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					August 14, 2011

      LDC Unbundling:         Problems and Opportunity

                                                              Page
I.    Overview

      1.    What is LDC unbundling? ............................3
      2.    To What Extent Is Unbundling Happening?..............4
      3.    Pros, cons and ambiguities of unbundling.............4
II.   Encouraging Unbundling Programs

      4.    What is necessary/required for unbundling?..........10
      5.    Process.............................................14
      6.    Elements of unbundling .............................15
      7.    Rates and revenues/cost ............................17
III. Impact of Unbundling on Traditional Regulatory Concerns: How
Far Can/Should Unbundling Proceed?

      8.    Protection and education of end users ..............18
      9.    Why and how should unbundling be evaluated?.........19
      10.   How might social programs, e.g., conservation,
            research & development, alternate fuel vehicles,
            area (economic) development, etc., be handled?......20
      11.   What might be done for low income customers?....... 22
      12.   What should be done about a supplier of last
            resort? ............................................23
      13.   Rate adjustments required for unbundling and
            the process by which those changes can be
            implemented.........................................25
IV.   Reality Checks

      14.   Alternatives to unbundling..........................26
      15.   What is the role of state regulation in
            partially/mostly unbundled markets?.................27   16.
            exit merchant service?..............................30

Appendix

            Materials that constitute or describe
            unbundling activity for individual states...........31
            This paper has been prepared by members of the NARUC Staff
            Subcommittee on Gas in an effort to stimulate and facilitate
            discussion on the several aspects of unbundling natural gas
            distribution service. We have not attempted to develop a manual
            for state unbundling, and we have avoided recommendations for or
            against unbundling efforts.

            We recognize that many readers are from states that have already
            proceeded down the road to comprehensive unbundling of traditional
            utility sales service. Others, however, may just be starting to
            consider whether unbundling might benefit energy users and, if so,
            the possible ramifications of such efforts. Still others see no
            advantage in being near the leading edge of these developments.

            Each state must consider the extent to which, and when, unbundling
            might provide an appropriate strategy for its citizens and
            industrial base. As indicated throughout this paper, there is no
            necessarily good or bad outcome that is associated with
            unbundling. Opportunities and pitfalls are both presented.

            States with high cost gas supplies and/or relatively ineffective
            supply oversight might conclude that unbundling offers potential
            benefits that should be pursued sooner rather than later.       By
            contrast, states with low cost gas might conclude that the
            potential benefits of unbundling do not outweigh the near term
            uncertainties that would accompany unbundling. Such states might
            defer unbundling efforts pending a review of unbundling experience
            in other jurisdictions. Similarly, each commission will have to
            consider the nature of its markets and their attractiveness to
            potential competitive suppliers.

            This paper presents a number of issues raised by the unbundling
            option and discusses the several facets of each issue. The paper
            will be revised as readers convey their questions, reservations,
            objections, and other critical responses to the Subcommittee.1

            There are some matters on which Subcommittee members may be in
            substantial agreement. On other issues, including the fundamental
            question as to whether unbundling is appropriate, we may disagree.
             Our purpose has been to develop a context in which a broad range
            of issues and options or opportunities could be identified, with
            particular emphasis on those difficult issues that some have
            termed "The unanswered questions."



1
    Comments should be addressed to Henry Einhorn, Massachusetts Department of Public Utilities, 100
Cambridge Street, Boston, MA 02202; you can also convey comments by: phone, 617-305-3709; fax,
617-723-8812; or e-mail, heinhorn@state.ma.us.
I.   Overview

1.    What Is LDC Unbundling?

To start, we would like to suggest what unbundling is not and,
then, what it might embrace.
What unbundling is not:

Unbundling is not simply the offering of a broad transportation
tariff alternative to sales service.

LDCs in almost every state offer some form of transportation
service, if only to large volume commercial and industrial (C&I)
users.     Unbundling involves more than such broad brush
transportation rates.

What unbundling is:

Unbundling is:
     (1) the separate pricing and offering of the discrete
          elements of local gas distribution utility (LDC)
          services (e.g., gas supply, balancing, storage, and
          transportation) and
     (2) the opening of these previously monopolized elements of
          sales service to alternative unregulated suppliers of
          those services.



Unbundling reflects broad based efforts to:
     1.   Identify those elements of LDC service that can be
          provided by alternative (competitive) suppliers and
     2.    Develop and implement regulatory and operating terms
          and conditions that would permit alternative sellers to
          function in a competitive manner to all users.

Objectives of unbundling,       i.e.,   the   rationale   for   considering
unbundling are:

      1.   Supply efficiency as lower cost suppliers can enter the
           market.

      2.   Improved incentives for suppliers and, also, users of
           gas to become more efficient.

      3.   Greater customer choice from increased service options.

Unbundling is an opportunity for competitive forces to operate in
previously precluded areas of the gas market.        As in other
deregulated markets, the impact from introducing competition will
vary by user and user group. As a general principle, unbundling
will offer greater benefits to those who have more and/or lower
cost supply alternatives or marketers who can offer supplies at
lower costs than LDCs.



2.   To What Extent Is Unbundling Happening?

Although we have not surveyed each state's experience with
unbundling, the Appendix to this version of the paper provides
some initial summaries of unbundling developments for a number of
states. We hope that this information will be useful to members
of the Committee on Gas and their regulatory staff. The Appendix
will not be included in future revisions.           However, the
subcommittee members associated with this paper will try to
maintain an ongoing file of related information for reference by
regulatory personnel. As with the other material in this paper,
supplementary information and suggestions for improvement will be
welcomed.

Other sources provide information concerning the nature and pace
of unbundling in the several states.    With no intent to provide
recommendations or to pretend to comprehensiveness, we note that
unbundling developments are the subject of summary descriptions in
the Public Utilities Fortnightly and Gas Utility Reports.       In
addition, industry surveys of state unbundling developments have
been conducted by a number of industry participants; these may be
available to regulatory staff.    In addition, a survey currently
being conducted by Tom Birmingham and Grace Hu (of the MA and DC
commission staffs) was the subject of a paper at the September,
1996 NARUC BRIC meetings.       In May, 9, 1996, the National
Regulatory Research Institute (NRRI) released a study, "Unbundling
the Retail Gas Market," as its NRRI Research Report 96-13.



3.   Pros, Cons and Ambiguities of Unbundling

This section reflects efforts to develop a summary overview of
unbundling that might provide a running start for those who are
relatively new to the unbundling arena.        Because no single
approach has satisfied those who have prepared this paper, two
such efforts are provided in this section: (a) facet-by-facet and
(b) an alternative summary listing of pros, cons, and ambiguities.
 The latter approach demonstrates the difficulties of simple
summations, because the benefits received by one group of users
might be obtained only as other users are adversely affected.
Unbundling   means   that   LDC   prices   will   have   to   reflect   the
                   utility's costs incurred to provide each service.            Thus,
                   unbundling will severely limit the opportunities for subsidized
                   LDC offerings. As strict cost of service pricing is adopted, cost
                   shifts will occur and reduce the previously explicit subsidization
                   of gas service. These shifts, which will affect each class of gas
                   use, will occur when costs are allocated by possible user
                   causation2 rather than by subsidization objectives.    Higher cost
                   allocations to a user class will tend to reduce demand by members
                   of that class, while lower cost allocations will tend to encourage
                   gas use by a class.

                   Theoretical economic analyses indicate the benefits of unbundling
                   in LDC markets.     No such easy characterization is possible,
                   however, when evaluating the impact of unbundling on the ratepayer
                   in specific markets. Unbundling demands cost reallocations that
                   can be significant in amount and in their impact on given customer
                   classes. These cost reallocations (and related reapportionment of
                   revenue responsibility) are a necessary aspect of unbundling.
                   Those who must bear higher cost responsibilities will have to
                   await the uncertainties of the new competitive market, before
                   knowing whether unbundling will provide any personal benefits.
                   For these reasons, no single, simple evaluation is possible at
                   this time.

                   As with other sections of this paper, readers are encouraged to
                   provide their reactions, including suggested alternative methods
                   of presenting bottom line evaluations of unbundling, to the
                   Subcommittee.
                   A.      Facets/Issues

                   LDC operating efficiencies
                        Pros
                             Induces efficient operations.
                             Induces use of efficient technology, such as
                        Cons
                             May create stranded investments for (only) core users.
                        Ambiguities
                             LDCs still monopolistic distributors.
                             Acuteness of regulatory treatment of LDC
                             Magnitude of LDC efficiency gains.

                   LDC service options
                        Pros
                             Induces new service options.
                        Cons
                             May be more choices than residential users want.

2. That is, the assignment of costs to those for whom those costs must be incurred as a condition of service; this is the de-averaging of gas costs rather than the
averaging of gas costs, i.e., the WACOG.
    Ambiguities
         Savings may not compensate for complexity of choice.

Market efficiency
     Pros
          Users choose and pay for only services desired.
          Increases with competitive market pricing and
               resource allocation.
     Cons
          Efficiency gains may not occur in the absence of
          Competition will not tolerate redundant reliability.
     Ambiguities
          Net impacts will vary with current LDC efficiency.

Market prices
     Pros
          Potential for competition to drive prices to lowest
     Cons
          Cost redistribution will cause some price increases.
     Ambiguities
          Impact varies by customer class, cost

Residential customer impacts
     Pros
          Potential for lower gas prices with new suppliers.
     Cons
          Loss of subsidies in many jurisdictions.
          Potential for higher gas costs, if competition fails to
                    materialize.
     Ambiguities
          When others will market to small load factor users.
          LDC ability to offer residential aggregation.

