-term, advances in end use equipment will increase the flexibility to use gas and/or other fuels in combination to meet customer demands in a least cost manner. These developments will reinforce convergence of the gas and electricity markets. Further, improvements in metering and information technology will increase system efficiency and load control, and expand the number of available pricing options. Regulatory Actions Regulatory actions to promote a more competitive environment have dramatically reshaped the gas industry and will be pivotal to the industry’s evolution. A review of current issues before Federal and New York State regulators follows: Federal - The Federal Energy Regulatory Commission (FERC) is addressing a number of issues that will affect the desirability of acquiring or holding upstream capacity: 1 Going into this past winter, storage capacity was full in the East consuming region, but approximately 85 percent full in the West consuming region (where the existence of excess capacity has been substituted for storage) and 75 percent full in the Producing region. The Commission recently addressed this issue in its Order Requiring the Filing of Proposals to Ameliorate Gas Price Volatility and Requesting Comments, Case 97-G-0600, dated June 5, 1997. 7 2 CASE 97-G-1380 "Capacity Turnback" - The issue of cost responsibility for unsubscribed pipeline capacity which result when an LDC fails to renew an expiring contract or renews for less capacity. FERC has ruled that a pipeline company cannot collect an exit fee upon the termination of firm service agreements and thus a pipeline company is "atrisk" and should pursue settlement agreements with customers. Capacity Release Rules - Under current rules, the rate for released capacity cannot exceed the maximum rate in the pipelines tariff, limiting its value in the secondary market FERC is considering lifting the price cap when the releasing shippers and pipelines can demonstrate that they are unable to exercise market power. Rate Issues - These include FERC’s: general requirement that pipeline companies use a straight-fixed-variable (SFV) rate design; policy statement on alternatives to traditional cost-of-service ratemaking;, negotiated/recourse rate program; and policy statement on rolled-in vs. incremental pricing for the costs of pipeline expansion projects. Mergers - FERC also issued a policy statement on mergers which established three factors that will be considered in analyzing proposed mergers: the effect on competition, rates and regulation. New York State - The two significant areas of regulatory activity have been retail unbundling and the move toward performance based regulation: Retail Unbundling - As directed by the Commission, LDCs implemented unbundled transportation services for small customer aggregation pools in the fall of 1996. 8 CASE 97-G-1380 The minimum volume for such aggregation pools is 5000 MCF/YR. For the first three years there are limitation s on customer conversions for some companies1. LDCs can require customers converting to transportation service to take associated capacity for a period of three years. The customer pays the LDC’s weighted average cost of capacity, and the LDC retains recall rights in the event that the marketer fails to provide service. Prior to the start of the third year, LDCs must demonstrate efforts taken to relieve themselves of "excess" capacity. In order to serve aggregation customer pools, marketers must provide specific customer protections, including plain language bills, dispute resolution procedures and disconnection notice procedures for residential customer. Both off-system (or city-gate) and on-system balancing have been addressed by the Commission and language related to both is set forth in LDC tariffs. Performance Based Regulation - The Commission has also continued to advance an alternative to traditional costof-service regulation known as Performance Based Regulation (PBR), which provides incentives for LDCs to lower costs and operate more efficiently. PBR measures include hard and soft price caps2, profit sharing, and gas cost incentive mechanisms (GCIM). Such incentives have been implemented for four LDCs: New York State Electric and Gas Corporation has a three year "hard cap"; The Brooklyn Union Gas Company has a "soft cap" for an unprecedented six years. Niagara Mohawk Power Corporation and National Fuel Gas Distribution Corporation have GCIMs applicable to 1 Brooklyn Union Gas, Consolidated Edison, New York State Electric and Gas, Niagara Mohawk and Rochester Gas & Electric all have such limits. In a "hard" cap the retail rate is frozen; in a "soft" cap the distribution charge is frozen, while the LDC passes along changes in the cost of gas. 9 2 CASE 97-G-1380 at least a portion of their gas purchases, and Consolidated Edison Company of New York, Inc., has proposed a GCIM. Further, in its unbundling order, the Commission also established as a general rule that LDCs could retain 15 percent of the net profits obtained from capacity release1 and off-system sales2 transactions. New York LDCs have been increasingly active in the off-system sales and capacity release market. STAKEHOLDER VIEWS ON THE FUTURE OF: LDCs There is basic agreement among all stakeholders that LDCs must perform certain core functions. These are generally seen to include the distribution of gas, system safety, and coordination of supply receipts with customer demands on a daily basis. There is also general agreement that beyond these core functions, any other function that an LDC now serves that could be provided on a competitive basis (either unregulated or less regulated) need not be provided by the LDC. For example, meter reading is widely seen as a potentially competitive service. The most significant question is whether LDCs should continue to serve as merchants. Stakeholders hold diverse views on this issue. Some LDCs would like to exit the merchant function as soon as possible. These LDCs see the merchant function as something with no upside, because they are not allowed to earn any profit on their gas supply purchases but remain at risk (subject to prudence review) for those supply arrangements. Several other stakeholders support this view, believing that there is a fundamental incompatibility between the existence of regulated LDC merchants and an increasingly competitive gas commodity market. In contrast to LDCs, gas marketers are not subject to price regulation. In addition, marketers have greater 1 Sales of pipeline capacity in the secondary market established under FERC Order 636. Sales of gas outside of the LDCs service territory, usually out-of-state. 10 2 CASE 97-G-1380 opportunities to optimize the use of upstream supply assets. Other LDCs believe that they must remain merchants either to assure proper system operation or to assure an appropriate level of system expansion and market growth. These LDCs believe that marketers are driven strictly by profit potential, and focus on the most attractive and easiest to access customers1. Thus, they believe that marketers have no vested interest in expanding gas usage in LDC service territories, especially to serve the smaller, less profitable customers. Other stakeholders reported actual experiences with pilot programs in other states in which marketer activity resulted in customer growth. And finally some stakeholders support a cautious approach. They believe that LDCs should not be allowed to withdraw from the merchant function until all factors are considered and all implications are fully identified and addressed. Marketers and ESCOs While marketers are expected to increasingly serve the gas merchant function, their future role is still somewhat unclear. To date, marketers have focused on serving the most profitable (high use/high load factor) customers, and have shown little interest in serving the smaller and lower load factor customers (e.g. residential customers). Therefore, at this point, marketer commitment to further penetration of the small customer market is unclear. A number of stakeholders stated that marketers have greater potential for efficient use of upstream assets. Marketers serve larger geographic areas with more load diversity and thus have greater opportunities to maximize use and flexibility of their capacity assets. However, some stakeholders expressed the concern that instead of pure efficiency gains, marketers might reduce costs by providing a lower quality of service. For example, a marketer 1 While there is a general sense that today’s marketers may be allies working to increase throughput, there is also a sense that electric restructuring may create more profitable opportunities for marketers, and under those circumstances today’s allies may become tomorrow’s competitors. 11 CASE 97-G-1380 might plan to serve a load that was previously served with firm capacity with a package of 75 percent firm capacity and 25 percent interruptible capacity. Some LDCs view marketers as allies working to increase throughput. Two out-of-state LDCs reported that marketers activity has resulted in attachment of additional customers. However, some LDCs fear that as electric competition emerges marketer interest in fostering gas sales may wane. On the other hand, electric restructuring could result a more aggressive marketing of both gas and electricity as marketers strive to meet all customer needs and to increase their market share. The scope of services to be offered by marketers and their potential overlap with energy service companies (ESCOs) is also unclear. The convergence of the gas and electricity markets, the recent trend of mergers and acquisitions, and the notion that ESCOs might offer a host of energy and non-energy related products and services raises questions about the future role of today’s natural gas marketers. Marketers expressed interest in total unbundling as soon as possible. They complained about limitations in LDCs tariffs, what they view as the slow progress toward complete unbundling and lack of access to storage1. With respect to the supplier of last resort and obligation to serve functions (SOLR/OTS) and social cost issues, marketer and other stakeholders acknowledged that these issues must be addressed and that mechanisms must be available to address them. However, the discussions did not go beyond broad concepts and approaches, never reaching the level of detail needed to fashion a concrete solution. Some stakeholders expressed concern that marketers could acquire capacity and emerge as seller-shippers, and that perhaps a few large marketers might dominate particular cities or regions, both of which raise market power issues. 1 The Commission has addressed this issue and recently approved unbundled storage tariffs for most LDCs. 12 CASE 97-G-1380 Pipeline Companies The role of regulated pipeline companies is now limited to the transportation of gas, as the merchant function that they previously served is now served, in part, by their marketing affiliates. Pipeline company stakeholders expressed concern about the risk of capacity turnback as existing contracts with LDCs expire, and they expect to offer an increasingly broader array of customtailored, shorter-term services. Accordingly, pipeline companies are expected to seek reduced and more flexible regulation to accommodate the provision of such services and to minimize their exposure to stranded costs. Some stakeholders are concerned that pipeline company marketing affiliates could acquire capacity and gain market power. On the other hand, pipeline companies are concerned about the continued reliable operation of the system and therefore appear cautious about the performance of new market entrants. Pipeline company stakeholders also expressed concern about the operational and administrative problems associated with unbundling of storage capacity. Generally speaking, the stakeholders do not see any major problems with respect to the adequacy of pipeline capacity in the future. No dramatic changes in the pipeline system are expected. The changes are expected to be gradual, as old supply sources decline and new supply sources are developed. Stakeholders appeared to be somewhat split on the question of who will plan for and finance future capacity expansions. Many stakeholders were unconcerned, believing that "the market will provide". In fact, at this time there are a number of proposed pipeline expansion projects which are supported by either producers or marketers. Other stakeholders, particularly some LDCs, believe that they should remain responsible for planning system needs and that financing pipeline expansions will be difficult with SFV rates. 