March 16, 2001

Via UPS Overnight Delivery
The Honorable Louis G. McAfoos, III, ALJ
Office of Administrative Law
9 Quakerbridge Plaza
CN-049
Trenton, NJ 08625

Dear Judge McAfoos:

Please accept this original letter motion on behalf of the Division of the Ratepayer Advocate to dismiss the above-referenced Petition filed by Public Service Electric and Gas Company ("Public Service" or "Company"), in the BPU's Docket No. GM00080564, and for a declaratory ruling that the Board has jurisdiction over the transactions contemplated in the Petition. The Ratepayer Advocate also is moving for dismissal of the related Petition in Docket No. GM97100758, which has not been actively pursued by the Company since early 1998.

This letter motion is also being filed with the Board for determination of the Ratepayer Advocate's motion to dismiss the petition in Docket No. GM97100758, which has not been transmitted to the Office of Administrative Law ("OAL"), as well as any other issues which may remain at the Board.

Copies of this letter are being provided to all parties by hand delivery or overnight mail. In addition, copies are being provided by e-mail to all parties for which we have been provided e-mail addresses.

The Division of the Ratepayer Advocate ("Ratepayer Advocate") is moving to dismiss Public Service's petition for approval of its proposal to (1) transfer its contracts with natural gas suppliers, as well as its contracts with interstate pipelines for transportation, storage, and peaking services to an unregulated affiliate; (2) procure all of the gas needed to supply the Company's basic gas supply service ("BGSS") customers under a sole source "Requirements Contract" with the affiliate at essentially unregulated "market based" prices for an initial term ending December 31, 2002, subject to renewal at Public Service's option for an initial 3-year term; and (3) at the conclusion of the Requirements Contract, give the affiliate unfettered control over the transferred Contracts.

The Public Service proposal, if approved, could seriously hinder the Board's ability to create a competitive natural gas market in New Jersey. In the upcoming months and years, the Board must determine how to create a competitive natural gas marketplace in New Jersey, including, in the near future, determining how to structure BGSS. The Public Service petition would severely restrict the Board's options, by transferring to an unregulated entity a large block of resources which are essential to providing natural gas service to New Jersey consumers. Furthermore, the Public Service Petition is in direct violation of the provisions of the Electric Discount and Energy Competition Act ("EDECA") regarding the pricing of BGSS. The proposed transaction would subject consumers to essentially unregulated rates for natural gas service under a "no-bid" contract with a affiliate, directly contrary to EDECA's specific requirement that BGSS rates be based on either the actual costs of providing natural gas service, or a competitive bid.

In addition to a dismissal of the current petition, the Ratepayer Advocate is seeking a declaratory ruling that the transactions contemplated in the Public Service proposal are subject to the Board's jurisdiction. In its filing, Public Service repeatedly claims that Board approval is not required for either the contract transfer or the proposed full Requirements Contract. (Public Service Petition, pages 2 and 3.) To the contrary, the BPU has clear authority to review both the proposed contract transfer and the procurement issues raised by the proposed Requirements Contract.

The Ratepayer Advocate is also seeking dismissal of a 1997 Public Service petition which also sought to transfer the Company's interstate pipeline contracts to an affiliate. The 1997 proposal has not been actively pursued by Public Service since early 1998, when one of the Company's major pipeline suppliers, Texas Eastern Transportation Corporation ("Texas Eastern"), successfully objected to that transaction in a proceeding before the Federal Energy Regulatory Commission ("FERC").

This proceeding commenced on August 11, 2000 when Public Service filed this Petition. The Ratepayer Advocate served its initial discovery requests on August 28, 2000. The Company's written responses were served on September 22 and October 3, 2000. Following informal discussions and discovery conferences, the Ratepayer Advocate served follow-up discovery questions on December 18, 2000.

On October 26, 2000 the Board transmitted the Petition to the OAL, where the case was assigned to the Honorable Louis G. McAfoos, ALJ, t/a. A prehearing conference was held on December 19, 2000, where intervention was granted to Enron Corp., Mid-Atlantic Power Supply Association ("MAPSA"), Shell Energy Services Company, North Jersey Energy Associates ("NJEA"), New Jersey Business Users ("NJBUS") , New Jersey Business and Industry Association ("NJBIA"), and New Power. The Independent Power Producers of New Jersey ("IEPNJ") were allowed to intervene in a telephone status conference on January 26, 2001. Pursuant to the procedural schedule adopted at the prehearing conference, the Intervenors served initial and follow-up discovery requests in December 2000 and January, 2001. Responses to these requests, as well as the Ratepayer Advocate's follow-up discovery questions, were provided by Public Service in January and February, 2001.