C&I customer impacts
     Pros
          Likely price reductions.
          Likely increase in service alternatives.
          Relief from subsidy support obligations.
          Pay only for services desired.
     Cons
          Load factor may affect a customer's costs.
     Ambiguities
          A customer's savings relative to procurement efforts.




Technological developments
     Pros
          Induced by competition.
        Cons
             Risk of R&D funding declines as competitors reduce
        Ambiguities
             Net impact on efforts to move the conservation

Regulatory responsibilities
     Pros
          Decline with increased reliance on competition.
     Cons
          Supply oversight will decline.
          Need for constraints on LDC/affiliate relationships.
     Ambiguities
          Supply reliability pursuant to consumer choices of
          Tax consequences when third party suppliers are excused
                    from gross receipts taxes.
B.   Alternative "Summary" Overview of Unbundling
Pros:

        Customer choice drives LDCs to operate more efficiently, in
        order to remain competitive with unregulated suppliers and,
        perhaps more important, with other LDCs.       Increased LDC
        administrative   efficiency probably    will  reflect   staff
        reductions,    computerized   and    less    (governmentally)
        constrained operations.

        LDCs can be    expected, in response to competitive pressures,
        to   adopt     new    technologies,  if  those   technological
        developments    offered any significant savings potential for
        distribution   functions.

        New service options are likely as unregulated, i.e., third
        party, marketers and aggregators, enter the residential and
        smaller C&I markets.
        Through competition with unregulated firms, services can be
        increasingly assumed by the unregulated sector, where markets
        can function more efficiently under competitive conditions.

        Consumption efficiencies will be improved as customers are
        able to tailor service to their needs and from prices that
        reflect the costs of component services.

        Competition will continue to provide lower prices for larger
        users and those users with high load factors.    These users
        can be served with the least supply complications and,
        therefore, the lowest costs of service.

        More efficient use of upstream capacity as marketers serve
        multiple markets more efficiently than LDCs can.
                            Permits regulators to focus on strategic issues (such as
                            affiliate relationships) rather than "second guessing" LDCs
                            on operational issues.
                   Cons:

                            Competition may not develop as planned. This could result in
                            higher prices with one dominant supplier being the price
                            setter and a few others being followers.

                            Smaller users and low load factor, e.g., heat sensitive,
                            users may find that competitive market pressures will lead to
                            higher cost responsibilities and prices as subsidies from
                            other use classes are eliminated.

                            Stranded costs may develop, partly due to the uncertain short
                            term   potential   for   pipeline   decontracting   and   the
                            destabilization effect of new supply alternatives.3

                            An increased risk of a decline in supply reliability may be
                            associated with unbundling, because market prices may not
                            always assure supply deliverability or at least not at
                            politically acceptable prices.

                            Technological (R&D) support by gas industry might diminish,
                            because competitive pressures may induce each market supplier
                            to reduce its short term costs to a minimum.       This is a
                            "con," because technological improvements are a principal
                            source of continued efficiency gains and the development of
                            user choices.

                            Customers of currently efficient LDCs may find negligibly
                            lower marketer prices, especially when compared to increased
                            customer confusion.

                            Customer rights and safeguards might be needed for consumers
                            who are not knowledgeable about the nuances or about
                            information that might be available concerning alternatives.

                            Increased   controversy    as   regulatory   protections   are
                            eliminated and until consumers adapt to the unbundling
                            changes.    More costly litigation probably will replace
                            regulatory   dispute    (consumer    complaints)   resolution,
                            particularly as funding for consumer complaint bureaus is
                            reduced.
                   Ambiguities:

3. This would indicate the inefficiencies inherent in the current system. Regulatory commissions will have to determine the disposition of these costs.
      The principle ambiguity is the degree to which: (1) small
      users are, in fact, interested in securing gas from third
      party suppliers and (2) third party suppliers are interested
      in serving small users. Many observers detect no sentiment
      for change by the vast majority of smaller users.     Others,
      however, note a widespread interest in competitive suppliers
      whenever a regulated service is restructured into deregulated
      and regulated entities. These parties point to an impressive
      history of innovation when government constraints are removed
      from a market.

      It is unclear whether unregulated suppliers should be subject
      to financial and other (e.g., supply) prequalifications and,
      if so, the financial criteria that would be appropriate.
      Some states or LDCs have adopted financial qualification or
      bonding requirements that an unregulated supplier of natural
      gas would have to meet in order to participate in an
      unbundling program.     In some instances, the financial
      requirements have mimicked those of a pipeline serving the
      LDC in question.

      Similarly, it is unclear as to the nature of supply planning
      oversight that might be required in an unbundled market
      environment.

Threshold Question

From this point of the discussion, the material will be presented
In a context which assumes that a commission has decided to either
pursue LDC unbundling or identify the process and issues that
would have to be confronted, if unbundling were to be pursued.

Each commission must decide if legislation is required in order
for unbundling to be pursued in its particular state. Since this
is a legal issue, we do not comment further on the need for new
legislation. This is a state-specific issue.

Finally, we emphasize that unbundling is a discrete issue,
separate from incentive, i.e., performance based regulation (PBR).



II.   Encouraging Unbundling Programs

For a commission that has not yet been presented with unbundling
proposals, one of the first concerns is to identify prerequisite
conditions or activities for unbundling.
4.    What is necessary/required for unbundling?
Unbundling requires a commission decision that the public interest
(with regard to price, reliability and safety) requires tariffs
that permit users to choose (and pay for) only those LDC services
that the end user desires.    Regulated LDC service would include
only those services that others could not provide at reasonable
cost, i.e., those services that a user cannot provide for itself
or secure from parties other than its local LDC. The charge for
any regulated LDC service would be based on the LDC's costs of
providing that service.

The unbundling process requires the LDC and regulatory authority
to unbundle, i.e., separate, the LDC's rates so that distribution
costs reflect:
     (1) only the costs of bringing gas from the city gate to
               the burner tip,
     (2) separately stated gas commodity costs, and
     (3) separately stated costs and prices for services

Obligation to serve must be reexamined         and   redefined.   The
obligation to serve may have two aspects.

     (1)   The obligation to balance the     system so as to maintain
           service. This is a technical     issue and lends itself to
           discussion/resolution through    a review of the specific
           LDC's technical specifications   for its own system.

           System constraints must be recognized in developing an
           LDC's unbundling program.     System constraints are a
           major   factor   when  the   unbundling   planners  are
           confronted with allocating upstream capacity.        In
           addition, allocation of downstream capacity may well
           pose a problem if third party suppliers seek that
           capacity as part of an LDC's unbundling process.

     (2)   The obligation to serve individuals or identifiable
           customer classes. This obligation probably is a matter
           for generic resolution in each jurisdiction.      Each
           commission probably would seek to apply to the
           customers of all LDCs the same "protections" that it
           might extend to customers of any given LDC.

           However, commissions must limit, if not eliminate, any
           obligation to serve for unbundled services for which
           the LDC is to compete with other suppliers.        The
           imposition of an obligation to serve is tantamount to
           the imposition of market costs and constraints, thus
           impeding the LDC's ability to participate in the
           competitive process.

           If the LDCs are to continue to have the obligation to
           serve, then the commission should allow LDC to recover
           the costs associated with this obligation.
                   Commission guidelines?

                   Regulatory guidelines are neither a      necessary nor sufficient
                   prerequisite for LDCs or marketers to initiate unbundling efforts.
                   It is not obvious that guidelines would have any significant
                   effect on promoting change, unless there are other factors driving
                   change in a given jurisdiction.4    Moreover, even when guidelines
                   are   promulgated,    regulatory   monitoring    of   each   LDC's
                   implementation of the commission's unbundling mandate may be
                   required to assure compliance with those guidelines.

                   The principle advantage of guidelines might be as the initial
                   educational effort through which all stakeholders would understand
                   the advantages and limitations of unbundled service.           For
                   unbundling to succeed, a significant "educational" effort probably
                   will be required to change the expectations and attitudes of
                   market participants concerning gas service.     Over 50 years of
                   assumptions, expectations, and patterns of behavior will have to
                   be changed within relatively short periods, e.g., one to three
                   years.

                   Most LDCs have been exposed to considerable information concerning
                   unbundling from their trade associations and the trade press. The
                   degree to which LDCs absorb such information varies considerably.
                    Casual observation suggests that LDC managements remain divided
                   in their assessment as to the value of unbundling for their
                   stockholders, customers, or other interested parties.     At least
                   some LDC managements probably require guidance as to what their
                   regulatory commissions believe should be considered in order to
                   provide acceptable service to ratepayers.