13 CASE 97-G-1380 Producers Gas producers are expected to take a more active role in pipeline capacity, sponsoring additional capacity to "monetize" supplies and overcome bottlenecks. However, some stakeholders believe that some producers may acquire pipeline capacity to LDC citygates and emerge as seller-shippers, depending on how the market develops, and whether such action could maximize their profits. Said another way, as the merger activity reported above shows, producers interests are positioned to be major gas marketers. These marketers may operate at the wholesale level or may enter retail markets. Market power concerns would arise if these marketers dominate specific markets or acquire significant pipeline capacity to serve specific market areas. Regulators Regulatory action will play a critical role in how the market develops. As outlined above, FERC is addressing issues which will influence the desirability of acquiring and holding pipeline capacity. This will have a significant impact on the current holders of pipeline capacity, LDCs, and potential future holders of pipeline capacity such as marketers. The future role of marketers will also be effected by FERC action on the terms, conditions and rates for use of pipeline capacity. Further, FERC action on merger proposals and market power issues will shape the development and structure of the industry. State regulators will play a defining role in the future of LDCs, in particular whether they will continue to provide merchant service. This, in turn, will impact and define the entities that hold upstream assets. A critical related element is who will be responsible for the SOLR/OTS functions and how those functions will be provided. State regulators will also have a critical role in the review and approval of proposed mergers, approving establishment of LDC-affiliates, establishing safeguards for LDC-affiliate relationships, and monitoring affiliate transactions. 14 CASE 97-G-1380 Several stakeholders identified the need for regulators to reexamine their roles in an increasingly competitive market. One stakeholder raised the specific issue of regulatory treatment of confidential and business sensitive information in an increasingly competitive market. Finally, regulators must work to ensure that customers are provided realistic expectations regarding the benefits of competition. Without this, there is a real possibility of customer backlash which would inhibit competition. Consumers From the customers viewpoint, expanding choice and increased competition are not goals in themselves, but are vehicles to reduce costs and increase service options. The extent of customer interest in unbundling will be determined in large measure by how well those needs are met. Customers will have to decide if the effort involved in changing suppliers is worth the potential outcome. Some stakeholders indicated that the ultimate interest of marketers (and/or ESCOs) is to offer a host of energy and nonenergy related services -- gas, electricity, oil along with telecom, internet, cable TV, security systems, and other consumer goods. Such marketers might be able to achieve real economies in providing such packages, but customer interest in such packages is unproven and unclear. Generally, customers will have greater responsibility to make choices and to bear the consequences of their decisions. To do so, customers will need information on industry changes and expanded choices. In addition, the impacts of competition may be uneven across customer sectors or groups, with more immediate benefits likely for larger and higher load factor users but benefits unclear or further in the future for smaller and lower load factor users. Consequently, comprehensive customer education programs will be needed throughout the transition to a competitive environment to inform customers of the changes occurring in the gas 15 CASE 97-G-1380 industry and how to exercise choice. In particular, such programs will need to be developed and implemented at the residential and small commercial customer level to facilitate establishment of a fully competitive market. Without such programs, it is likely that some consumers will find the changes confusing and frustrating. STAFF’S ANALYSIS Emerging Trends - Impact on New York State LDCs We believe that the following major trends are being experienced both nationally and in New York: 1. 2. The role of LDCs as gas merchants will diminish. The merchant function will increasingly be provided by larger and more integrated companies, with marketers expected to become the dominant players. Through mergers and acquisitions, and the convergence of gas and electricity markets, there will be fewer and larger gas and combination gas/electric companies. Some of the functions now performed by LDCs will be provided on a competitive basis by new market entrants as the marketplace creates innovative products, alliances, and solutions. Pipeline capacity will become more commoditized. The need to expand the pipeline system capacity to serve New York will be limited with a greater need for more flexible market area storage capacity. 3. 4. 5. Regulatory Challenges The objective of the evolving changes in the gas industry is to achieve the benefits of competition, more choice and lower prices, for as many customers as possible without sacrificing service quality or reliability. Appropriate regulatory policies are those which promote this objective, facilitating market entry for new, reliable service providers and fostering innovation and 16 CASE 97-G-1380 efficiency. Thus, there is a need to redefine regulation in response to the evolving gas market. The regulatory challenges identified below relate to problems discussed in more detail in the following section: 1. 2. Assure that regulation is streamlined and flexible. Promote competition, minimize the concentration of market power and create a framework within which affiliate transactions may take place. Resolve issues related to SOLR/OTS. Assure that rate design is appropriate for and facilitates an expanded competitive environment. Ensure system reliability without stifling competition. Address treatment of the cost of social programs now built into LDC rates. 3. 4. 5. 6. Staff’s Vision In staff’s vision of the future, the merchant function1 will be provided by non-regulated entities -- local gas distribution companies (LDCs) will be completely out of the merchant business2. These non-regulated entities will share the Supplier-of-Last-Resort and Obligation-to-Serve responsibilities, and along with the LDCs, they also will share the cost of social programs3. A robustly competitive market will emerge as LDCs exit the merchant role and as distribution service rate structures are modified to meet the needs of the competitive marketplace. LDCs will collaborate with marketers to develop informative and meaningful customer choice programs which greatly facilitate 1 A gas merchant sells gas; LDCs sell gas through a bundled service which includes interstate transportation, storage, and distribution. They may have unregulated affiliated marketing entities. E.g., Home Energy Fair Practices Act (HEFPA) protections, lowincome assistance programs, uncollectible accounts. 17 2 3 CASE 97-G-1380 customer willingness to select new suppliers1. System reliability will be assured because LDCs and marketers will cooperate to preserve it and because competition underscores the importance of reliable deliveries to a marketer’s reputation. Finally, with the deregulation of the electric industry, Energy Service Companies (ESCOs) and other entities will offer, on a competitive basis, many of the services now performed by LDCs. Admittedly, this is an idealized view. There are a number of barriers to achieving this model that must be addressed, and most likely, additional issues will arise along the way. The problems that we have identified and potential solutions are discussed next. PROBLEM IDENTIFICATION AND POTENTIAL SOLUTIONS The threshold issue is addressed below followed by a discussion of issues that require immediate action to facilitate a smooth transition to an expanded and sustainable multi-provider environment as well as issues that require continuing attention to maintain that environment. The Threshold Issue - The Future of the Merchant Function The role of LDCs as gas merchants has diminished since larger customers were allowed to choose their own suppliers beginning in the mid-1980’s and will be further reduced as unbundling evolves. However, there may be a limit to how far this will go without further Commission action because marketers have shown little interest in low volume/low load factor customers to date. As stated above, some LDCs would like to exit the merchant function as soon as possible. These LDCs see the regulated gas merchant business as offering only downside because they are not allowed to earn a profit on gas sales but remain subject to prudence reviews on gas purchases. They may also see 1 Those not making a choice will be assigned to marketers or a risk pool. 18 CASE 97-G-1380 marketers as potential allies to help them with the work and expense of expanding gas markets in their service territories. An LDC could exit the merchant business quickly if it transfers this function to a marketing affiliate (assuming the Commission approves). However, this would not expand customer choice and raises concerns with regard to market power and affiliate transactions. Alternatively, LDCs can transfer the merchant function to marketers as existing capacity contracts expire. However, this would be a much more gradual process. For example, contracts for approximately 25 percent of upstream pipeline capacity will expire by the year 2000; by the year 2005 contracts covering approximately 75 percent of capacity will expire. Even so, if marketers continue to show no real interest in serving low volume/low load factor customers the likely result will be that these customers remain with the LDC or the LDC affiliate. Several other stakeholders agree that LDCs should exit the merchant function because they believe that there is a fundamental incompatibility between the existence of regulated LDC merchants and an increasingly competitive gas commodity market. Other LDCs believe that they must remain merchants either to assure proper system operation or to assure appropriate levels of system expansion and market growth. These LDCs point to the critical load coordination and balancing functions that they provide and their pursuit of, and the required long-term investments in, new franchise territories. Action must be taken now because New York LDCs’ existing contracts for upstream pipeline and storage capacity will soon begin to expire. The Commission has allowed LDCs to assign upstream capacity to firm customers converting from sales to transportation service for a period of three years. Prior to the start of the third year, LDCs must demonstrate efforts to relieve themselves of "excess" capacity. These upstream assets are needed to provide balancing service and fulfill the SOLR/OTS responsibilities. 19 CASE 97-G-1380 Staff finds persuasive the argument that regulated merchants are incompatible with a competitive market. We believe that the most effective way to enhance competition is to separate the merchant and distribution functions1. This would ensure that natural gas is universally provided on a competitive, deregulated basis. It would also eliminate "uneven playing field" issues between LDCs and other merchants including any subsidies that are embedded within existing bundled sales services. The need to regulate LDC purchasing practices would be eliminated, substituting instead the discipline of the market to set gas prices. Conversely, we find unpersuasive the argument that LDCs must remain merchants to properly operate and expand the distribution system. We believe that the operational problems and concerns raised by some stakeholders are real and significant. However, we also believe that these problems can be solved through innovation and cooperative approaches possibly involving alliances between LDCs and new market participants. We see no reason why non-merchant LDCs could not continue to pursue market expansion, also possibly through alliances with marketers and other new market participants. Further, we believe that marketers are better positioned than LDCs to use upstream supply assets more efficiently, achieving cost savings that could benefit all consumers. We believe that the barriers to achieving such economies should be removed. Accordingly, there is a need for the Commission to provide guidance to LDCs and other market participants on this issue. We believe that it would best to separate the merchant and distribution functions, that is, for LDCs to exit the merchant function. However, this cannot happen until certain obstacles that impede LDCs from exiting the merchant function are removed. The primary impediments to LDC withdrawal from the merchant function, the future of upstream capacity, the SOLR/OTS 1 This is parallel to FERC action to separate the merchant function from the pipeline transportation function. 20 CASE 97-G-1380 and assuring system reliability and operational integrity are addressed below: Options - Staff believes that there are three basic options regarding the future role of LDCs as merchants: 1. Do nothing: allow the merchant to be allocated by the market. 2. Remove obstacles that impede LDCs from exiting the merchant function. 