Public hearings were held on January 29, 30, and February 1, 2001 in Mt. Holly, New Brunswick, and Hackensack, respectively. The procedural schedule established at the pre-hearing conference was revised on March 8, 2001 during a telephone conference call held with ALJ McAfoos and the parties. Hearings are currently scheduled at the OAL for March 23, 26, and 27, and April 16 and 27, 2001.

By letter dated March 7, 2001, Public Service informed the parties that it was negotiating a Joint Position with third-party suppliers, which, if completed, would be presented through Company witnesses David Wohlfarth and John Scarlata in lieu of the original filed proposal. By letter dated March 9, 2001, Public Service informed the parties that it intended to amend the previously filed testimony of David Wohlfarth to defer for two years the proposed change to "market based" pricing for BGSS customers. To date, Public Service has not filed any amendment to its testimony, nor has it advised the parties whether it intends to proceed with the original filing or a Joint Position.

I. THE PUBLIC SERVICE PETITION SHOULD BE DISMISSED AS A MATTER OF LAW AND BOARD POLICY, BECAUSE IT WOULD SERIOUSLY HAMPER THE BOARD'S ABILITY TO DETERMINE THE STRUCTURE OF A COMPETITIVE NATURAL GAS MARKETPLACE AS CONTEMPLATED BY EDECA, INCLUDING THE STRUCTURE OF BGSS SERVICE.

Public Service's petition involves contractual rights to the interstate transportation, storage and peaking services provided by the interstate pipelines used to bring natural gas to New Jersey from the producing areas in the Gulf Coast and Canada. These resources, unlike the natural gas commodity, are not purchased in a competitive market. The market for these services remains subject to regulation by the FERC, which regulates both the construction of new interstate pipeline and storage facilities, and the rates which may be charged for the transportation, storage, and peaking service provided by the pipelines.

The FERC has begun to experiment with de-regulating prices in short-term capacity markets. Regulation of Short-Term Natural Gas Transportation Services, FERC Statutes and Regulations ¶ 31,091 (2000). However, long-term contracts such as those sought to be transferred by Public Service remain subject price regulation "as a protection against the pipelines' exercise of market power." Regulation of Interstate Natural Gas Transportation Services, FERC Dkt. No. RM98-12-000, Notice of Inquiry at 7-8 (July 29, 1998) (available on FERC website). Although the FERC is considering changes in its regulation of the long-term markets for interstate transportation and storage services, it has determined that a period of market monitoring and analysis is needed in order to determine which markets may require continued regulation due to "competitive constraints." Regulation of Short-Term Natural Gas Transportation Services, FERC Statutes and Regulations ¶ 31, 091, p. 31,267 (2000).

Public Service apparently recognizes that such constraints may exist in New Jersey. In comments filed in the rulemaking proceedings cited above, the Company stated that it "supports the retention of traditional cost-based rates for recourse transportation and storage services" because the pipelines "continue to have market power in the primary market" for these services. Regulation of Short-term Natural Gas Transportation Services and Regulation of Interstate Natural Gas Transportation Services, FERC Dkt. Nos. RM98-10-000 and RM98-12-000, Comments of Public Service Electric and Gas Company, p. 17 (Apr. 22, 1999) (available on FERC website).

As is clear from developments in California, the Board must carefully consider proposals to allow unregulated entities to control essential resources which may be subject to market constraints. Public Service is New Jersey's largest natural gas utility, and thus controls a considerable portfolio of interstate pipeline transportation, storage, and peaking resources. Public Service is proposing to transfer this portfolio, in a single block, to an unregulated entity which, the Company asserts, will not be subject to the Board's oversight or control. This would create the potential for an undue concentration of market power, leading to a lack of competitive alternatives and artificially high natural gas prices, as well as potential impacts on New Jersey's electric generation market. The disposition of these important resources should be considered only as part of the Board's overall evaluation of the structure of New Jersey's natural gas marketplace pursuant to the entire legislative mandate and policies of EDECA, which should include a thorough evaluation of the need for safeguards against the exercise of monopoly power in the market for interstate pipeline resources..

Part of the process of creating a competitive natural gas market will be the Board's determination of how and by whom BGSS should be provided to those customers who do not choose a third party supplier. The Public Service proposal would seriously restrict the range of options available to the Board for structuring BGSS service. For example, the Board may determine that, due to market constraints, non-utility suppliers will need access to the utilities' interstate pipeline resources in order to provide BGSS. Thus, the Board may wish to consider directing the utilities to make their interstate pipeline resources available to third-party suppliers interested in submitting bids to provide BGSS. This option could be foreclosed for Public Service's customers if the Company's interstate pipeline resources are transferred to an unregulated entity.