                   Those marketers experiencing unbundling in other jurisdictions may
                   not be in need of guidelines.      However, even parties familiar
                   with unbundling, generally, might require information and
                   direction as to the procedural requirements of a given regulatory

4. The New York PSC, in Opinion 94-26, December 20, 1994, at page 2 listed the following principles:
                                                1.        There will be a commitment to gas service for New York consumers, considering both
                                      customer need and economic feasibility.
                                                2.        No compromise to the safety of the gas distribution system will be tolerated.
                                                3.        Environmental implications and concerns will continue to be carefully considered.
                                                4.        An adequate forum for resolving consumer concerns must continue to exist.
                                                5.        Rate shock to individual customer classes or groups must be avoided.
                                                6.        Deregulation or reduced regulation must not lead to an unregulated monopolistic (or
                                                                             otherwise uncompetitive) market.
                                                7.        The ability to regulate, should any of the above conditions not be met, must be
                                                                             maintained.
                                                8.        Access to a basic and affordable package of gas services should continue to be provided
                                                                             to core customers.
                   commission.5 In any event, many marketers, potential aggregators
                   of demand by individual users, and potential marketers of gas
                   (e.g., trade associations and municipalities) might benefit if a
                   commission issued guidelines for unbundling.

                   Guidelines might help consumer advocates and other user groups
                   whose often limited resources might preclude their efforts to
                   induce LDCs to initiate unbundling. Moreover, as a general rule,
                   the further that one is from the LDC process, the less likely is a
                   party to understand the concept or potential of the unbundling
                   process.

                   The formulation of guidelines may well educate, or otherwise
                   assist, a commission and its staff, as much or more as for the
                   LDCs or other parties.      However, one should not forget that
                   regulatory authorities often can achieve given objectives through
                   informal promulgations, i.e., "jawboning" or "moral suasion," as
                   contrasted to rulemaking or similar formal processes.

                   The following issues are among those that might lend themselves to
                   generic guidelines:

                   (1)       Standards of conduct that govern an LDC and its unregulated
                             marketing affiliate,
                   (2)       Consumer protections (historically available from regulatory
                             commissions),
                   (3)       Curtailment principles that govern the use of natural gas and
                             the rights of customers who might be adversely affected as
                             LDCs seek to manage their system when unanticipated
                             emergencies disrupt gas supply,
                   (4)       Third party supplier qualifications,
                   (5)       Penalties and terms and conditions of sale, and
                   (6)       Mitigation of gas-related and non-gas transition costs, if
                             any.

                   Pilot programs may be useful to improve the likely feasibility or
                   success or feasibility of an unbundling program. Experience has
                   demonstrated that unbundling is, to some degree, feasible for the
                   full range of gas users.      Arguably, no state or LDC has to
                   undertake further studies of whether unbundling is feasible.
                   LDCs, marketers and user representatives have been dealing
                   successfully with virtually all aspects of the operational issues
                   that influence or are affected by unbundling.6

5. For marketers, entry into service territories is facilitated by consistency across LDCs in a given jurisdiction.



66. Operating functions that might be susceptible to unbundling include: supply, firm pipeline transportation, interruptible pipeline transportation, storage,
balancing arrangements, standby service, meter reading, billing and collections, supply planning, inspection and leak detection, line extension and facility
planning, energy conservation.
Most commentaries probably believe that unbundling is easiest for
the larger volume C&I customers.    Because the great bulk of C&I
users are accustomed to choosing from alternative supply options
on many business supply inputs, the unbundling of natural gas
should pose no significant challenge to them.        Many of the
largest C&I users have been using transportation service for many
years. For all practical purposes, service for these experienced
transportation customers is already unbundled. Those larger users
that are not yet transporting gas probably have considered that
option and are familiar with its requirements, advantages and
possible limitations.

The complexity of, and interest in, unbundling for the residential
and smaller volume C&I customers remains an open question.
However, even for these users, eight years of experience in
Toronto suggests that residential users are able to handle the
task of selecting gas suppliers other than the traditional LDCs.


Pilot programs are a useful way for LDCs and other parties to
develop the ongoing relationships and operating conditions that
are essential for long term unbundling. Pilot programs probably
can be limited to     a two-year phase-in to full system-wide
unbundling.

For regulatory commissions at the initial stage of encouraging
unbundling, the hardest task may be to determine whether
unbundling is appropriate and/or timely in the context of a
particular LDC's customer base and gas supply situation.   Thus,
some   commissions  have   provided  their  smaller   LDCs  with
considerably more time than was granted to their largest LDCs to
develop their unbundling proposals.

However, the choice of regulatory process (e.g., use of
collaborative efforts rather than reliance on traditional
quasi-judicial procedures) is probably a far more important
influence on the unbundling movement than the promulgation of
guidelines.




5.   Process

Unbundling    programs    require    regulatory   approval    for
implementation.    In turn, commissions generally rely upon a
quasi-judicial process to resolve utility rate and service tariff
applications. Settlement conferences, conducted concurrently with
the regulatory proceedings, often result in a workable or
compromise agreement that the litigants submit for commission
acceptance.      Settlement   proceedings   can  save   significant
litigation costs for all parties.        Even greater savings are
possible when "adversarial" parties work together to reach
agreement prior to an initial filing with the commission.      Such
collaborative   efforts   can   be  particularly   useful  in   the
development of unbundling programs.

A collaborative (that is, settlement) process can lead to the
development of an effective unbundling program with the least cost
and fewest resource requirements.         This informal process
facilitates efforts to review alternative proposals. By utilizing
direct communication of technical personnel, the process reduces
the persistence with which parties pursue their optimal objectives
and minimizing the need for costly litigating resources.

Collaborative efforts require the least amount of regulatory
commission inputs. The availability of regulatory staff, to serve
in a facilitator function, may well be the single least cost, but
most important, contribution that a commission can make when
seeking to encourage collaborative efforts.

A proactive regulatory stance must exist, before a commission will
require   is   LDCs   to   develop  their   unbundling   proposals
collaboratively.    However, that stance is likely only after a
commission has given serious consideration to the potential
benefits and problems posed by LDC unbundling.      The commission
should also consider the goals to be addressed by a collaborative
process.   These goals could include fairness to LDCs, customer,
choice, and reasonable terms for open access.

The collaborative process can facilitate a party's efforts to
delay development of an unbundling process.    Similarly, a party
might use the process to secure a unique objective as the price of
agreeing to conditions satisfactory to all other parties.      The
likelihood of such results can be reduced by giving careful
consideration to the structure of the collaborative process.

States and LDCs have varied significantly in the type of
collaborative effort pursued and in the effectiveness of the
collaborative    process  in  developing acceptable   unbundling
programs.     For example, all parties might meet to jointly
undertake planning the unbundling proposal.       Alternatively,
parties could meet initially in small groups, adjourn while the
LDC developed the unbundling plan, and reconvene as a single
larger group to refine the program.

Several types of collaborative processes are available to develop
effective unbundling programs. For example:
     1.   All parties might meet to jointly undertake planning
          the unbundling proposal, or

     2.   Parties meet initially in small groups, the LDC
          develops an unbundling plan, the parties reconvene as a
          single larger group to refine the program and reach a
          settlement.

6.   Elements of Unbundling Programs

At the very least, the unbundling process requires the parties to:

     1.   Identify sales and transportation elements.

     2.    Develop   storage,   balancing   and   standby   service
provisions           and appropriate penalties.

     3.   Consider if billing, meter reading, safety checks, and       other

     4.   Determine the appropriate time line for adopting each
of        the recommended unbundled services.

Each of these requirements embraces a number of individual
operating elements that must be addressed when developing
unbundling programs.  For each element, one can anticipate that
the proposals of LDCs, marketers and end-users might differ. It
would be presumptuous for regulators to assume that they could
identify some optimal combination of conditions for unbundled
service.


Unbundling of the physical facilities is, perhaps, the          most
controversial element in the unbundling process, because:

     1.   Capacity access has been a significant condition of
     2.   LDC capacity commitments have been actual or potential

     3.   LDC   capacity    cost   commitments,   borne   by   firm
ratepayers,               may have exceeded alternative peaking
supply               options, i.e., LDCs may have excess capacity.

     4.   Controversy exists as to whether gas users and their

     5.   Questions arise as to the amount of capacity that might
               be made available and the rates for that capacity.

     6.   LDC recall of capacity might be required.

     7.   The interrelation between the value of capacity and
     8.   Receipt and delivery point flexibility for released

     9.   Assessment of LDC distribution   and, where required,

Although failure to resolve the "obligation/right to assume
responsibility for these cost elements" will result in extended
discussion of "stranded costs," the resolution of these matters
will not dispose of the "obligation to serve" issue.

Balancing   embraces   several   major   city-gate   and   on-system
operational issues, but these are being resolved as they arise.
The component issues (e.g., tolerance levels, penalties, terms of
daily/weekly/monthly/annual     balancing      services,     cashout
provisions) have been satisfactorily resolved in many instances.
Similarly, aggregation and elements of service parity, duration of
aggregation   and   supplier/user   commitments,   limitations   and
metering requirements have been increasingly resolved.

Aggregation of individual customers is another issue that,
although of substantial controversy in prior years, has been
resolved with increasing acceptance by LDCs and commissions.
Similarly, the elements of service parity, duration of aggregation
and   supplier/user   commitments,    limitations   and   metering
requirements all have been the subject of stakeholder agreements
in unbundling programs.

The resolution of other issues may vary        more noticeably by
jurisdiction. These issues will include the    amount and duration
of    continued     consumer    protection     (residential    and
non-residential), monitoring of third party    supply efforts, the
LDC obligation as provider of last resort,      and the amount of
information to be provided to customers.

Some generic issues probably can be resolved with little, if any,
controversy.   For example, the developing rules of conduct to
govern affiliate transactions have engendered rather little
dissension in several states.      Other decisions will be more
controversial, especially where the subject has been controversial
historically, e.g., LDC services priced by value of service rather
than cost of service.