3. Require LDCs to exit the merchant function. Staff’s Proposal LDCs should exit the merchant function. This would ensure that natural gas is universally provided on a competitive, deregulated basis. It would also eliminate "uneven playing field" issues between LDCs and other merchants including any subsidies that are embodied with in existing bundled sales services. The need to regulate LDC purchasing practices would be eliminated, substituting instead the discipline of the market to set gas prices. A discussion of related problems and other issues, options for addressing them and staff’s proposed actions steps is presented next. I. The following impediments to LDCs exiting the merchant function must be eliminated: A. Control of Upstream Capacity Must Move from LDCs to Marketers - The future holders of upstream capacity will most likely be the gas merchants, although that issue is far from settled1. 1 An alternative model would have LDCs retain capacity contracts and provide merchants with access to that capacity. This is similar to the current situation, except that the LDCs would have little or no merchant role. Such a model would open commodity sales to competition (as they are today), but the efficiency gains possible with the use of upstream assets would be limited. 21 CASE 97-G-1380 Currently, the interest of marketers, producers and pipeline companies in acquiring upstream capacity now held by LDCs is unclear. Likewise, it is also somewhat unclear who will plan for and finance future capacity expansions. Further, the terms and conditions for the use of capacity will likely change as Federal regulation evolves. Marketplace developments, such as changes in supply sources, changes in market demand, and the construction of new pipeline links and storage facilities, will impact the market value of existing pipeline and storage assets. As stated above, action must be taken now because New York’s LDCs entered into existing contracts for upstream pipeline and storage capacity will soon begin to expire. Potential stranded costs are a key issue. Simply stated, marketers do not want to pay the current tariff rates for capacity contracts now held by LDCs. This has been one of the most significant impediments to more aggressive marketer entry into the small customer retail market. A market test is needed to determine marketer interest in acquiring pipeline capacity now held by LDCs and quantify both the price that they are willing to pay and stranded costs. LDCs could develop plans to auction existing capacity in increments over the next five years to provide such a market test. These plans could be structured with different objectives: to offer portions of capacity needed to serve specific geographic areas: to serve specific segments of LDC system load; to assure marketer presence in the small customer market; to serve a cross section of high and low volume and load factor customers; or, on some other basis. As a first step, LDCs should focus on encouraging firm commercial and industrial sales customers to switch to other merchants. Stranded cost issues may also arise because there may be mismatches between the expiration of LDC contracts for pipeline capacity and penetration of the market by other merchants. These issues will have to be addressed on a case by case basis. 22 CASE 97-G-1380 Options 1. 2. 3. LDCs continue to hold all or most upstream capacity. Upstream capacity is held by an expanded number of merchants. LDCs hold little or no upstream capacity. a. LDCs can terminate contracts as they expire. b. LDCs can transfer the merchant function to an unregulated subsidiary. c. LDCs can put existing capacity contracts out for bid. Recovery/sharing of stranded costs will have to be addressed. Staff’s Proposed Action Steps 1. LDCs should plan to eliminate or restructure any capacity contracts extending beyond five years so as to eliminate LDC obligation beyond that point except for capacity that may be required for supplier of last resort or operational considerations. Staff’s preferred approach is for the LDCs to sell the contracts at an auction(s). Stranded cost recovery/sharing will be addressed on an individual company basis: a. This will provide a "market test" for determining marketer interest, the value of capacity to marketers and the magnitude of stranded costs1. b. As a first step, LDCs should encourage commercial and industrial customers to switch to other merchants. 1 These plans could be structured with different objectives; to offer portions of capacity needed to serve specific geographic areas; to serve specific segments of LDC system load; to assure marketer presence in the small customer market; to serve a cross section of high and low volume and load factor customers; or, on some other basis. 23 CASE 97-G-1380 2. Stranded Costs - The LDC plans should address treatment of strandable costs. Partial pass-through should be considered and settlements encouraged. B. All Merchants Must Share the Responsibility/Costs of the Supplier of Last Resort and Obligation to Serve (SOLR/OTS) - LDCs now have an obligation to attach new customers and to provide gas supply. It appears that LDCs are the only logical provider of new customer attachments. However, some stakeholders raised the possibility that marketers might be interested in constructing facilities to attach certain customers in the future. The obligation to supply residential customers continues even after the customer switches from sales to transportation service. Non-residential customers who switch from sales to transportation service and then wish to switch back should be treated no more or less favorably than applicants for new service. Marketers have not yet become significant players in the firm market, and the LDC’s ability to reduce capacity is limited because it has the obligation to serve. This provides inaccurate market signals to both merchants and customers. The LDC’s OTS provides marketers a safety net and spares them full responsibility for the assets needed to serve firm loads1. Customers that switch to non-LDC marketers are provided a subsidy via the LDC OTS. Consequently, and in light of the upstream capacity and merchant function issues discussed above, staff believes that there is a need to share the service obligation responsibilities among all merchants. Without such a change the "playing field" between LDCs and non-regulated merchants will become more tilted: the ability of LDCs to reduce the costs of upstream assets will be limited; LDCs will increasingly be serving a small number of less 1 At the same time they are denied the opportunity to achieve the efficiencies in providing the OTS function themselves. 24 CASE 97-G-1380 profitable customers; non-regulated merchants will escape the full cost of providing reliable service; and customers will receive inaccurate price signals. LDCs could shed capacity regardless of what happens with the service obligation, but their ability to do so would be limited and options for sharing the costs of holding the necessary assets to provide the SOLR/OTS functions among all merchants must be evaluated to move the industry toward a sustainable multi-provider environment. Options for sharing these costs include a "pipes" charge, an auction, and an assigned risk pool. Options 1. 2. Share the service obligation among all gas merchants. Determine that this obligation remains with the LDC (e.g. LDC is the logical provider of new customer attachments), but that the costs should be shared among merchants. Options for sharing these costs include: a. a "pipes" charge (a serve-or-pay option) b. an auction to bid out the SOLR responsibility c. assignment of customers to a risk pool Staff’s Proposed Action Steps 1. The Commission should develop a policy by which the service obligation may be shared by all merchants. Options for sharing these obligations must be explored and tested. 2. The Commission should consider whether there should be a limit to how much capacity an LDC could shed. Options to share the costs among merchants that serve the market should be explored and tested. C. System Reliability and Operational Integrity Need to be Assured - The issue is how best to assure reliability of service to core customers and system operational 25 CASE 97-G-1380 integrity as the portion of upstream capacity controlled by LDCs diminishes, and the number of merchants and their share of system supply expands. Stakeholder discussion of this issue was on a very broad, conceptual level without any specifics. Some LDCs want to maintain control of upstream assets, or at least control how much capacity will be made available and how it will be used. To the extent that they turn capacity over to marketers, these LDCs would like to dictate how much capacity must be held to serve specific customer groups and how that capacity should be used. Other stakeholders caution that such a strict approach would preclude efficiency gains in the use of upstream capacity. As noted above, some stakeholders expressed the concern that instead of pure efficiency gains, marketers might reduce costs by providing a lower quality of service. A key aspect of the issue is how to best assure system reliability, without unduly stifling competition. In theory, a truly competitive market will self correct. Reliability is a valuable service quality and marketers who are unreliable will lose customers to reliable suppliers. Thus, establishing a robustly competitive market is the best way to ensure system reliability. Marketers need the ability to select an approach that is comfortable in terms of level of risk, fixed cost commitment, etc. and should be provided flexibility/incentives to develop innovative approaches and solutions. For example, marketers and LDCs can collaboratively develop measures to assure reliability including: guidelines for appropriate levels of capacity; improved consumption data collection and communication; capacity sharing agreements; alliances; risk sharing pools; etc. Options 1. Place primary reliance on market based solutions. Achieving a robustly competitive market is the best way to achieve reliability. LDCs and marketers can 26 CASE 97-G-1380 collaboratively develop measures to assure reliability to facilitate development of such a market. Examples include guidelines for appropriate levels of capacity, improved consumption data collection and communication, capacity sharing agreements, alliances, risk sharing pools, etc. Place primary reliance on penalty to discourage nonperformance by marketers. Require marketers to pay a surcharge to fund some level of capacity as a back-up for non-performance by other merchants. Prescribe standards for adequate capacity that marketers must meet, to be incorporated in LDC gas transportation tariffs. 2. 3. Staff’s Proposed Action Step Prime reliance should be placed on market based solutions. The best way to assure system reliability is to establish a robustly competitive market. Collaboration between LDCs and marketers can facilitate development of such a market. II. Rate Designs Need to be Reviewed and Revised as Needed to Eliminate Barriers to a Fully Competitively Market - Rate design issues related to a competitive market include interclass subsidies, intraclass subsidies, as well as the gas adjustment clause (GAC), assignment of upstream demand costs, and load factor based rates as transitional issues. These issues must be reviewed to identify anything that could hinder competition (e.g. pricing subsidies, gas cost passthrough mechanisms), and revised accordingly. The goal should be to develop and implement tariffs that would permit alternative service providers to compete, and it would therefore be helpful to identify all elements of LDC service that can be provided by alternative suppliers. Expanded customer choice and increased competition go hand-in-hand. Accordingly, gas rates should be designed to permit 27 CASE 97-G-1380 a customer to choose, and pay for, only those services that the customer desires. However, smaller customers may not be particularly interested in such choices. This might be due to either a lack of information or to limited potential savings, or both. Likewise, marketers may not be interested in serving customers that offer limited profit potential. The potential benefits of increased competition include lower gas commodity costs (including more efficient use of upstream capacity), and a reduction in distribution costs as more LDC functions are provided on a competitive basis (e.g. metering and billing). However, these benefits cannot be realized until a more competitive (i.e. multi-provider) market is established. At the same time, to varying degrees, existing LDC gas sales rates for smaller customers include subsidies. Interclass and intraclass rate subsidies impede development of a competitive market and send inaccurate market signals. Interclass rates of returns should be equalized. Subsidies distort the market because they cause some customers to appear more or less attractive to nonLDC merchants than they should. Most stakeholders agree that establishing a competitive market will require removal of these subsidies. Retail sales rates can either increase, decrease or remain the same as a result of eliminating subsidies, depending on how this is accomplished. The counterpart transportation rates may also be impacted. Therefore, changes to rates should also consider customer impacts, and -- particularly for the non-core contestable markets -- competition from alternate fuels and value of service. However, it is important to recognize that removal of these subsidies may be needed to increase the competitiveness of gas sales rates overall, regardless of who serves the merchant function. However, the specific method used to "rationalize" or move rates to a cost-basis (where appropriate) will impact the interest of marketers in serving an expanded merchant function. For example, retail rates could remain the same but rate components can be adjusted (e.g. reassign responsibility for distribution costs and gas costs-- which will impact counterpart transportation 28 CASE 97-G-1380 rates). Alternatively, retail rates could change by reassigning gas costs and/or distribution costs. These issues and impacts must be carefully considered as rate issues are reexamined. Rate changes should foster a robust multi-provider environment to the maximum extent reasonable. These rate changes, changes to rules regarding recovery of gas costs, and other changes must be coordinated with and contribute to the restructuring of the industry. Options 1. 