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