Operating issues may be resolved on an LDC by LDC basis. These
will include the conditions under which an LDC might issue an
operational flow order, responsibility for billing, the frequency
with which user switching might be permitted, and the availability
or requirement for backup service.

Finally, the degree to which various parties might be subject to
reporting or other regulatory requirements might be resolved only
after some controversy and in ways that vary by jurisdiction.
7.   Rates and Revenues/Cost Allocations

Where unbundling has been introduced, a complete reexamination of
costs and rate adjustments generally has been deferred to the next
following rate case.      Implementing an unbundling program is
sufficiently difficult without adding the burden of a major rate
case to the parties, efforts.      Initial rates adjustments for
unbundled services can be determined by backing out the known
costs of service from the established bundled rates, using
information from the LDC's last cost of service study.       Then,
after some experience with the unbundling process, a traditional
rate case can be used to develop more precise cost allocations and
rates.   Section 13, below, discusses some of the specific rate
adjustment problems associated with unbundling.




III. Impact of Unbundling on Traditional Regulatory Concerns: How
Far Can/Should Unbundling Proceed?
8.   Protection and Education of End Users

The introduction and smooth functioning of unbundled service
requires considerable user education, particularly for the
residential and smaller C&I users.     Users can benefit from
unbundling only if they are knowledgeable about the available
market options and the consequences of selecting one option or
another.

The    unbundled    competitive    market    places   significant
responsibilities on each user.       Unbundling will affect many
aspects of the currently available user protections, e.g.
complaint resolution, that regulators and regulated service now
provide to residential and other LDC customers.        Preserving
traditional consumer protections may not be consistent with
full-scale unbundling.    Alternative suppliers of gas will be
deterred from entering a market when entry would be subject to
unique regulatory constraints.

Regulatory commissions must recognize the need to publicize: (1)
the availability of unbundled service and (2) the potential
consequences of that service for consumers. One of a commission's
roles is to assure the dissemination of necessary, sufficient and
understandable information so that users can make their service
selection in an informed manner.       However, the LDC and the
interested marketers may be the most effective parties to
communicate this information to gas users,

Many regulatory utility commissions have functioned, in part, as a
readily available, low cost mediator of disputes between
ratepayers and their utilities.      This function reflects the
commissions' broad scope of authority over their regulated
utilities. The function provides a relatively low cost way of
resolving disputes that frequently lack financial significance.
Moreover, commissions bring a degree of knowledge to these dispute
resolutions that is lacking in Small Claims courts and other
publicly provided forums. Retention of this regulatory mediation
function could facilitate a smooth transition to a completely
unbundled market. The need for continued mediating authority is
buttressed by the declining state support for other, more general
programs to review consumer complaints. However, a competitive,
unbundled market environment might not evolve if otherwise
independent marketers were subjected to extensive, costly
reporting and other regulatory constraints.

Individual residential savings from unbundling are uncertain,
particularly for customers of LDCs that already have reduced their
administrative and operating costs. Purchased gas costs for LDCs,
today, are far more comparable to those for marketers than they
were even three or four years ago. Although some potential gains
undoubtedly remain from more efficient operations, they are of
somewhat uncertain importance for individual small-volume users.
                        Technological developments are not obviously likely to provide new
                        products or other means by which distribution costs might be
                        reduced during the foreseeable future.7 If this expectation holds
                        true, then space heating customers may face increasing cost
                        responsibility and higher rates as subsidies are eliminated in
                        future years.

                        Protection will be required to deter some supplier practices, such
                        as "slamming," for which the public has expressed strong
                        condemnation elsewhere. Experience with regulatory reform efforts
                        for other services should be reviewed as a guide to useful
                        protection for natural gas users in unbundled markets.


                        9.        Why and How Should Unbundling Be Evaluated?

                        The progress of unbundling must be monitored by current regulatory
                        authorities, because unbundling constitutes a fundamental change
                        in the state's "regulatory compact."8      Arguably, energy users
                        have committed themselves to costly, long-term gas equipment
                        commitments in some expectation that regulatory commissions would
                        exercise oversight as to the continued fairness of LDC terms and
                        conditions of service.

                        Evaluations are necessary to identify ways to adjust the initial
                        unbundling plan. The net economic benefits of unbundling can be
                        evaluated in relative, absolute or benchmark terms. For example:

                                  (1)      Analyze complaints received by us and each LDC.

                        (2) Benchmark                   to      other         utilities             or      to       LDC's         historical
                        experience.

                        (3) Establish targets for individual aspects of customer service
                        based on experience elsewhere.


                        Relative comparisons could reflect NYMEX or trade paper price
                        indices.   If LDC sales were minimal, that information would be
                        less likely to provide a reliable basis for evaluating service
                        alternatives.

                        Comparisons to other LDCs and to prior, regulated service costs

7
.       In the airlines and telecommunications industries, technology has been a major source of cost savings that is apparently continuing to lower unit costs.



8
    .      This term is not applied with any traditional legal definition in mind.
are other ways by which unbundled service can be evaluated.

In a qualitative sense, an unbundling program could be evaluated
by the extent to which other suppliers are provided with fair
access, that is, equal treatment, to: (1) the LDC's distribution
system and (2) all end users of gas that are served by that
system.    In this respect, the frequency and specificity of
marketer and user complaints are relevant information.

Some LDCs are proposing to exit the merchant function over the
next few years.     At this time, the impact of such actions on
ratepayers remains unclear. Consequently, there may be a need to
keep some LDC sales as a benchmark until the competitive strength
of unbundled service has been unambiguously demonstrated.



10. How might social programs, e.g., conservation, research &
development, alternate fuel vehicles, area (economic) development,
etc., be handled?

Regulators must assure a comprehensive discussion of social
programs when evaluating unbundling proposals. Ordinarily, social
programs are considered to have system-wide benefits.       These
benefits go beyond the benefits realized by the participants in
the program and help all customers on a particular distribution
system by lowering costs, increasing throughput or making more
efficient use of existing pipeline or distribution system
capacity.

As a practical matter, societal support probably will not be
forthcoming from state or federal legislators.     Ratepayers have
been required to bear a significant portion of these program costs
through rate surcharges. Surcharges distort otherwise competitive
market forces. This distortion assumes greater significance when
the surcharges are borne by some, but not all, users, e.g., by LDC
sales customers but not those who buy gas from marketers.      The
benefits of unbundled service can be fully secured only if all
parties compete on a "level playing field."      The field is not
level if some sources of supply are assessed a surcharge or a tax,
but other sources are not subject to those additional charges.

In an unbundled operating environment, in which all services are
separately priced, non-participants are less likely to be willing
to pay for these programs. Several alternatives (to spreading the
cost of these programs over all ratepayers) may be feasible. For
example:


     A.   Charge the beneficiaries and/or participants of the
          program directly for the cost of the conservation,
         research & development or alternate fuel vehicle.
         This approach encourages only those programs that can
         "pay their own way" but does not consider external or
         system-wide benefits.

    B.   Other approaches    utilize   alternative   financing   for
         these programs.

         1.   The cost of conservation and DSM programs could be
              offset against a participant’s energy savings on
              the monthly energy bill.       (This method would
              probably only be feasible in jurisdictions that
              allow LDCs to earn an incentive for meeting
              specific conservation goals or recovery of lost
              sales margins attributed to DSM programs.)

         2.   LDCs could be encouraged to set up energy service
              companies   (ESCOs)   to   provide  "complete"  or
              "bundled" energy service.       The service could
              include energy, conservation, appliance repair and
              maintenance, etc.     ESCOs use creative financing
              and pricing to make this economically feasible.

    C.   Ideally, if a particular program is worthwhile, market
         transformation will occur so that the program does not
         need to be subsidized any further by non-participants.
          Complete market transformation would integrate these
         programs into the array of services the Company offers
         on an unbundled basis and customers would choose a
         socially optimal and economically efficient amount of
         conservation based on the price at which the service is
         offered.

The prior discussion focused largely upon surcharges that are
imposed to support particular programs that are believed to offer
significant benefits to suppliers, users or to society generally.
 In a similar fashion, supply distortions are created when sales
taxes are levied on sales by LDCs but not on sales by unregulated
marketers. That differential will enable marketers to offer gas
at lower prices than from the LDCs. As buyers cease LDC merchant
service to take advantage of lower, non-taxed prices from
marketers, remaining LDC customers may be subject to increasing
cost responsibility.
11.   What might be done for low income customers?

Low income customers pose a difficult problem for LDCs when
developing an unbundling program, because low income customers
often are unable to pay their utility bills.    As a practical
matter, unbundling probably is a political non-starter if
low-income users are not protected.

Most businesses are allowed to discontinue service to slow or
non-paying customers.    However, most LDCs are prohibited (or at
least restricted) from cold-weather disconnections for non-payment
of bills and required to offer payment plans for low-income
customers who wish to reconnect.    Uncollected charges generally
are expensed for recovery through rates paid by other users.

An unbundling program could permit LDCs to continue charging its
customers for the costs of low income programs.    This requires a
 decision as to which customers, e.g. all customers, all sales and
transportation customers, residential only, etc., should be held
responsible for these costs. Alternatively, one could:

      1.   Randomly assign low income customers to marketers, in
           proportion to each marketer's residential sales.

      2.   Assign low income and/or poor payment users to a "high
           risk" pool to be supported by a surcharge assessed
           across either all residential or to all customer
           classes.