2. Do nothing; make no rate changes. Eliminate rate subsidies to ensure development of a fully competitive market. These issues can be addressed: a. Generically and general principles adopted to be implemented in individual company cases. b. In individual company cases. Staff’s Proposed Action Step A generic review of rate design issues is needed to identify changes required to eliminate subsidies and create a competitive market. Appropriate changes should be implemented in individual company cases. III. Market Power Concentration Must Be Monitored and Safeguards Established - There are a number of market power issues that the Commission will face during and beyond the transition to a more competitive multi-provider market. It appears likely that several merger and/or corporate restructuring proposals will come before the Commission for approval. Further, a number of LDCs have, and others may seek to establish, marketing affiliates and LDC-affiliate transaction issues are expected to become more numerous and complex. Finally, as mentioned above, market power issues will increase with respect to upstream capacity and supply providers. 29 CASE 97-G-1380 Staff’s Proposed Action Step These issues will require establishment of appropriate safeguards and careful monitoring to assure that an open and sustainable competitive market is achieved. IV. Customer Education - Customer communications and outreach campaigns are essential to ensure customer awareness about the changes in the natural gas market and to encourage active customer participation to assess and select energy service providers. While the need to develop communications strategies will depend on the intensity of this effort and the pace of an emerging competitive market, several measures should be undertaken. LDCs, marketers and the DPS staff, each have a responsibility to expand existing communications initiatives to ensure that all customers have access to information and viable opportunities to participate in a competitive marketplace. The DPS staff should continue to monitor the effectiveness and degree to which various communications channels are employed by all market interests. To date, LDC programs have generally not provided the level of communications needed because the majority of the marketing programs began in late 1996 or early 1997 resulting in the lack of tangible market experience, and because the corporate commitment to further consumer research and communications activities has been minimal. There are several customer perspectives that may impact the level of participation in the emerging competitive natural gas market. 1. Will I save money? Issues concerning the level of potential cost savings must be addressed. Benefits are more likely for larger and higher load factor users, but are unclear for smaller and lower load factor users. 30 CASE 97-G-1380 2. Am I assured of supply? Issues concerning service reliability standards and continued availability of service for low income or payment troubled customers must be addressed. Am I comfortable making a change? Issues concerning inconsistent information on industry changes and expanded choices, the degree of customer interest to participate in combination services, and the need for innovative aggregation service offerings designed to meet the expectations of residential and small customers, must be addressed. 3. Staff’s Proposed Action Step 1. LDCs should serve as a clearinghouse resource for the customers in their service territories, regardless of whether they remain in or exit the merchant function1. Specific, formal communications initiatives should be focused with emphasis on competition and customer choice. 2. Both LDCs and marketers should be encouraged to support experimental aggregation package offerings that would meet the needs of residential and small commercial customers. Evaluations obtained from these experiments would provide insight on how different package offerings may achieve two important criteria for a competitive environment: profitable margins for marketers and feasible benefits for customers. 3. The DPS staff should conduct a market analysis and communications audit of the local distribution company and marketer programs to identify the potential barriers and develop a systematic plan of 1 In the spirit of the Commission’s March 28, 1996 Order, Case 93-G-0932. 31 CASE 97-G-1380 action for greater accessibility to information and options about choices. V. Regulation Must be Refocused- Several stakeholders identified the need to redefine regulation in response to the evolving gas market. For example, as the competitive gas commodity market expands the regulation of gas purchase arrangements will decline and increasingly become a buyer-seller contract issue. On the other hand, LDC affiliate issues are likely to increase and must be monitored. Overall the gas market will become much more complex and dynamic, requiring a new oversight approach. One stakeholder raised the specific concern of how confidential or business sensitive information will be treated in a more open market. Staff’s Proposed Action Step 1. 2. 3. 4. The focus of regulation must change as the industry evolves, with increased reliance on market forces. Regulation must become more streamlined and flexible. The system integrity must be assured without stifling competition. A review of the appropriate treatment of business sensitive information in a more competitive environment is needed. VI. The Cost and Funding of Social Programs Now in Utility Rates Needs Review - The costs of social programs includes the costs of HEFPA protections, low-income assistance programs, uncollectible accounts, and DSM programs. LDCs have long complained that the cost burden of these programs undermines their ability to compete fairly with suppliers of competing energy products (e.g. oil, propane). These comments were echoed by many stakeholders. 32 CASE 97-G-1380 Staff’s Proposed Action Step 1. Social programs should be reviewed to determine if costs savings are possible, or if legislative change is appropriate (e.g. should LDCs continue to be required to provide 100 feet of service to any customer, even if it is uneconomic to do so?) 2. Options for sharing either these obligations and/or their costs among merchants should be explored. For example, through a "pipes" charge, serve-or-pay option, an auction, or assignment of customers to a risk pool. VII. Monitoring of Federal Actions With Appropriate Intervention Must Continue - As stated above, FERC is addressing issues which will influence the desirability of acquiring and holding pipeline capacity. The future role of marketers will also be effected by FERC action on the terms, conditions and rates for use of pipeline capacity. Further, FERC action on merger proposals and market power issues will shape the development and structure of the industry. Therefore, Federal policies will play a critical role in how the market develops. Staff’s Proposed Action Step Staff must continue to monitor evolving Federal policies on rate and capacity issues and intervene to assure that these policies are appropriate and facilitate a sustainable, fair and open competitive market. VIII. Tax Inequities Should be Eliminated - There are two primary tax issues: (1) different tax burdens for sales vs. transportation gas, and (2) the different overall level of tax imposed on utilities vs. alternatives such as oil and propane. While taxes are beyond the Commission’s purview, staff is of several initiatives to address tax inequities, 33 aware CASE 97-G-1380 particularly the Gross Receipts Tax. We further note that the first issue -- different tax burdens for LDC vs. marketer sales -would be eliminated if LDCs were to exit the merchant function pursuant to a Commission directive. RECOMMENDATIONS The Commission should issue the following proposed policies for comment by the parties: 1. LDCs should exit the merchant function to establish a fully competitive commodity market. We believe a five year period will be needed for LDCs to transition out of the merchant business. 2. Impediments to LDCs exiting the merchant function must be eliminated1: a. Upstream Capacity - LDCs should plan to eliminate or restructure any capacity contracts extending beyond five years so as to eliminate LDC obligation beyond that point except for capacity that may be required for supplier of last resort or operational considerations. Staff’s preferred approach is for the LDCs to sell the contracts at an auction(s).2 Such a plan would also involve treatment of stranded costs. As a first step, LDCs should encourage 1 If impediments to LDCs exiting the merchant function cannot be removed, a review of the regulation of LDCs in a multi-provider environment, including the continued use of a GAC, will be needed. This will provide a "market test" to determine marketer interest and establish the value of capacity as well as the magnitude of stranded costs. These plans could be structured with different objectives; to offer portions of capacity needed to serve specific geographic areas; to serve specific segments of LDC system load; to assure marketer presence in the small customer market; to serve a cross section of high and low volume and load factor customers; or, on some other basis. 34 2 CASE 97-G-1380 commercial and industrial customers to switch to other merchants1. b. Supplier of Last Resort/Obligation to Serve The Commission should develop a policy to allow these obligations to be shared by all merchants who want to serve the market2. c. Assuring System Reliability - Prime reliance should be placed on market based solutions. The best way to assure system reliability is to establish a robustly competitive market. Providing opportunities for marketers to bid on and acquire the upstream capacity now under contract to LDCs and cooperative arrangements between LDCs and marketers can facilitate development of such a market. Continue to review rate design issues to identify changes required for a competitive market3. Develop safeguards and monitoring mechanisms for market power issues. The Commission will increasingly face market power issues during and beyond the transition to a more competitive market (e.g. proposed mergers, changed corporate structures and affiliate transactions). These issues will require the adoption of appropriate safeguards and careful monitoring to assure that no player garners undue market power. Continue staff review and monitoring of LDC and marketer customer education programs to identify 3. 4. 5. 1 If marketers fail to show sufficient interest in the small customer market, marketers who want to serve in New York could be required to serve a cross section of high and low volume and load factor customers. Alternative approaches to share the cost of and responsibility for these obligations should be developed and market tested. Appropriate changes should be implemented in individual company cases. 35 2 3 CASE 97-G-1380 the potential barriers and develop a systematic plan of action for greater accessibility to information and options about choices. LDCs should employ customer research as a basis for developing or continuing customer communications activities. Customer communications and outreach campaigns are essential to ensure customer awareness of the changes in the natural gas market and to encourage active customer participation in the assessment and selection of energy service providers. Refocus regulation as the industry evolves (e.g. marketpower issues will become much more important, while increased reliance on market forces will reduce the need for traditional regulation). Regulation must become more streamlined and flexible. The performance of new market entrants must be assured without stifling competition. A review of the appropriate treatment of business sensitive information in a more competitive environment is needed. Develop a mechanism for funding social programs. These programs should be reviewed to identify possible cost savings and appropriate legislative changes. Alternative approaches, such as LDCs sharing these responsibilities and/or costs with other merchants (e.g. bidding, risk pools, and payment options) should be developed and market tested before full scale implementation. Staff should continue monitoring of evolving Federal policies and the Commission should intervene as appropriate to assure that an open, fair, reliable and competitive upstream market exists. 