The interstate pipeline resources which are currently controlled by the utilities are crucial to the development of a competitive natural gas marketplace in New Jersey. The disposition of these resources should be considered only in a generic proceeding in which the Board can carefully consider the overall natural gas marketplace, not as part of a petition filed by a single utility. We are entering a period of compliance with the structural and policy mandates of EDECA. The Public Service proposal cannot be viewed in isolation from the Board's comprehensive evaluation of the entire natural gas marketplace in New Jersey in accordance with the mandates of EDECA.

II. THE PUBLIC SERVICE PETITION SHOULD BE DISMISSED BECAUSE IT IS IN DIRECT VIOLATION OF EDECA'S PROVISIONS CONCERNING THE PROVISION AND PRICING OF BGSS.

In addition to the policy reasons discussed in Point I above, the Public Service petition should be dismissed because it is in direct violation of EDECA's provisions concerning the provision and pricing of BGSS. In Section 10 of EDECA, the Legislature has set forth some specific parameters as to how BGSS is to be provided. Section 10(r) requires New Jersey's gas utilities to provide BGSS "[f]or at least three years subsequent to the starting date of 100 percent retail competition as provided in subsection a. of this section [i.e., through December 31, 2002] and thereafter until the board specifically finds it to be no longer in the public interest ...." N.J.S.A. 48:3-58(r). Non-utility suppliers may be permitted to provide BGSS under section 10(s), which provides that, "[b]y no later than January 1, 2002, the board shall issue a decision as to whether to make available basic gas service on a competitive basis to any gas supplier, any gas public utility, or both." N.J.S.A. 48:3-58(s).

These provisions clearly state that: (1) Public Service must provide BGSS through at least December 31, 2002, and (2) BGSS may be provided by non-utility suppliers only "on a competitive basis" after a Board Order permitting this. Public Service's proposed transaction is directly contrary to these requirements. Public Service would transfer crucial resources needed to provide BGSS to an unregulated entity, which would then supply all of the Company's BGSS customers under a no-bid requirements contract. Thus, Public Service would abdicate its responsibility to provide BGSS service through December 31, 2002, and an unregulated supplier would take on this responsibility without the statutorily required competitive bidding. This would be in clear violation of the requirements quoted above.

The Public Service proposal also would violate EDECA's requirements regarding the pricing of BGSS. These provisions are found in EDECA section 10(r), (t) and (u). With regard to BGSS provided by utilities, section 10(r) provides as follows:

The charges assessed to customers for basic gas supply service shall be regulated by the board and shall be based on the cost to the utility of providing such service, including the cost of gas commodity and capacity purchased at prices consistent with market conditions by the gas public utility in the competitive wholesale marketplace and related ancillary and administrative costs, as determined by the board.

N.J.S.A. 48:3-58(r) (emphasis added).

A similar provision in section 10(t) governs the pricing of BGSS as provided by non-utility suppliers:

The charges assessed to customers for basic gas service shall be regulated by the board and shall be based on the cost to the supplier of providing such service, including the cost of gas commodity and capacity purchased at prices consistent with market conditions by the supplier in the competitive wholesale marketplace and related ancillary and administrative costs, as determined by the Board, or shall be based upon the result of a competitive bid.

N.J.S.A. 48:3-58(t) (emphasis added).

Under these provisions, in the absence of a competitive bid, BGSS rates must be based on the cost of providing BGSS service. Furthermore, under EDECA section 10(u), these costs must be reasonable and prudent:

Each gas public utility or gas supplier that provides basic gas supply service pursuant to subsections r., s. and t. of this section shall be permitted to recover in its basic gas supply charges on a full and timely basis all reasonable and prudently incurred costs incurred in the provision of basic gas supply services pursuant to this section ....

N.J.S.A. 48:3-58(u) (emphasis added).

Thus, EDECA explicitly preserves the Board's obligation to assure that the natural gas used to supply BGSS customers is purchased under a reasonable and prudent procurement strategy.

The Public Service proposal would directly violate these requirements. BGSS customers would be charged "market based" rates, which could substantially exceed the actual costs of procuring gas.

Public Service is proposing to set rates for BGSS service based on the Company's present Market Price Gas Service ("MPGS") rate schedule. (Public Service Petition, par. 9.a.) This rate schedule currently applies only to commercial and industrial customers who have switched to a third-party supplier for commodity service, and subsequently returned to Public Service. (See Public Service Tariff Sheet 48.) According to Public Service's filed tariff, MPGS is a either "market based rate including all applicable taxes to be posted by Public service on a monthly basis" or a rate negotiated with a specific customers. (Public Service Tariff Sheet 157.) The rates to be posted by Public Service are subject only to a floor based on actual costs of supplying the gas, and ceiling based on "the applicable rate for Emergency Sales Service as defined in Rate Schedules FT-GS and FT-LV." Id. Emergency Sales Service, which applies to transportation customers whose third-party suppliers fail to deliver gas as scheduled, is based on "the highest cost of gas purchased or used by Public Service ... during that month, plus a surcharge of "up to 18.1 cents (19.1 cents including SUT) per therm ...." (Public Service Tariff Sheets 120, 131.)