Another alternative would be to shift responsibility for
administering low income programs from the LDC to state or local
welfare authorities.   This approach is based on the proposition
that, because these are societal costs rather than distribution
system costs, the cost of these programs should be recovered from
taxpayers rather than ratepayers.    Welfare agencies could handle
this responsibility in several ways:
      1.   Have the low income customer’s monthly bill sent
           directly to the welfare agency for payment by the
           agency.    This ensures that low income customers bills
           get paid.     Guidelines could be established whereby a
           set percentage of the customer’s income is used for
           energy, e.g. 10% or 12%, in the same way that
           low-income tenants pay 25% of their income for Section
           8 housing.

      2.   The responsible agency could aggregate all of its
           low-income clients into a single pool and buy gas for
           the pool as cheaply as possible.     The welfare agency
           would not pose a credit risk to the marketer.        The
           lower gas costs would provide taxpayers and recipients
           with a more effective, lower cost assistance program.
           These proposals clash immediately with a broad political
           resistance to anything that resembles an increase in taxation,
           even when the total cost of the assistance program remains
           constant when it is shifted from LDC administration to
           implementation by local welfare authorities.

           One of the most difficult questions related to unbundling is what
           happens to the LDC’s obligation to serve residential customers.
           If the LDC is permitted (or required) to exit the merchant service
           function will their be a supplier of last resort for low income
           customers?9  This will be considered in Section 16, below.


           12.   What should be done to assure a supplier of last resort?

           The supplier of last resort is the provider who "back-stops"
           everyone else by providing a stand-by service.10       In a real
           sense, the LDC's supply commitments have constituted the
           "insurance" policy that assures the continued operation of the
           system under all circumstances. Each LDC's unbundling plan must
           provide for this contingency.   Two principle requisites are (1)
           the assurance of sufficient LDC resources to maintain system flow
           under supply exigencies and (2) a full range of tariff provisions
           to   encourage  (a)   suppliers  to  fulfill   their  contractual
           obligations under all conditions and (b) users to understand and
           adhere to their obligations and risks under a full range market
           scenarios.

           The nature and cost of the resources necessary for the LDC to
           fulfill this responsibility will be subject to ongoing regulatory
           review. However, it might be possible for an LDC to contract out
           some of the specific services that might be required. Competitive
           bidding processes, including the use of Requests for Proposals,
           could be used to.minimize the LDC's costs of securing those
           resources necessary to fulfill the LDC's backup responsibility.

           LDCs should utilize a broad range of sales tariff alternatives,
           supply diversity, penalty provisions, and emergency planning
           efforts in order to assure the system's reasonable operation under
9

. The Wisconsin PSC allows "abandonment of service" if sustainable competition can be shown to exist.
However, abandonment proceedings are not an alternative for discontinuing service to residential
customers.

10

.   This is different from the question (considered in Section 11) about who has the obligation to
provide everyday service to customers that no one else wants.
all possible conditions.

A greater use of quasi-firm sales tariffs and similar sales
provisions that would permit LDCs to reduce their firm sales and
delivery obligations during periods of tight supplies.      Such
tariff provisions include "best efforts" clauses and the
specification of the terms and conditions that would govern LDC
use of another party's gas during periods of supply constraints.


Appropriate stand-by service rates for gas supply can help
maintain an appropriate balance of supply and usage by
discouraging use of gas that has not been delivered as required
under a marketer's contract.     Tariffs could provide for the
imposition of a standby service rate surcharge during periods of
uniquely tight supply conditions.   The terms and conditions of
service, under which such rates and surcharges would apply, must
be fully disclosed to customers converting to direct access
(unbundled) service.

A uniform and predictable penalty structure for handling
out-of-balance   situations   will  help    to   reduce   supply
uncertainties.    Penalties, if set correctly, will help to
discourage marketers from diverting gas supplies from firm
customers in one market to spot customers in another market in
response to uniquely higher prices in the other market.
Appropriate penalty charges will induce users to adhere to their
contractual obligations.

Regional coordination of out-of-balance penalty levels lessens the
incentives for suppliers to divert supplies in order to reap net
benefits from local area shortages. Coordination would reduce the
likelihood that closely situated LDCs would have significantly
different penalties. With a comparable penalty structure across
LDCs   and  pipelines,   suppliers   would   lack  incentives    to
significantly breach their contractual obligations to one LDC in
order to avoid significant penalties imposed by another utility.

Broader aggregation of balancing-out agreements would encourage
marketers to cooperate in efforts to alleviate LDC problems caused
by uniquely tight supply conditions.

Inter-utility coordination may be the most effective way to assure
that, in times of unique short term shortage, limited supplies are
distributed among LDCs in ways that protect the operational
viability of each LDC.    Regulators might direct LDCs to develop
such mutual-help efforts, but LDCs have demonstrated that they are
capable of developing and implementing such efforts without
significant regulatory input. It is a relatively short step from
(a) the use of such mechanisms to assure supply continuity in the
face of severe natural disruptions in supply to (b) the
utilization of mutual assistance to counter sever disruptions of
supply due to sudden diversion   induced   by   short-term   market
aberrations and price spikes.
                     13. Rate adjustments required for unbundling and the process by
                     which those changes can be implemented.

                     As suggested in Section 7, above, commissions could first back out
                     the readily identifiable costs from the current rates as the
                     initial approach to setting rates for unbundled service.       The
                     backing out of estimated costs of the newly unbundled services can
                     be based on an LDC's preliminary cost estimates, on cost data
                     developed at the FERC level, or on negotiations between the LDC
                     and its stakeholders. Subsequently, a rate case could be used to
                     develop a more precise cost of service rates for the LDC's
                     remaining bundled and unbundled regulated services.

                     Unbundling programs affect cost of service allocations and,
                     therefore, rate design; cost allocations will be a major issue in
                     unbundling rate cases.   Significant changes in rate design will
                     occur for those services that either benefited from or were
                     subjected to jurisdictional imposition of subsidies. There is no
                     single way to allocate costs. However, these decisions should be
                     no more complex than for traditional cost allocation issues.
                     Unbundling, by itself, need not affect the cost allocation
                     concepts normally considered in a given jurisdiction.

                     The incremental costs associated with individual services and uses
                     may be difficult to assess, particularly if, historically, no cost
                     responsibility was assigned to some users, e.g. interruptible
                     customers or those under special contracts.11

                     Stranded costs are a second major rates issue that may arise when
                     developing an unbundling program.    Stranded costs of unbundling
                     might be analogized to those similar issues associated with bypass
                     situations or to the "take or pay" issues in prior years.
                     Recovery of stranded costs may hinge on whether those costs were
                     prudently incurred or imprudently retained, e.g., did the LDC
                     attempt to reduce its cost exposure by renegotiating lower
                     contractual commitments with its suppliers?         As such, the
                     identification of stranded costs will vary with each LDC. Parties
                     affected by this issue should participate in efforts to develop
                     detailed principles to supplement that suggested above, i.e.,
                     facilities or demand charges not needed and which were not
                     incurred imprudently.

                     Finally, LDCs should be encouraged to develop new ways of
                     recovering stranded costs, perhaps by a FERC-type flexibility in
11
.    Theoretically, incremental costs refer to the additional costs incurred from adding another unit of output.   In reality, companies probably do not think of costs
or associated prices in such a rigidly refined manner.    Companies consider their incremental costs as blocks of output change, not as each unit of output changes.
Producers of goods and services normally do not charge each customer a price that reflects its individual contribution to incremental costs.       Moreover, companies
generally do not change their prices frequently, unless the price(s) of major inputs are very volatile. Rather, prices generally are set in the expectation of
recovering all costs over broad levels of output, not with each level of output.
designing rates for new types of service, by a schedule             of
writeoffs over time, or by offsets to deferred costs.



IV.   Reality Checks

14.   Alternatives to Unbundling

At some point in the    consideration of LDC unbundling, one should
question whether any    alternatives to unbundling might exist and,
if so, whether they      might offer greater net benefits than an
unbundling program.      A number of actions may be considered as
possible alternatives   to unbundling.   These include:

      A.    Improve the existing PGA process to make recovery of
           gas costs more responsive to current market conditions,
           e.g. allow:

           1.   monthly rather than quarterly or semi-annual price
                adjustments,
           2.   adjustments to made without a hearing on a
                provisional    basis   but    subject   to   later
                reconciliation,
           3.   different weighted average gas costs for different
                customer classes based on load factor, etc.

          Improving the PGA process will not, by itself improve
the efficiency of the LDCs' non-gas operations, particularly those
functions that comprise its continuing monopolistic distribution
function.

      B.   Encourage LDCs to lower      their   gas   costs   for   all
           customers by allowing:
           1.   incentives for efficient gas purchasing.
           2.   encourage LDCs to use financial instruments, such
                as futures contracts, to hedge their gas costs.

      C.   Allow LDC to operate a non-regulated merchant service
           but   require  the   savings   generated  for non-core
           customers to be shared with core customers.

      D.   Explore alternative forms of regulation, e.g.:

           1.   Incentives   (performance-based)  rates   for  gas
                procurement efforts or for all aspects of an LDC’s
                operations or for specific functions.
           2.   Permit LDCs to offer fixed-rate contracts with
                suppliers and/or customers covering gas costs.
           3.   Permit more flexible pricing (or contracts) with
               non-core customers.  Price caps provide greater
               incentives for efficiency than does a simple
               indexing approach.