6. 7. 8. 36 CASE 97-G-1380 APPENDIX A (ISSUES PAPER AND QUESTIONS) CASE 97-G-1380 APPENDIX A STATE OF NEW YORK DEPARTMENT OF PUBLIC SERVICE THREE EMPIRE STATE PLAZA, ALBANY, NY 12223-1350 Internet Address: http://www.dps.state.ny.us PUBLIC SERVICE COMMISSION JOHN F. O’MARA Chairman EUGENE W. ZELTMANN Deputy Chairman HAROLD A. JERRY, JR. WILLIAM D. COTTER THOMAS J. DUNLEAVY MAUREEN O. HELMER General Counsel JOHN C. CRARY Secretary July 24, 1996 1~ Dear 2~: Staff of the Department of Public Service is undertaking a study of the future of the natural gas industry and the role of local gas distribution companies (LDCs). Our goal is to identify regulatory and legislative actions needed to increase competition and expand customer choice in that environment, consistent with the provision of safe and reliable gas service. Once these actions are identified, further proceedings may be initiated. We are interested in your thoughts and seek your assistance in this effort. Attached is an overview of the topics we will explore as well as questions on: Global Issues; Pipeline, Storage and Supply Issues; and LDC Issues. This material is being distributed to various stakeholder groups (e.g. producers, marketers, pipelines, LDCs and consumers) to promote a dialogue and solicit input. We will contact you soon to determine your willingness to participate in the process. We envision a series of roundtable discussions among small groups of stakeholders, held at various locations. You may address all of the issues, or focus on specific areas. Brief written comments to supplement the discussion would be welcome prior to, or following, the meeting. We look forward to working with you on this important project. If you have any questions please do not hesitate to contact either me at 518-473-4628 or Mike Scott at 518-486-2800. Very truly yours, Sheila A. Rappazzo Chief, Policy Gas & Water Division Attachment 2 THE FUTURE OF THE NATURAL GAS INDUSTRY: NEW DIRECTIONS IN EXPANDING COMPETITIVE CHOICES The natural gas industry has undergone continuous and dramatic change over the last decade. Natural gas wellhead prices were decontrolled, interstate pipeline companies opened their systems, unbundled services and shed their gas merchant (sales) function. The gas industry will continue to evolve in response to internal and external forces, technology developments and changes in federal and state regulatory policies. Currently, LDCs must provide safe, adequate and reasonably priced service and are obligated to serve all customers. The functions LDCs perform in support of this service include planning, financing, construction, coordination, dispatch, gas supply acquisition and management, delivery and storage capacity acquisition and management, local peaking supply development and management, distribution system operation and maintenance, gas supply emergency response, metering, billing and numerous customer services. Traditionally, LDCs were the sole merchants of gas to consumers in New York. Competition in the interstate gas market began in the mid-1980’s and was fully implemented under FERC Order 636. Within New York, retail competition also began in the mid-1980’s when larger customers were given the option to purchase gas directly. Today, many larger customers contract directly with suppliers or marketers for gas to be delivered to the LDC. The LDC then "transports" this customer-owned gas. New York State LDCs, as directed by the Commission, are now unbundling their tariffs, expanding this option to all customers. Existing firm customers in New York State who choose a third party supplier will be assigned a portion of the LDC’s contract rights on upstream pipelines.1 LDCs provide a "balancing service", making up differences between receipts of 1 Generally, customers will be assigned capacity for a period of three years or until the LDC contracts for new capacity, or an existing contract expires, whichever occurs first. Prior to the start of the third year each LDC must demonstrate efforts made to relieve itself of excess capacity (Case 93-G-0932, et al. Order Concerning Compliance Filings issued and effective March 28, 1996). CASE 97-G-1380 customer-owned gas and actual consumption, to ensure continuous firm deliveries. Storage services are also being offered by some New York LDCs, allowing customers to store gas in the summer to meet winter needs. The use of upstream supply, delivery and/or storage capacity assets is required to provide these services. Control of upstream assets is required to serve as the supplier of last resort. LDC contract rights to upstream capacity assets will soon begin to expire. On a statewide basis, about 25 percent of the pipeline capacity now under contract will expire by the year 2000; about 70 percent by the year 2005. It is not clear who will acquire these capacity rights when the contracts expire. Evolving FERC policies will influence the desirability of acquiring and holding capacity. Among the issues are who will bear the costs of unsubscribed pipeline capacity, the value of capacity in the secondary market, and the rates, terms and conditions for use of the capacity. Sources of gas supply are also changing. Traditionally, gas was produced primarily from the U.S. Gulf Coast region. Today, Canadian sources account for about one-fourth of the gas used in New York State. In the future, Canadian and Rocky Mountain gas sources are expected to become even more important. As sources of gas supply shift, the usefulness and value of pipelines will change and the development of additional pipeline capacity may be required. Technological developments could result in further changes in the gas supply sources as well as impact the demand for gas, expanding opportunities to both conserve and increase its use. Further, competitive pipeline access to supply areas will depend on FERC rate design and production area transportation capacity policies. The outcome of the dynamics among these issues is unclear. Some observers believe that LDCs should, and will, shed their merchant role, and at least one LDC in the Northeast has filed a petition to do so. Many observers believe that the merchant role and control of upstream capacity go hand-in-hand, 2 CASE 97-G-1380 which will lead to the reemergence of a seller/shipper system where gas suppliers again control delivery capacity. The prospect of LDCs losing control of upstream assets raises many questions and concerns regarding distribution system operation, reliability of service, and customer rights and benefits. Consequently, there may be practical limits to the potential reduction of the LDC merchant role. On the other hand, it would be a mistake to underestimate the capacity of the marketplace to create new innovative products, alliances, and solutions to such problems. It is also instructive to examine current changes in the electric industry. The industry models used to explore electric restructuring in New York are wholesale vs. retail competition combined with poolco vs. bilateral pricing mechanisms1. The Commission has adopted a flexible retail poolco approach2. It envisions establishing a wholesale poolco as an initial step, with an orderly and rapid transition to full retail access. The poolco would be flexible enough to accommodate individual retail bilateral contracts. In terms of these industry models, New York LDCs have already implemented a structure akin to a flexible retail poolco. The range of future possibilities includes the current model, where LDCs hold upstream assets and serve as supplier of last resort, to a model where LDCs shed these assets and obligations to others3, and provide a simple "distribution" service. In between are varying system operation, reliability, and customer rights issues, which increase in complexity as more customers choose alternative suppliers. This level of complexity 1 A poolco mechanism has a centrally dispatched spot market power pool; a bilateral mechanism involves direct contracts between power producers and users, outside of a centralized power pool. Opinion and Order No. 96-12, Competitive Opportunities for Electric Service, Cases 94-E-0952 et al. Elimination of the LDCs obligation to serve would require legislation. 3 2 3 CASE 97-G-1380 will also be affected by potential technological innovation, such as real time metering and control for all customers, which could impact the LDC’s need to backstop private bilateral agreements. The desirability of options within this range is an open question. Further, the focus of "competition", as it has been discussed to date, has been on customer choice among commodity providers. As the industry evolves, elements of the traditional "distribution" service itself may become more competitive. Conceivably, new market entrants might offer total energy services, meter reading, billing, or other services on a competitive basis. Others could acquire the pipeline capacity and other assets needed to replicate the LDCs upstream functions. In addition, there may be consolidations and mergers among LDCs that could generally reduce the cost of "distribution services", making gas more competitive with alternative fuels. Finally, LDCs might diversify activities to provide new services and increase productivity. All of these possibilities raise many questions regarding future directions in expanding competitive customer choices. Therefore, staff seeks a dialogue to elicit information and opinions from various stakeholders on all of the issues that could impact the future of the gas industry and the role of LDCs. We hope to gain a better understanding of the direction and impact of these changes and determine what actions, if any, are needed to further competition in the evolving natural gas market. The questions which follow are organized into three issue groups: Global Issues; Pipeline, Supply and Storage Issues; and LDC Issues. 4 CASE 97-G-1380 I. GLOBAL ISSUES AFFECTING THE FUTURE OF THE GAS INDUSTRY A. What major changes within the gas industry are expected and what impact will they have? (e.g. the roles of suppliers, pipelines, and LDCs and the impact on concentration of market power). What major external forces or events are expected and what impact will they have on the gas industry? (e.g. electric industry restructuring and emergence of a total energy market). What technology changes are on the horizon and what impact will they have? (e.g. gas supply/demand technologies, metering hardware and billing software, telecommunications developments). What legislative and regulatory changes are needed to meet public policy and business requirements in a more competitive environment? (e.g. PUHCA and PURPA reform; regulatory reform, responsiveness and flexibility). B. C. D. II. PIPELINE, STORAGE AND SUPPLY ISSUES A. What is the future of upstream pipeline and storage capacity? 1. 2. 3. 4. B. How have financial/operational risks and/or opportunities changed; what is the impact on reliability of service? Who should bear the costs for unsubscribed capacity when contracts expire? Who will identify market needs, plan for, sponsor, and finance future pipeline and storage capacity expansions? Can storage be further unbundled? If so, how? What is the future of the gas supply market? 1. 2. What changes in gas supply sources are expected and how will they impact the use and value of existing pipeline capacity? Who will supply gas and/or delivery capacity in the future? Will profits be sufficient from each sector to provide all customers an adequate choice of suppliers? What actions, if any, are required to create a level playing field and robust competition among all gas merchants? 3. CASE 97-G-1380 4. What changes to FERC production area transportation rate policies are needed to ensure a competitive supply market? C. What are the existing and future regulatory issues? 1. What impact will result from FERC policies on: alternatives to cost of service ratemaking; negotiated and market-based rates; rate design issues; recovery of capacity costs; and capacity release programs? How will these policies interact; what changes are needed? 2. III. LDC ISSUES A. What is the future of LDCs? 1. 2. How have financial/operational risks and/or opportunities changed; what is the impact on reliability of service? What services do LDCs currently provide? Which should remain regulated; which should not? What new services and service providers will emerge? What LDC functions might be reduced or eliminated as their merchant role diminishes? What roles will be served by unregulated LDC affiliates? Should these affiliates be monitored more closely? What level of LDC pipeline and storage capacity contract rights will expire by 2000 and 2005? What issues will arise? What are the cost impacts of LDC unbundling? What changes, if any, are needed regarding tax inequities, recovery of social program costs, the adequacy and financing of gas R&D, and cost allocation and rate design? How can the use of LDC assets be optimized and the efficiency of the gas delivery system be increased? What changes to metering and billing systems will be needed; what will it cost and how long will it take to implement? 3. 4. 5. 6. 7. 8. B. What is the LDC’s obligation to be the supplier of last resort? 1. What does standby service mean? How will these services be provided (who will hold the necessary assets)? 2 CASE 97-G-1380 2. If the LDC’s sales obligation was eliminated who would have that obligation? Are there alternative approaches (e.g. an assigned risk pool concept) that could meet these goals? How would the needs of low-income and special needs customers be met if the LDC merchant role were eliminated? Should third party suppliers have the right to access LDC billing systems or procedures? What cut-off rights should LDCs have if customers do not pay third party suppliers? 3. 4. C. What are the future reliability of service/operational concerns? 1. 2. 3. What LDC system operational changes will be needed if the LDC’s merchant function is assumed by multiple competitors? Who is responsible for and how do we assure reliability of alternative gas suppliers? What does reliability mean? Should customers be able to choose and pay for the level of reliability that they want? D. What are the existing and future regulatory issues? 1. 2. 3. To what extent are other states addressing these issues, and what are their conclusions? If LDCs are allowed increased rate flexibility, what steps are needed to assure that a sufficiently open market exists? What changes, if any, are needed in the regulatory treatment of "trade secret" data as well as information on LDC approaches to problems in a competitive environment? IV. ADDITIONAL ISSUES A. Are there other issues or barriers to a more competitive market which need to be addressed? 3 CASE 97-G-1380 APPENDIX B (ROUNDTABLE MEETING PARTICIPANTS) CASE 97-G-1380 APPENDIX B Page 1 of 2 STAKEHOLDERS INVOLVED IN STAFF’S STUDY OF THE FUTURE OF THE GAS INDUSTRY LDCs New York State The Brooklyn Union Gas Company Central Hudson Gas & Electric Corporation Consolidated Edison Company of New York, Inc. Long Island Lighting Company National Fuel gas Distribution Corporation Niagara Mohawk Power Corporation New York State Electric & Gas Corporation Orange & Rockland Utilities, Inc. Rochester Gas & Electric Corporation Trade Associations The American Gas Association’s LDC Caucus The Energy Association of New York State The New York Gas Group Out-of-State Bay State Gas Company Boston Gas Company Consumers Gas East Ohio Gas Company Yankee Energy System, Inc. PRODUCERS Amoco Gas Company Chevron Corporation EXXON Corporation Natural Gas Supply Association Texaco Natural Gas MARKETERS CNG Energy Services Coalition of Concerned Consumers (representing several marketers) Coastal Gas Marketing Company ERI Services Enron Capital & Trade Resources KSC Energy Management MidCon Gas Services NGC Corporation Tenneco Alliance Program CASE 97-G-1380 APPENDIX B Page 2 of 2 PIPELINE COMPANIES Algonquin Gas Transmission Company ANR Pipeline Company CNG Transmission Corporation PanEnergy Corporation Tenneco Energy Transcontinental Gas Pipe Line Corporation CONSUMERS Multiple Intervenors New York State Consumer Protection Board Public Utility Law Project GOVERNMENTAL Federal Energy Regulatory Commission Massachusetts Public Utility Commission National Association of Regulatory Utility Commissioners New York State Department of Economic Development New York State Energy Research & Development Authority U.S. Department of Energy CONSULTANTS Foster Associates Philip Marston Reed Consulting Group Supply Planning Associates OTHERS Gas Research Institute New York State Petroleum Council INVITED BUT UNABLE TO PARTICIPATE American Association of Retired Persons Associated Gas Distributors Cambridge Energy Research Associates Columbia-New York Fuel Buyers Group Consumer Utility Board Empire State Petroleum Association Interstate Natural Gas Association of America Independent Producers Association of America New York Capitol Consultants TransCanada Pipelines Limited CASE 97-G-1380 CASE 97-G-1380 APPENDIX C (SUMMARY OF STAKEHOLDER INPUT) CASE 97-G-1380 APPENDIX C TABLE OF CONTENTS Page PARTICIPANT CODES GLOBAL ISSUES 1. 2. 3. 4. Major changes within the industry and expected impacts External forces/events and their impacts Technology changes and their impacts Legislative/regulatory changes 1 3 4 5 PIPELINE, STORAGE AND SUPPLY ISSUES 1. 2. 3. Upstream pipeline and storage Future of gas supply Existing and future regulatory issues (FERC) 5 10 11 LDC ISSUES 1. 2. 3. 4. Future of the LDCs 12 Obligation to serve (OTS) & supplier of last resort (SOLR) 17 Reliability of service 19 State legislative/regulatory issues 19 ADDITIONAL ISSUES 1. 2. 3. 4. The role of the Marketer Customer Education The Customer Miscellaneous 22 23 24 25 CASE 97-G-1380 PARTICIPANT CODES C CR G LDC M O PL PR Consultant Consumer Representative Government Entity Local Gas Distribution Company Marketer Other Pipeline Producer CASE 97-G-1380 GLOBAL ISSUES 1. What major changes within the gas industry are expected & what will their impact be? Massive service changes brought about largely by changes in electric industry. (O) Many more mergers will occur "Bulking up for Survival" (G/PR/G/C) Cost of service rates will become irrelevant, except as a stop gap measure (G) Holders of all deregulated pieces will be looking to rebundle; customers want service, not pieces (C) Mergers could be creating a monopolist (G) New services to be offered instead of customers purchasing electric power they can acquire fuel and pay to have it converted to electricity (C) Nuclear plant retirements could impact gas demand Gas utilities to be acquired by electric utilities (C/G) (C) We try in our thinking not to talk about gas and electric service, but rather retail energy service (G) Wires and pipes should be combined after competitive elements are stripped away and should be offered by the same company (G) Not so concerned about electric dominating (replacing) gas. concerned about gas expansion (G) More Prefer separate companies. In combination companies - because of lack of competition-attention will be given to electric (G) With electric restructuring gas will become preferred generation source increases competition on pipeline capacity (G) ESCO will manage energy from a distance. Maximizing efficiency (LDC) People are trying to create NY Environment Combination gas and electric companies Customer gets one bill (LDC) Total energy marketing companies (e.g. Tenneco/Enron) will be major players in the future (3-7 years) (PL) CASE 97-G-1380 * * * There will be more delivery than capacity 20 yr. contracts moving toward 5 yr. More rationing of capacity based on price * * (PL/M) * (M) There will be consolidations because of small margins Price is driving electric competition; it isn’t driving gas (LDC) Move to performance based regulation Cost based rates will disappear Rebundling of supplier/pipelines Reaggregation (C) (C) Philosophy "DeJour" Repackaging of services People want that convenience Don’t want energy management (C) Major industry players will be using credit cards for sales of rebundled gas (LDC) Some electrics looking at gas to become total energy companies (PL) Pure gas/pure oil mergers may occur (PL) Competition will take place faster than we might expect New players Mergers, alliances, verticle combinations (PR) All services unbundled; customer picks from a menu Companies marketing everything (PL) (PR/PR) Economies of scale will offset loss of subsidies in rates Technically system is open in New York now. System can be open but not make economic sense to enter Tariff’s need to be revised Storage an issue Transportation rates have to make sense Low load factor customer bills have to go up (PR) -2- CASE 97-G-1380 ISO for gas industry Good for competition as everyone gravitate’s to low cost producers (PR/M) GLOBAL ISSUES 2. What major external forces or events are expected & what will their impact be? (C/LDC) Nuclear plant retirements could impact gas demand Electric restructuring (LDC) In the future any new generation will be gas-fired Technology Trenchless system expansion Improvements in end-use technology information technology (LDC) (LDC) As electric becomes deregulated electric heating may become competitive (LDC) Small scale cogeneration could create gas demand (LDC) Unbundling of electric will be major driver (of change) Marketers will serve energy (LDC/M) * Technology Political forces Reliability/customer choices Light handed regulation Economic development Need to drive down costs Federal initiatives @ FERC EPA Utilities themselves But most want performance based rates Industrial users Thought they were subsidizing residential and commercial customers New competitors (LDC) -3* * CASE 97-G-1380 * * * Electric restructuring will blow right by gas Cookie cutter (for gas restructuring) will be developed on the electric side. (LDC) GLOBAL ISSUES 3. What technology changes are on the horizon & what impact will they have? Dual Fuel Heating Systems Fuel Cells Chiller/Heaters NG Vehicles (O) Telecommunications will effect how gas is purchased (G) There will be more electronic tariffs, less need for file clerks (G) Electric and gas utilization technologies will take advantage of differences in seasonal demands e.g. on-site gas fueled generation (fuel cell) combined with electric resistance heat and gas chillers/heat Management of energy growing in importance Leads to ESCOs Leads to efficient use of energy (LDC) Information Technology e.g. Texas Eastern moving to true-up (sales) in a 6 hr window (LDC) Osaka Gas installing Meters Burglar alarms CO2 protection Ability to remotely shut off customer when flow has gone uninterrupted for 40 minutes Need real time meters; but they’re costly Storage Small fuel cells Low cost liquification of natural gas (LDC) (LDC) (PL/PR) (LDC) Improved technology for offshore recovery of gas Vendor talking about using satellites for metering Need for better real time information handling -4- CASE 97-G-1380 Improved technology for Discovery of gas Extraction Pipeline monitoring/shut offs Billing (PL) Global Issues GLOBAL ISSUES 4. What legislative & regulatory changes are needed to meet public policy & business concerns? FERC would like to move ahead with negotiated rates but confidentiality is a sticking point. Straight Fixed Variable (SFV) Charges to a low-load factor utility has a high impact Modifying SFV rates would benefit company and its customers. FERC policy on rolled-in vs. incremental pipelines (needs to be looked at). You now have an incentive to build on low cost existing facilities. (LDC/PL) Plug for negotiated rates with recourse rate option and for lite - handed regulation (PL) FERC - oversight by exception (PL) PIPELINE, STORAGE AND SUPPLY ISSUES 1. What is the future of upstream pipeline & storage capacity? The key issue is who holds capacity and how it is managed. LDCs will reduce capacity holdings to the extent they lose sales. Pipelines and major marketers will acquire capacity, but producers will not. (C) LDCs may not want to hold capacity. Pipelines can’t shift costs. (G) (G) (G) There will not be as much turnback capacity. There will be changes in Move to market . Depends on how pass through. how the product is priced: based rates state PUC acts on cost (G) -5- CASE 97-G-1380 There will be an expansion of storage. (G) No problem in planning for new capacity; we have seen expansion proposals with marketers, etc. (G) The increase in market area storage may have slowed. (C) Capacity contracts will go short term, mirroring what has happened in gas supply contracts. (C/LDC) Some LDCs will keep signing new contracts; part of a strategy to become "too big to fail." (C) Are you willing to charge customers for the value of that capacity; and deal with the political problems? (G) Pipelines will be forced to accept stranded costs. Pipelines can spread revenue collection seasonally. (G) (G) Who will hold, plan for and sponsor future capacity additions? Whoever wants to make money. Financing is not a problem. (G) LDCs should charge a market rate for direct access to storage. Elimination of capacity release price caps would impact the value of pipeline capacity. (LDC) Our LDC might retain upstream capacity rights even it exits the merchant function. (LDC) Capacity is built in chunks, new projects will immediately result in excess capacity, which will be absorbed by load growth. (LDC) Value of existing capacity will increase over time. New capacity additions will diminish. (C) (C) (LDC) (LDC) (LDC) Producers will step forward to acquire capacity. Producers will support capacity to the citygate. Pipeline capacity screams for seasonal rates. Those LDCs that exit the merchant function might try to hold on to more capacity than needed. There might be a lag in de-contracting for those LDCs. (G) Changing supply sources will create excess pipeline capacity which will put downward