If unbundling works and competition leads to reduced costs in some
service territories, then the failure of other LDCs and/or
jurisdictions   to    unbundle    might   result   in    declining
competitiveness and slower economic development in those areas.
To the extent that unbundling induces lower energy costs,
companies sensitive to energy costs will migrate to states with
unbundling and at lower costs. A related risk is that LDCs will
be able to shift costs to their remaining core customers, if
residential users are not provided with access to unbundled
service.

Unbundled gas service is not a competitive service in the textbook
sense of a purely or perfectly competitive market.         Rather,
unbundled markets are hybrids in which some services can best be
performed on a single seller basis, while other services can be
performed by many alternative suppliers, but, as time passes,
those many suppliers can be expected to coalesce into a relatively
few sellers. Thus, the best that one might reasonably anticipate
in the natural gas industry is that markets will stabilize into
workably competitive entities or into markets of few sellers
(oligopolies)   with   sufficient  rivalry   as   to   approximate
competitive pricing.



15. What is the role of state regulation in partially/mostly
unbundled markets?

Commissions must assure the existence of competitive market
conditions, before approving an unbundling program. Unbundling is
justified by the reality of sufficient alternative suppliers to
assure competitive price and service offerings for those gas users
who will receive access to the unregulated suppliers.         When
commissions accept this premise, they obligate themselves to
develop a sensitivity to the requirements of a competitive,
unregulated market. This obligation arises during the unbundling
process and continues after approval of unbundling programs.

Throughout the unbundling process, commissions will have to
assure:
     (1) the absence of potential barriers to competitive
          behavior and
     (2) the presence of sufficient suppliers to provide an
          effectively competitive market.

After unbundling has occurred, and the dimensions of appropriate
regulatory oversight are defined, commissions should continue to
be sensitive   to   the   requirements   for   workably   competitive
conditions.

Regulatory commissions do not enforce the antitrust laws, but
commissions must be sensitive to the indicia of competitive and
noncompetitive market conditions.      Failure to recognize the
marginality or absence of competitive conditions could lead to
unbundling under conditions that would subject gas users to higher
prices and/or poorer service than if regulation had been
continued.     An important regulatory concern will be the
development of appropriate responses where effective competition
fails to develop after unbundling has been initiated.

Monitoring and evaluating the progress of unbundling efforts will
probably be an ongoing responsibility of regulatory commissions.
This may require some changes in the way that oversight is
conducted in some states.    Quasi-judicial proceedings may be a
much less effective way to exercise that oversight than ongoing
communications with the major parties.

Regulatory oversight of gas supply issues will change as the
industry evolves.    The nature of these changes is not at all
obvious at this time. However, it is not clear that legislatures
will either: (1) authorize either the sunsetting of current
regulatory constraints or (2) acquiesce in a commission-initiated
atrophy of current regulatory oversight of many subjects.

Continued regulatory oversight of gas supply may be necessary.
Reliability of the gas supply system may continue to be a
significant concern of state government, because failures in gas
supply carry the very great possibility of major safety and social
policy impacts.

Avoiding system failure will continue to be an important public
concern, and oversight of supply planning is perceived as one way
to minimize the possibility of system failure.      The potential
remains for significant supply problems under unbundling.     Not
everybody agrees that price will be the great assurer of capacity
and commodity.

Some suggest that the big risk we face is that supply will not be
available, because neither LDCs nor marketers have secured
sufficient pipeline or storage capacity to assure gas delivery to
a given market. This focus on capacity is, perhaps, a variant of
the commodity shortage scenario.      After all, price can also
attract capacity and not simply the commodity element of supply.
For any jurisdiction, the issue might be posed as: To what extent
are people willing to believe that market prices will always
assure supply in its local markets.     If one is not willing to
accept widespread curtailment of gas use or very high spikes in
gas prices, then there will be a continuing need for supply
oversight.
A major uncertainty is the extent (if any) to which state
commissions will need to review supply planning by the currently
unregulated marketers.

A reliance    on government action in such matters is, perhaps
unfortunately, virtually instinctive, as the recent gasoline price
controversy attests. This response would seem to be more likely
when, as here, there has been a long period of reliance on
government oversight.     Ingrained views and expectations will
require more than five or ten years of competition to change.

Much of the substance and procedures that comprise current
oversight of gas supply planning and procurement may be rendered
superfluous as LDCs exit (completely or substantially) from sales
service or adopt incentive regulation. Future oversight of supply
issues will rely more on frequent briefings/discussions and much
less on formal filings. These changes will include:

     1.   Commissions will not (be required to) grant proapproval
          of   supply   contracts    in   a  competitive   market
          environment.
     2.   Commissions    will     reexamine   whether    existing
          confidentiality of LDC sales contract terms should be
          maintained when LDCs transfer these contracts to their
          unregulated marketing affiliates.    The reexamination
          will be required in order to preclude LDCs from
          leveraging their protected utility information into
          unfair marketing advantages for their unregulated
          affiliates.

     3.   Significantly less reliance on quasi-judicial processes
          for regulatory oversight efforts on gas supply issues,
          and a corresponding increase in the frequency and
          intensity of informal discussions between LDCs and
          regulatory staff.   Such discussions should include as
          many major stakeholders as would be consistent with the
          competitive realities of an LDC's service territory.

To the extent that continued regulatory oversight does continue,
that oversight will require significant training and upgrading of
regulatory staff's knowledge and skills. Regulatory staff should
participate in as many seminars and training programs as possible.
 The incremental cost is negligible; the potential for more
informed regulatory analyses that are consistent with the needs of
an increasingly complex industry would be immense.
16.   Should LDCs Be Permitted/Required to Exit Merchant Service?


Some LDCs and other parties, in different jurisdictions, have
questioned whether LDCs should      continue to provide merchant
service. In some instances, the LDCs seek permission to exit the
merchant function, while, in other instances, marketers have
suggested that LDCs be precluded from providing such service.
Clearly, the several parties bring different assumptions and
concerns to the unbundling table.     LDCs seek to escape onerous
regulatory oversight of a service for which the LDC can only lose
money or, at best, recover costs.     Marketers and other parties
seek to preclude LDCs from providing a service in which the LDC
seems to have the potential for exercising its inherent monopoly
power to exclude alternative sources of gas.

The consequences of permitting/requiring LDCs to exit the merchant
function are ambiguous, at best. It would be disingenuous for the
Subcommittee to pretend that a simple positive or negative
response is appropriate at this time. None of our domestic LDCs
has yet to experience even a single season (heating or
non-heating) of significant unbundled service to residential
users.   The Ontario and other markets have had more extensive
experience with direct access (unbundling), but these markets
differ in significant respects from the market conditions extant
in the United States.

Some of the uncertainties, as well as the promises, of unbundled
service have been considered in previous sections.            Each
jurisdiction will have to review these considerations and
establish   a process and schedule by which it might evaluate a
pace of unbundling that is appropriate for its LDCs and
ratepayers.   For each market, a central concern will be the
willingness of marketers to provide service to residential users.
 Competition will develop only as a sufficient number of
alternative suppliers enter the market for residential service.
The Subcommittee reiterates that this paper will be revised as
readers indicate concerns or arguments that have been omitted, or
aspects that could use elaboration, clarification, emphasis or
correction.
                             APPENDIX

  Materials That Constitute Or Describe Unbundling Activity For
                        Individual States

NOTE: Absent a groundswell of demand, this Appendix will be
deleted from future revisions of this paper (See discussion in
Section 2, above).

California Southern California Gas (SoCal) parent company Pacific
Enterprises is starting a natural gas marketing business under a
new subsidiary, to be called Ensource. Ensource will buy, sell,
trade gas and related services such as supply aggregation,
transmission, storage and price risk management.
          (Natural Gas Week 6/17/96)


Colorado PUC has had Gas Transportation Rules in place since
April, 1991.     Any customer can qualify as a transportation
customer.   There is no minimum throughput requirement or backup
fuel requirement.     Transportation customers are required to
nominate and balance on the larger LDCs.        Small LDCs do not
require nomination and balancing.       Netting of imbalances is
allowed. Since monthly service and facility is derived through a
cost   of   service  study   and   mostly   large   customers are
transportation customers, monthly service and facility charge is
high.

          Contact:   Billy Kwan


Florida   Docket No. 960725-GU opened on 6/12/96:   Unbundling of
natural gas services. On July 2nd, Order No. PSC-96-0844-PCO-GU
was issued.    This order established the procedure, including a
tentative list of issues and the controlling dates for comments
and workshops, by which the commission staff will develop
recommendations to the Commission.
          Contact person: Cheryl Bulecza-Banks
               phone: 904-413-9942

Georgia Atlanta Gas Light Co is taking a major step to end its
natural gas sales function following release on May 31 of new
policy guidelines developed by the Georgia PSC to stimulate
natural gas competition in Georgia. AGL's obligation will be only
to deliver gas to customers whose gas is received at the citygate.
 Three distinct kinds of pools are envisioned in the application.