pressure on price. (G) * * -6* CASE 97-G-1380 Financial institutions will move pipelines from regulated to competitive arena. with higher returns (LDC) Higher returns for all market based services. Shorter pay-back periods. Higher prices. A lot of efficiencies in pipelines once marketers get involved. (LDC) Little load growth in Northeast. (LDC) Pipelines more concerned about capacity turnbacks. Will put pressure on regulation. * * * May see a shift (in supply source) in next few years. Canada will use net-back pricing: not extensively won’t strand a lot of capacity Capacity turnbacks created by packaging firm transportation and interruptible transportation will be a bigger problem. Marketers will take up some of that capacity. (LDC) - - Can you do 75% firm transportation/25% interruptible transportation for 100% of your load given risk associated with operating that way? (LDC) If firm transportation and interruptible transportation don’t increase, stockholder (pipeline) will pay for excess capacity. (LDC) * * * (LDC) Assigning capacity to marketers works. Real pressure if LDCs start turning back low cost capacity when another utility is paying higher costs. If it’s higher cost that’s released, no one will want to buy it. (LDC) FERC says to the degree there is excess capacity customer should have to pay. Result: 5 year contracts will be long term -7- CASE 97-G-1380 As a buyer, there will be a lot of competitive opportunity. But that’s also true for sellers. (LDC) * Q. A. * * What happens if a utility wants to get out of marketing and each customer gets its assigned capacity? It would take a lot of courage (on the regulator’s part) to allow that. (LDC) * * * My LDC’s capacity costs are more than 50% of the delivered cost of gas. (LDC) * Q. A. * * What happens when contracts expire? LDC’s sue agency. They’re between "rock and a hard place." Reliability v. "imprudent costs." (CR) Boston Gas - mandatory assignment of pipeline capacity. Utility plans to leave merchant function by the year 2000. (CR) Producers may buy downstream for access to markets. Canadian producers trying to end bottlenecks. Producers trying to monetize gas. (LDC) Capacity being released has to stay attached to customer. If (LDC) loses a customer, marketer who picks him up should hold capacity. "That capacity can’t be allowed to go to Chicago." Solution: assign capacity to customer. (LDC) (PL) There is a value to having excess capacity. A value to not being 100% subscribed May have to look beyond contracts to see why capacity is unsubscribed (stranded). (LDC) Do we just assume marketers will pick up capacity if (LDC) leaves? (LDC) If tax breaks favor a state, capacity will move. -8(LDC) CASE 97-G-1380 If you release high cost capacity customers want average cost. If you release low cost they’ll take it. (LDC) Grass root (new) facilities won’t make sense because of rates. Expansion of existing plant will occur. (LDC) PSC upstream capacity regulation reasonable. Customers take capacity with them. (LDC) What’s still an issue is assignment of capacity. With changing supplies, supply may be less than capacity. (LDC) Who’s going to own capacity? New capacity will be needed. New buyers will come into market. LDCs are reluctant to buy. New methods of financing will result in more capacity owned by producers and by pipelines. (PL) * * * What happens if too much capacity gets placed into a few hands? (C) Pipelines still regulated. (LDC) If LDCs are out of the market 90% of capacity could be held by four suppliers. Regulations won’t protect against that. (LDC) So don’t take LDC out of the game. market will bear. (C) Four competitors may be enough. * * End use price will be what (LDC) * At pipeline level LDC, rather than the vendor, holds capacity. If LDC leaves merchant function, holding will move downstream to customer. Perhaps aggregator of ESCO will provide that service. (PR) Marketers will acquire that capacity. Aggregators will serve a role (M) (PR) Not a lot of excess capacity in New York. Whoever comes in last will have to acquire capacity for me. (PR) Whoever replaces LDC Should take LDCs capacity. (M) Always a market for capacity. in. (M) Marketers and hybrids will step New capacity financed by LDC or pipeline. -9- CASE 97-G-1380 LDC may pay for capacity. Just roll-in rates. Some capacity will be held for reliability. * * * (PR/M) (PR) Producers will acquire capacity. Producers as producers have an interest to assure they can move supply. Producers as marketers need it to serve that role. Move to market-based capacity (PR) (M) (PR) Market will provide capacity if LDC doesn’t have to. Hard to see global shifts in movement of gas. Doesn’t see marketers providing storage. New capacity financed by LDC or pipeline. LDC may pay for capacity Just roll-in rates Some capacity will be held for reliability * Producers will acquire capacity * (PR/M) (PR) * (PL) (PR) Producers as producers have an interest to assure they can move supply Producers as marketers need it to serve that role (PR) PIPELINE, STORAGE AND SUPPLY ISSUES 2. What is the future of the gas supply market? (C) You will see a shortening of paths to market hubs Some talk that Canadian imports from British Columbia could reverse flow of natural gas pipelines to north to south (C) You will see Transwestern - type deals with risk sharing among players (C) Changes will be gradual and incremental, especially if a new corridor is involved Canadian gas will be moving into market (in Northeast) -10(LDC) CASE 97-G-1380 Supply and demand patterns will both shift Result: under utilized pipes both transmission and gathering has ability to set gathering rates Problem: offshore pipes not considered gathering by FERC (PL) Problem: producers making decisions 10 years in advance (M) Supply basins: Canada and the Gulf Gulf will need to be price driven Doesn’t think it will shift More gas from Canada, Mexico (PR) (PR) Some east/west capacity will (M) Some expansion in Northeast Canada. be added PIPELINE, STORAGE AND SUPPLY ISSUES 3. What are the existing & future regulatory issues? FERC has created an upside-down system In other markets retail customers do not deal directly with supplier Capacity is now held by the wrong side of the market A seller shipper/system needs to be reestablished for the gas industry to stabilize (C) We will see negotiated rates. Dual system (negotiated rates co-existing with cost of service rates) not a problem Price caps should be removed from the secondary market Agrees with negotiated rate policy FERC SFV rate design inhibits resale * * (G) (CR) * (G) FERC searching for a better model Its needed Hasn’t found a good alternative model Not a fan of incentive ratemaking Models assume competitive rates in areas not found to be competitive (PR) FERC still looking for better model and that’s good (PR/PR/M) -11- CASE 97-G-1380 LDC ISSUES 1. What is the Future of LDCs? Billing will be contracted out and taken over by credit card companies and/or banks (G) LDCs may not want to hold capacity (G) (G) LDCs can use venture arrangements to retain markets What is the value of an LDC? straight gas companies are acquisition targets because of the potential for cost reductions Need to allow LDCs to profit on the sale of gas (G) Affiliate abuse problems mostly in the past; very few since Order 636 (G) Monopoly function is pipe in the ground; billing and other functions can be made competitive Some LDCs might exit the merchant function and provide only distribution service; others might become more like marketers (C) LDC marketing affiliates are Ok during the transition, but not in the end game (G) Ultimately LDCs should not be in the capacity business (G) We (LDC) have a vision to exit the merchant function by the year 2000 This will attract competition and new business LDCs as merchants are incompatible with a competitive business (LDC) What will you (LDC) be We will build pipes We will find and fix leaks We will read meters (maybe for others too, via a subsidiary We will continue in the merchant business if there is a reduced throughput or questions as to who will support market growth (LDC) The question is not whether, but how long it will take for LDCs to exit the merchant function (C) The LDC will always have the wrench (C) -12- CASE 97-G-1380 Requiring LDCs to stand ready to backup marketers will eliminate any potential customer savings (LDC/LDC) * * * LDCs will have to retain system balancing function Lack of meters will limit unbundling Without real time meters, the second best step may be to use load research data to balance the system (LDC) * * * Those functions related to putting gas through the pipe will remain regulated; all other functions can be provided on a competitive basis (LDC) Meter reading will probably be put in an affiliate (LDC) We view it as a possible in-house opportunity for the regulated LDC (LDC) The basic LDC roles will be Independent System Operator and Planner (LDC) LDCs will not necessarily exit the merchant function (G) No one has thought through the implications of LDCs exiting the merchant function (G) Function of LDC is gas delivery. The LDC should not be allowed to exit the merchant function We don’t know enough We have not thought it through Planning issues have not been addressed Will marketers take capacity? Will they play games with capacity (G) Retaining an LDC’s merchant role is basically incompatible with a competitive commodity market (G) My LDC stays in there (merchant function) We don’t see ourselves getting out Some customers can’t leave Some customers won’t leave (LDC) (LDC) Indifferent as to whether merchant function stays with LDC or goes to affiliate No margins on gas (LDC) * * * -13- CASE 97-G-1380 Q. A. Why stay in business (merchant role)? Very difficult to make that decision (Because of existing contracts) If it will take 10 years to get out, what does it hurt to wait another year (LDC) If it were easy to get out, we might Barriers? L/T obligations (capacity contracts) A. (LDC) Core Functions to stay with LDC O&M Forecasting Promotion of Gas Sales Emergency Response Supply (LDC) * Q. A. * * Will LDCs have an Independent System Operator (ISO) role More important for electric * (LDC) * * Gas companies will continue to want to be gas companies (LDC) Gas utilities that want to stay in merchant business will affiliate with a gas clearing house. (LDC) HEFPA protections should apply to marketers If you don’t you’ll stifle competition If you don’t LDC will become sole supplier of last resort (CR) The way it’s going marketers sell gas; utility will take care of you if a problem develops (CR) LDC has to maintain storage and capacity Only one system LDC (CR) Hard to imagine LDCs won’t be involved in metering Could contract out services, but you’d have to keep protections (CR) LDC should get out of marketing/ownership of gas Affiliates Ok (CR) (CR) (CR) (CR) LDC has to maintain reliability Marketers have to pay their share -14- CASE 97-G-1380 Capacity will move from LDCs to marketers (PL) We expect to be out of marketing. If we can’t get out, a lot needs to be fixed Obligation to serve Don’t want not selling gas, but having obligation to serve Obligation of marketers Consumer protection (LDC) * Q. A. * * Down the road which of the services currently provided by the LDC will be regulated? Unregulated? Regulated T&D Emergency Repairs Social Programs Unregulated Appliance Repairs Billing Metering Home Security Energy Products Energy Services (LDC) * * (M) * Balancing will have to be regulated Affiliated Transaction? Take a look at Wisconsin Developing rules, code of conduct with access to the Commission if things go wrong (M) FERC affiliated transactions (Regulations) work Some LDCs want out of marketing (PL) (LDC) (PL) (PL) LDC will fail without merchant function without it market share will plummet LDC shouldn’t be forced out of marketing Large LDCs can, because of their size, take marketing out of regulation Smaller companies will fail (LDC) LDC has incentive to pay to market gas Serious mistake to prohibit or discourage marketing function...regulated or not Favors allowing them to compete either way. LDC has to be viable for purpose of reliability (PL) -15- CASE 97-G-1380 Without performance based rates LDC will flee merchant function (LDC) LDCs will still have to be responsible for storage (reliability) so it doesn’t make sense to leave marketing (LDC) A marketers perspective: LDC can stay in as a player Regulated or unregulated with a level playing field (M) Marketers could also be in a position to help LDC assuming a marketer doesn’t fulfill requirements. (M) LDCs can compete in all areas Some question as to their role as merchant LDC will become responsible first and foremost for distribution. SOLR will probably remain an LDC role. be an LDC role. (PR) Maybe storage shouldn’t LDCs getting out of merchant function Unregulated affiliate provides more flexibility Concern about affiliate role (PR) * Q. A. * * Do performance based rates do away with much of the concern about affiliates Many of us don’t look favorably on PBR anyway. Where are the incentives? Favor cost based rates unless you can show benefits (PR) * * * Movement to Use of More Financial Tools? Small LDCs