The Georgia PSC's policy statement on 5/31/96 regarding strategies
to promote gas markets in Georgia. regarding Georgia's non-core
natural gas markets, the PSC believes competition can be improved
by unbundling utility interruptible sales (IS) service into its
supply and distribution components. Standards of conduct must be
established to govern affiliate relationships.        As to core
customer services, the PSC viewed the timing and benefits of an
unbundling program to be uncertain. At least four issues must be
addressed:   guidelines   regarding  marketing   affiliates;   the
existence of marketers willing to provide functionally equivalent
or substitute services at the citygate to smaller, low load factor
customers; provisions which must be in place to ensure
transportation of gas to the burner tip on a comparable basis for
all shippers; and minimizing transition costs. The Georgia PSC
suggested a pilot program to test the interest of core customers.
                                         (Foster Report 6/20/96)



Illinois Natural gas unbundling has been happening since the
early 1980's. At this point in time, gas volumes associated with
unbundled service constitute approximately 40 percent of total
throughput. Currently, unbundled service is primarily limited to
those classes comprised of relatively large-volume customers.
However, one Illinois utility, Central Illinois Light Company
recently sought and received approval from the Illinois Commerce
Commission to provide unbundled service to residential customers
on a pilot basis.

          Contact person at the Illinois Commerce Commission:
Thomas E. Kennedy (217-785-1414)



Indiana Northern Indiana Public Service Co. said this week that
almost three-fifths of residential customers responding to a
company survey indicated that they would like to be able to
choose their gas supplier.
          (Gas Utility Report 7/5/96)
Iowa      Opportunities for all customer classes to purchase and
move third party gas over the LDC systems has been in place for
about 10 years.    Balancing provisions and standby services are
provided. Telemetering is required by most LDC tariffs, but has
been found not to be necessary in the Rock Valley Pilot Project
and is no longer used.       Telemetering requirements and other
tariffed issues may be looked at in future procedures.

          Contact person:     Bill Adams
               phone: 515-281-3279

Maryland During the past year, the Public Service Commission has
approved programs providing small commercial gas customers in
Maryland the opportunity to buy their gas on the "open market" at
competitive prices. These changes in gas regulation are already
making Maryland businesses more productive and will soon make gas
usage at home more economical. Approximately 1,300 Baltimore Gas
and Electric (BGE), 1,700 Washington Gas Light (WGL), and 200
Columbia Gas of Maryland (CGMD) commercial customers are now
buying their gas directly in competitive markets.      Starting in
November, a limited number of WGL and CGMD residential customers
will also have a choice of gas supplier.          Maryland is an
acknowledged leader in the move to give gas customers real choices
that can save them money and better suit their energy needs.

          A Roundtable process was established February 6, 1995
to develop unbundled services for Maryland's three largest LDC's
(all but one of the smaller LDC's still take service off a
non-open access pipeline).      The first phase of Maryland's
unbundling effort ended in August, 1995 with Commission approval
of programs that provided customer choice of supplier to thousands
of BGE, WGL, and CGMD commercial and industrial customers. Prior
to that time, competitive gas options were available to only a
small number of large customers (a few hundred customers in the
entire state).

        Since last August, the roundtables have continued to
monitor the success of the first phase, modify the existing
programs (with Commission approval) as needed, and expand the
number of customers eligible to take advantage of competitive gas
supplies. Currently over 8,000 BGE customers (probably 12,000 by
November 1996) and all WGL and Columbia commercial customers are
eligible for the utility services which makes supplier choice
possible.    However, their is a cap of approximately 2,000
customers (first come, first served) in WGL's small customer
program and 600 customers (out of 2,900 eligible) in CGMD's
program. Over a dozen marketers and utility affiliated suppliers
are currently competing to provide the best price and the best gas
services product to these customers.

          On June 26, 1996, the Commission approved the Roundtable
filing of WGL's program to provide residential customers these
same choices. All WGL customers in Maryland will be eligible to
participate, but there is a first come, first served cap of
approximately 6,000 total customers for each of the first two
years of the pilot program.    A similar program submitted by the
Columbia Gas Roundtable on July 1 is likely to be approved by the
Commission by late July.      The Columbia program will have a
participation cap of approximately 10,000 customers.          Both
programs include extensive product disclosure and customer
protection requirements, in addition to the existing commercial
program requirements that a marketer be financially sound (to
insure that a marketer is able to reliably deliver the gas, and if
not to pay significant penalties). This summer Marketers will be
signing up customers for these programs and service will begin in
November. BGE filed a committment on July 1 for a November 1, 1996
filing of a residential pilot program with a 25,000 customer
participation cap service starting November, 1997.
          In the next few years, the Commission acting through
the Roundtable process will continue to refine the existing
utility programs, expand customer options, and expand customer
eligibility. Even though Maryland is moving at a rapid pace to
provide economically viable choices of gas supplier to customers,
the Roundtable process keeps all affected parties in close
communication on a regular basis to carefully monitor each
expansion and new service.     The Roundtable process has shown
itself to be an effective alternative to traditional regulation in
its ability to quickly address any development which might effect
service reliability, efficient program administration, or customer
acceptance.   If all goes well, it will not be long before all
Maryland customers will have a realistic choice of gas supplier.

         Calvin Timmerman, Assistant Director Rate Research and
Economics Division
          Maryland Public Service Commission
          Phone: (410) 767-8058 Fax: (410) 333-6086  email:
          ctimmerman@psc.state.md.us

Columbus Gas of Maryland, Inc. last week became the second
Maryland LDC to apply for regulatory approval to launch a pilot
program on residential transportation service. As expected,
Washington Gas Light Co. received approval for its pilot program
late last month.

Baltimore G&E Co. has informed the Maryland PSC that it will
delay submitting its proposal, thus pushing back the start of a
residential pilot program for its system until Nov. 1, 1997. A
company spokesman said the planned merger of BG&E and Potomac
Electric Power Co. made startup of the pilot program this
November "impossible".

Washington Gas Light Co. last week obtained the Maryland PSC's
approval to launch a pilot program allowing 6,000 residential
customers to choose their gas supplier.
(Gas Utility Report 7/5/96)

"Introducing Competition Behind the City Gate"
Gregory V. Carmean, Exec. Dir.     Maryland PSC         (7/7/95)

"Maryland Gas LDC Unbundling roundtables: Past, Present & Future"
 Calvin Timmerman, Asst. Dir. Rate Research & Economics, Maryland
PSC         (2/96)

"The Maryland Experience with Unbundling LDC Rates and Service"
Gerald L. Thorpe     (9/1/95)

"A Framework for Future Regulation of Gas Services in Maryland"
Recommendations of Staff of the Maryland PSC           (12/20/94)
Massachusetts

            Massachusetts Department of Public Utilities
            Bay State Gas Company
            DPU 95-104-A
            Compliance Filing
            Pioneer   Valley  Customer   Choice  Residential   Pilot
Program
            June 10, 1996

            Boston Gas Company
            Performance-Based Regulation and Unbundling Plan
            DPU 96-50
            May 17, 1996

            Contact person:   Henry Einhorn
                              Massachusetts D.P.U.
                              Phone: (617) 727-3545

In the second proposal, Bay State Company asked state regulators
to approve a plan that would allow 10,000 of its residential
customers to begin choosing their own gas supplier beginning
November 1. According to the company, the proposal would be the
first residential natural gas pilot in New England.
                                     (The Energy Daily 6/13/96)

On 5/17/96, DPU 96-50, Boston Gas filed a natural gas services
unbundling plan and associated five-year scheme to implement a
performance-based rate mechanism. The LDC's anticipated
timetable is: unbundled sales and transportation available to all
residential customers by 11/1/97; gas sales closed to commercial
and industrial customers by 11/1/98; and closing of gas sales to
customers to residential users on 11/1/2000.
                                        (Foster Report 5/23/96)

Minnesota
          Minnegasco - Natural Gas Unbundling Proposal - Docket
No. G-008/M-95-216
          In April 1995, Minnegasco, a division of NorAm Energy
Company, filed a proposed Aggregation Rider to its Firm
Transportation tariff which would allow marketers to form pools of
firm C&I customers. The proposed pilot would be limited in size
to 50,000 Mcf/day, or approximately 5%, of Minnegasco’s firm
capacity.

          Minnegasco would charge pool members a customer charge
and a volumetric distribution charge.    Marketers would sell gas
directly to pool members, pay the LDC a fixed monthly charge, and
take assignment of the pipeline capacity formerly used by the LDC
to serve customers who switch to firm transportation service.
          The Office of Attorney General - Residential Utilities
Division opposed the Rider because unbundling would cause an
increase in the gas costs for residential customers. (The Company
called this a de-averaging of gas costs.)

          The Department of Public Service raised the issue of
the role the Company’s in-house merchant operation should be
allowed to play in the aggregation market, e.g. formation of
customer pools and the selling of gas to those customer.
Subsequently, the Company, with the agreement of the Department
and participating gas marketers, proposed standards of conduct
which would apply to all Minnegasco affiliates.

          The Commission has held two meetings on the issue with
no final disposition. The Commission expects to act on the matter
after Minnegasco consults with parties and makes additional
filings.

            Contact person: Robert Harding, Rates Analyst
            Minnesota Public Utilities Commission
            Phone:    (612) 296-7125
            Fax:      (612) 297-7073
            E-mail:   robert#u#h@pucgate.puc.state.mn.us

            Document retrieval: Minnesota    Department     of   Public
Service
            Phone:     (612) 296-6913
                       $.25/page

Missouri Transportation service has been available to industrial
and larger commercial LDC customers since mid-late 1980's.     No
uniform minimum delivery eligibility requirements have been
prescribed. (Typically 1,500-3,999 Dth/mo.) To date, no LDC has
yet   proposed   (1)   any   residential   or    small commercial
transportation program, nor (2) separate/stand-alone or upstream
capacity service. On 6/28/96 Natural Gas Roundtable Discussions
began for the purpose of discussing such issues.

            Contact:   Bo Matisziw, Manager-Energy Department
                       Missouri PSC
                       Phone: (573) 751-2152
                       Fax:    (573) 751-1847
                       E-mail: bmatiszi@mail.state.mo.us
New Jersey
"Guidelines for Further Unbundling of New Jersey's Natural Gas
Services" , Order BRC Docket No. GX 93110516        (11/10/93)

New York:
            State of New York
          Gas Restructuring Proceeding
          Staff Analysis of Comments
          April 4, 1996
          Part 1-Generally Applicable Comments
          Part 2-Company Specific Summary.
          Summary of Comments Re: Utility Complianct Filings in:
Case: 93-G-0932- Proceeding on Motion of the Commission to Address
Issues Associated with the Restructuring of the Emerging
Competitive Natural Gas Market.
          Individual Compliance Case Numbers:
          Case:93-G-1032- Compliance Filing of Long Island            Lighti
          Case:93-G-1035- Compliance Filing of Rochester Gas and      Electr
          Case:93-G-1039- Compliance Filing of Central Hudson Gas
          & Electric Corporation
          Case:93-G-1040-   Compliance   Filing  of   Orange   and
Rockland Utilities, Inc.
          Case:93-G-1041- Compliance Filing of New York State         Electr
          Case:93-G-1042- Compliance Filing of National Fuel Gas      Distri
          Case:93-G-1046- Compliance Filing of Brooklyn Union Gas
          Company
          Case:93-G-1048- Compliance Filing of Niagara Mohawk         Power
          Case:93-G-1053- Compliance Filing of St. Lawrence Gas       Compan
          Case:93-G-1054- Compliance Filing of Corning Natural
Gas Corporation
          Case:93-G-1055-   Compliance   Filing  of   Consolidated
Edison    Company of New York, Inc.


          State of New York
          Public Service Commission
          Opinion No. 94-26
          Case 93-G-0932 - Proceeding on Motion of the Commission
          to Address Issues Associated with the Restructuring    of the Emer
          Opinion and Order Establishing Regulatory Policies and      Guidel
          Issued and Effective December 20, 1994
          Contact person:   Jack Zekoll




Ohio      Gov. George Voinovich has signed into law a bill to
partially deregulate the state's gas industry and extend to the
Ohio PUC new authority to use alternative methods of setting rates
and charges.   The governor's June 18 action means that the gas
service will not be regulated if the PUC determines, at the
request of a gas company, that sufficient competition exists to
give customers "reasonably available alternatives". The new law
regulates all services other than commodity sales, distribution
and some ancillary services.    It also authorizes a utility to
designate which of its gas supplies were obtained to provide
unregulated services.    The new law establishes a state policy
generally promoting choice in the supply of gas services. The PUC
was a strong advocate of the legislation.
          (Gas Utility Report 7/5/96)

"In the Matter of Commission Implementation of FERC Order 636 and
Related Matters" (Case No. 93-1636-GA-UNC) and "In the Matter of
the Commission Ordered Investigation of the Availability of Gas
Transportation Service Provided by Ohio Gas Distribution Utilities
to End-Use Customers." (Case No. 85-800-GA-COI) 3/29/95



Oklahoma The Oklahoma Corporation Commission, in accordance with
FERC direction regarding competition and alternative regulation of
the natural gas utility market on the national scale, seeks to
identify, describe and create a process to implement a
comprehensive and integrated restructuring of the gas industry for
the state of Oklahoma.        To facilitate a restructuring of
Oklahoma's   economy,  the   Commission  seeks   to  establish   a
restructuring process that effectively and fairly utilizes
competition and will produce the necessary tools, structures and
timetable that will accommodate the current and future needs of
Oklahoma and it citizens.

To accomplish these goals, the Commission issued a Notice of
Inquiry (NOI) regarding the restructuring of Oklahoma's gas
utility on May 17, 1996, Case No. PUD 960000133. Specifically, the
NOI seeks comments and documents regarding restructuring in
general;   alternative   regulatory  strategies;   the   transition
process; stranded investments and benefits; planning and the long
term   effects   of   restructuring;  the   organization   of   the
restructured industry; and creating fair, effective and efficient
markets.   As part of the NOI, the Public Utility Division (PUD)
staff will sponsor focus group meetings.     The purpose of these
meetings will be to discuss possible restructuring issues
concerning Oklahoma's gas utility industry.      Each focus group
meeting will be followed by a technical conference conducted by
PUD staff.
(Oklahoma Commission Release, July 96)

"In the Matter of a Notice of Inquiry of the Oklahoma Corporation
Commission Regarding the Restructuring of Oklahoma's Gas Utility
Industry - Cause No. PUD 960000133 "Notice of Inquiry".
(Oklahoma Commission 5/17/96)



Pennsylvania     Columbia Gas of Pennsylvania, a unit of The
Columbia Gas System, Inc., asked Pennsylvania regulators to
approve a proposal that would give more than 20,000 residential
natural gas customers in Washington County the opportunity to
choose their natural gas supplier over the next two years.
     (The Energy Daily 6/13/96)

The Pennsylvania PUC has issued final regulations designed to
guide the restructuring of intrastate transportation services
offered by natural gas LDCs. The new regulations require all LDCs
to unbundle service to the extent necessary to offer separately
tariffed transportation and balancing services.   It revised its
current margin-based pricing rule for transportation services by
requiring establishment of the new tariffs on a "uniform cost of
service" basis. According to the commission, properly structured
balancing charges and penalties are a fundamental solution to the
problem of fairness between different classes of gas consumers in
a changing industry.



South Dakota    The major regulated natural gas LDCs (3) have
offered transportation service for many years in South Dakota. At
this time one has no minimum take requirement, one has a minimum
of 2.5 mmbtu per hour and one has a minimum of 19.9 mmbtu per day.
 To date aggregation of small customers (residentials) has not
occurred.

Recent activities possibly related include the approval of an
incentive mechanism applicable to one Company's PGA.          The
mechanism compares the actual cost of purchased gas to an indexed
gas price and involves a sharing of gas costs collections if the
company's cost falls outside (above or below) a dead zone
threshold.   The incentive plan was just approved in a rate case
last year and the results of its implementation are not yet
certain. The plan was approved as a three year pilot project to
be reviewed at the end of that time.

Also, the Commission has recently initiated an investigation into
a possible rulemaking regarding the relationships between LDCs,
their agency business and marketing affiliates. Marketer activity
has increased significantly in South Dakota over the last couple
of years. Concerns have arisen by at least one marketer that the
regulated LDCs may be using regulated resources to unfairly
compete against the non-regulated marketers. The Commission has
just recently asked for and received comments against the
non-regulated marketers.

            Contact person:     Dave Jacobson
                 Phone: (605) 773-3201

The two major gas utilities operating in South Dakota believe
there is no need for a rule establishing standards of conduct for
marketing affiliates.

Wisconsin       Wisconsin   Gas   Co   this   month   requested   that   the
Wisconsin PSC approve a pilot program permitting competitors to
supply natural gas to 1,000 residential and 1,200 commercial
customers beginning November 1.
       (Foster Report 4/18/96)

Wisconsin PSC to approve a limited supplier-choice program.
Wisconsin Gas Co's. two-year program, approved at the PSC's June
27 meeting, will begin Nov. 1.      The program will provide gas
supplier choice to 1,000 residential customers in West Bend near
Milwaukee, and 1,200 small customers in greater Milwaukee and the
eastern part of the company's service area.     The pilot, dubbed
GasAdvantage, will be the utility's first attempt at providing
transportation   service   with   individual   customers  to   be
telemetered. But the utility's primary interest is in gearing up
the pilot the following year to include the utility's entire
Wisconsin service territory.
          (Gas Utility Reports 7/5/96)
Other states: Can you Subcommittee members suggest other states
that have developed unbundling programs and can you provide any
materials or references to staff at those other states?



New York

"Gas Restructuring - Glossary of Terms"



NARUC                                                   (2/96)

"The Theory and the Politics of Regulating the Unbundled World"
                                 Kenneth W. Costello, Assoc. Dir.
                                 N.R.R.I.

"Unbundling: A Direct Purchase Option in Ontario"
                                    Marie C. Rounding, Chair
                                    Ontario Energy Board

"Highlights and Summaries of Core Aggregation Pilot Programs and
Services Offered by LDCs in North America and Great Britain"
                                    Reed Consulting Group
                                    1050 Waltham St.
                                    Lexington, MA 02173

"The Obligation to Serve: The Issue for the Nineties - Twice in a
Century"
                                   Reed Consulting Group

N.R.R.I.
National Regulatory Research Institute report (NRRI 96-13)
entitled "Unbundling the Retail Gas Market: Current Activities and
Guidance for Serving Residential and Small Customers" is by
Kenneth W. Costello, Associate Director for Gas and Electric
Research, N.R.R.I. and J. Rodney Lemon, Monmouth College, with
funding by participating members of NARUC. The report reviews a
host of policy and economic issues associated with unbundling of
sales services to small retail (especially residential) customers,
with the focus on residential unbundling in California and the
Canadian provinces of Ontario and British Columbia. In the case
of most issues, the report said "no easy solution exists" and
interest groups at the state level take "highly divergent"
position on them.

				
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