won’t get into it; many LDCs not allowed to hedge (LDC) * * * We (LDC) expect to be out of the merchant function by year 2000 (LDC) Not sure LDCs happy buying at the well head. We’d rather buy at the city gate (LDC) Can buy as efficiently as marketer (LDC) -16- CASE 97-G-1380 Drivers to leaving he merchant function? Market slowly eroding If we’re going to lose the market Lets do so quickly Lets encourage it LDC ISSUES 2. What is the LDC’s obligation to be the supplier of last resort (SOLR)? (LDC) We should distinguish between failure to supply vs. customer’s willingness or ability to pay (C) Cleanest way to deal with this is for state legislature to create a fund to deal with social issues (C) Maryland has an assigned risk pool to serve less desirable customers (C) SOLR & defaulting supplier issues need to be addressed. SOLR could be bid for All six LDCs that serve Pittsburgh pay to fund marketers that serve as SOLR Marketers could be required to contribute to a fund to address defaulting supplier situations. (G) Marketers will pick-up low income customers as a cost of doing business (if not regulated) (LDC) Unattractive customers could be pooled and bid out, with the other customers paying the difference between the bid and the cost of service (LDC) Cost of social programs should go to social agencies (LDC) A fuel What happens when you need oil in December and can’t pay? tax would be better. (LDC) * Q. A. * * What happens if only unattractive customers remain with LDC Doesn’t matter. charge. (LDC) These costs are largely in the distribution * * * We’re (LDC) committed to being the SOLR. We want to take responsibility But how do we avoid bearing the cost (LDC) -17- CASE 97-G-1380 If reimbursement can’t be arranged not sure SOLR should be part of LDC’s role (LDC) Model already exists for transportation customers (LDC) If LDC has no supply access but obligation to serve, how much capacity should you have to hold? What are you protecting against? (LDC) Everyone’s talking about the cost of being the provider of last resort; what cost? (CR) Social costs should not be the role of the LDC Dumping social costs into rates allows social decisions to be made out of public eye. Social costs should be supported by pipe/system charges paid by all (CR) If you force LDCs out of merchant business, you’d have to have HEFPA (for marketers) (CR) You could handle "provider of last resort" on a statewide basis but there would be problems (CR) Package "ugly ducklings" and bid them out (LDC) Problem (OTS) may take care of itself Utility may end up raising price of service to serve unattractive customer Marketer may then be able to underprice (LDC/LDC) SOLR great business to be in but not with cost based rates They’ll always be a supplier at-a-price for every market alternative. Create a universal fund paid for by all marketers. (LDC) Have to have an obligation to serve (PR) Reliability is a red herring for both the gas and electric sides (G) * * * (LDC) (G) You can make it painful for marketers to not perform Marketers will not walk away from their obligations Marketers will self-discipline * (G) * * -18- CASE 97-G-1380 LDCs could have perfect tariff but others further upstream could be the weak link (C) Price reliability will not be the same Supply (reliability) won’t change (LDC) Marketer packaging 75% firm transportation and 25% interruptible and sells it as firm All supplies may have to go that way (LDC) May be incentives for customers willing not to take gas on peak day (new service) (LDC) * * LDC ISSUES 3. What are the future reliability of service/operation concerns? * Different type of reliability; may not be able to keep thermostat at same level on peak day (LDC) Real time metering goes with that * * * In an unbundled world utility may have to maintain some assets to ensure reliability (LDC) Special concern for reliability Everyone should have to pay for that (CR) (LDC) We don’t want penalties, we want gas from marketers’ LDC ISSUES 4. What are the existing and future regulatory issues? Need for guidance on unbundling Don’t be afraid to make a non-decision Need to be flexible States have a very difficult job and many more social issues to deal with (G) Regulators should create the paradium needed to allow any service to be provided on a competitive basis. You don’t want to cut off innovation, creativity and option (G) Government’s role is to facilitate unbundling of everything, billing and meter reading, line extensions etc. (G) -19- CASE 97-G-1380 Regulation is much more complicated politically at the state level then at the Federal level (G) Performance based rates will lead to economies of scale and scope, mergers and increased size (G) Jurisdiction split between Federal and State may need to change. May be reduced, or no need for state PUCs Regulation could be done on a regional or Federal basis (G) Growing emphasis on anti-trust and dispute resolution If the future is ESCOs, you need HEFPA (CR/CR) (C) (G) Need for legislative funding of low income assistance It is appropriate to warn LDC’s against investment in areas that may be competitive (G) Commission can’t modify HEFPA; legislature can and should clarify that HEFPA should apply to marketers (CR) Regulate Marketers Eliminate HEFPA (CR) (LDC) Incentive Regulation based on level of competition. More competition equals greater return (M) PSC law has to be amended to address "obligation to serve" * * * (LDC) Laws governing securities issuance and holding companies (need to be amended) Tax law needs to be amended Need a law that allows load factor based rates State Environmental Planning process needs to be modified PUHCA needs to be repealed PSC Law - except for safety aspects - needs to be relaxed. Need to report competitive data should be done away with Management audits and mandated training need to be looked at Billing practices need to be reviewed Relax HEFPA Main extension rules should be relaxed (LDC) * * * -20- CASE 97-G-1380 Public policy through taxes, not utility rates (LDC/LDC) Cost effective improvements to LNG operations are needed. problem: fire protection mandates (LDC) Level taxes (LDC) (LDC) PSC won’t have to handle disputes Marketing folks needed more clarity not necessarily new laws Level playing field with regard to taxes (PR/M) (M) Rules of the road need to be understood by everybody Business sees clarity as an asset in considering where to operate New models are needed for ongoing regulated functions * Q: A: * * (PR) PSC role between marketers & LDC? You’ll need a courthouse Assumes PSC/DPS will fill the role If gas doesn’t show up dispute shouldn’t go to PSC/DPS (because marketer isn’t regulated) If "Distribution" (which is regulated) isn’t meeting marketers’ requirements marketers go to PSC (PR) * * * What do you mean when you say regulators want choices, but are not willing to go all the way? LDC still has the obligations To serve as supplier of last resort Social programs Obligation to serve * * * Marketers have instilled paranoia (of marketing by utility) in regulators -21- CASE 97-G-1380 ADDITIONAL ISSUES 1. Marketers (C) The question is how and whether to regulate marketers New market entrants may act as middlemen to aggregate load through non-traditional means (C) Emergence of mega marketers; producers are focusing on producing, turning marketing over to others (C) Metering and billing can be made competitive and contracted out; this is key for marketers (C) Marketers may be able to carve off a set of customers and serve them more cheaply, but others lose; how do you deal with this? (C) Marketers have added 1/3 of our (LDC) new load (LDC) Companies will be indifferent as to what fuel they provide How they sell will be very different (O) We (LDC) see marketers as trade allies and would work with them if they wanted to put pipes in the ground (LDC) Commercial/industrial customers will be their first targets There is a Canadian marketer that is willing to pay an LDC to allow it to do billing and is making money at it. (S) Others (marketers) may be able to meet reliability standards with less capacity (S) Marketers using gas to get foot in the door (for electric) (LDC) (S) If marketers are promoting gas they’re our friends; if they’re promoting diesel, they’re our enemies (LDC) A utility shouldn’t rely on marketers May find marketers will move on to electric (LDC) No particular incentive to market gas if larger margins exist in electric (LDC) Marketers will focus on higher margin services (LDC) Marketers benefiting by buying capacity in secondary market and by tax advantages (LDC) -22- CASE 97-G-1380 Some advantages to marketers with unbundling Secondary transportation (LDC) Taxes Real problem with current status; lack of a level playing field (marketing vs. LDC) HEFPA protection should apply to marketers (CR) Saying everybody has to serve everybody will inhibit competition (CR) Require anyone who serves residential to serve anyone who asks; otherwise you’ll serve only "people with gold cards" (CR) Movement to marketer should be based on gas costs Regulate marketers (CR) (CR) (CR) Marketers can’t compete without tax differential Can’t see residential heating load going to marketers; markets seem to want non heating-load (good load factor customers) (CR) Marketers will not sell to new customers Marketers will go after mass markets (LDC) + 2% balancing means no residential customers will be served Marketers tell me + 5% might be liveable (CR) ADDITIONAL ISSUES 2. Customer Education (M) (LDC) * Customers will have to be informed Cooling off periods when switching service * * One marketer says my price 40% lower; second says my price 10% lower than last winter Misleading Where do you draw the line (LDC) We’re in an environment where we don’t know how its going to play out. S/T you may need an ombudsman (C) Customers need to be educated (PR/PR/M) -23- CASE 97-G-1380 Competition works when customers understand choices (PR) Doesn’t know how customer education is being handled in pilot programs Government may assume marketer will do it They will, but with their spin (PR) You need educated and aware customers before people make choices and industry changes (M) * * * Electric restructuring raising customer awareness? Not sure customers are aware here either ESCO - Type companies will have to be aggressive in educating customers as well (M) Customers can be educated without irritating them Doesn’t need direct phone calls Techniques can be learned (PL) ADDITIONAL ISSUES 3. Customers Competitive environment will lead to natural section (of customers a marketer wants to serve). Large customers Good load factor customers I’m not sure you should work to avoid cherry picking and charging higher costs to other customers To avoid that you’d have to create an unlevel playing field * Q. A. * * Won’t marketers have to hustle to sell gas more than a utility would A lot of customers won’t have a choice because marketers can’t make a profit (serving them) (LDC) 70% of the customers just won’t move * * (LDC) * A. -24- CASE 97-G-1380 Customers want choice with convenience (CR/M) Need "Consumer satisfaction with process" Need to avoid Extra billing Billing hassles Lack of protection (CR) Need for more customer surveys so that we could focus on issues of importance (PL) One survey said customers want convenience - one bill (PR/LDC) Inertia has prevented customers from demanding one gas & electric bill (PR) Many won’t change (PR) * * * (LDC) Customers don’t care (who’s supplying them) What size customers? Residential/small commercial * * * Not all companies - LDCs or marketers - want customer choice (LDC) ADDITIONAL ISSUES 4. Miscellaneous Rate Design Changes Since 1987 we (LDC and the state regulator) have made a concerted effort to eliminate rate subsidies and to equalize rate of return across customer classes. (LDC) Tariffs will be split to citygate from citygate (LDC) The only thing you can do selling gas in New York State is lose money (LDC) No reason to make changes to allocations or rate design (CR) -25- CASE 97-G-1380 Research and Development R&D via DOE and Gas Research Institute is needed; we do essentially no in-house R&D. Ultimately a non-bypassable charge per Mcf will be needed to fund gas R&D (LDC) Natural Gas Vehicles Taxis in New York City may be going over to gas. More reasonable in metropolitan areas (LDC) Its been suggested that reformulated fuel and buy-back of gas vehicles will be the future. (LDC) NGV is a good load factor customer, but there are a lot of hurdles -26- CASE 97-G-1380 CASE 97-G-1380 APPENDIX D (ACRONYM LIST) -27- CASE 97-G-1380 APPENDIX D ACRONYM LIST BCF DOE DPS DSM EIA ESCO FERC GAC GCIM HEFPA LDC NGCH NYMEX OTS PBR PUHCA PURPA SFV SOLR Billion Cubic Feet Department of Energy Department of Public Service Demand Side Management Energy Information Administration Energy Service Company Federal Energy Regulatory Commission Gas Adjustment Clause Gas Cost Incentive Mechanism Home Energy Fair Practices Act Local Distribution Company Natural Gas Clearing House New York Mercantile Exchange Obligation to Serve Performance Based Regulation Public Utility Holding Company Act Public Utility Regulatory Policy Act Straight Fixed Variable Supplier of Last Resort