The monthly market-based pricing reflected in the MPGS rate schedule does not reflect the way natural gas is actually purchased by New Jersey's natural gas utilities. As was thoroughly addressed in the recently concluded Levelized Gas Adjustment Clause ("LGAC") proceedings before the Board, most of the gas procured for BGSS service is not procured in the short-term market. All of the utilities use their interstate pipeline storage contracts to purchase gas during the summer months for use during the winter. Moreover, gas commodity costs are frequently hedged through long-term supply contracts, financial instruments, or both. Under the MPGS rate schedule, the actual costs of supplying gas would be the floor price. The tariff provisions quoted above would specifically permit the Company to establish a rate up to the Company's "highest cost" gas for that month, plus a substantial surcharge! Under this pricing scheme, ratepayers could be burdened with rates substantially above the actual costs of providing BGSS service, and any review of the actual costs of procurement would become irrelevant. This type of pricing may be appropriate for customers who use the Company's system gas on an emergency basis, thus requiring the Company to purchase incremental supplies on the short-term market. However, this pricing scheme is both unreasonable and contrary to the specific requirements of EDECA that, in the absence of a competitive bid, BGSS should be priced based on actual, prudently incurred costs.

The Public Service proposal is in clear violation of the specific EDECA requirements discussed above. For this reason, the Company's Petition should be dismissed as a matter of law.

III. CONTRARY TO PUBLIC SERVICE'S CLAIM, THE BOARD HAS JURISDICTION TO REVIEW BOTH THE PROPOSED CONTRACT TRANSFER AND REQUIREMENTS CONTRACT.

The New Jersey Legislature has vested the BPU with "general supervision and regulation of and jurisdiction and control over all public utilities...and their property, property rights, equipment, facilities and franchises so far as may be necessary for the purpose of carrying out the provisions of [Title 48 of the New Jersey Statutes]." N.J.S.A. 48:2-13. Just recently the New Jersey Supreme Court reaffirmed the comprehensive power of the BPU over utilities:

This sweeping grant of power is "intended to delegate the widest range of regulatory power over utilities to the [BPU]."

Matter of Valley Road Sewerage Co., 154 N.J. 224, 235 (1998), quoting Township of Deptford v. Woodbury Terrace Sewerage Corp., 54 N.J. 418, 424 (1969).

The court went on to say:

Furthermore, the BPU's authority over utilities, like that of regulatory agencies generally, extends beyond powers expressly granted by statute to include incidental powers that the agency needs to fulfill its statutory mandate.

The Board's authority has now been extended to the implementation of EDECA's objective of creating competitive electricity and natural gas markets in New Jersey. N.J.S.A. 48:3-50. The transactions proposed by Public Service would have significant impacts on both consumers and the overall development of New Jersey's competitive energy markets. The Board's broad statutory mandates do not permit transactions of this significance to escape review.

Moreover, the Board has specific statutory authority to review both the proposed gas contract transfer and the proposed Requirements Contract. With regard to the proposed transfer of interstate pipeline contracts, N.J.S.A. 48:3-7(a) requires Board approval before a utility may "sell, lease, mortgage or otherwise dispose of or encumber its property, franchises, privileges or rights, or any part thereof;" and any transaction made "made in violation of this section" is declared "void." The Public Service petition involves contract rights which are essential to provide natural gas service, and which have been paid for by the Company's ratepayers over a period of many years. Clearly, contract rights of this importance are within the scope of a provision requiring Board approval for dispositions of utility "rights."

The proposed Requirements Contract is subject to the Board's ratemaking authority. N.J.S.A. 48:2-21 provides the Board with full authority over the fixing of utility rates. The Board's ratemaking jurisdiction is at the core of its regulatory authority over utilities. As the Court found in Valley Road:

Unlike other corporations, however, utilities are subject to a special obligation to serve the public interest. In particular, the primary obligation of a utility is to provide safe, adequate and proper service at fair and reasonable rates. .... The legislature has entrusted the BPU with the responsibility of assuring that utilities fulfill that obligation.

Matter of Valley Road Sewerage Co., 154 N.J. at 240 (citations omitted).

In the context of natural gas costs, the Board has traditionally exercised it ratemaking authority through its review of the utilities' natural gas procurement activities in LGAC proceedings. As noted above, the EDECA continues the Board's authority over natural gas procurement through its requirements that the provision of BGSS by non-utility suppliers be on a "competitive basis," and that BGSS providers be permitted to recover only "reasonably and prudently incurred costs ...." N.J.S.A. 48:3-58(s) & (u). The Public Service proposal would directly affect the procurement of gas for the Company's BGSS customers, as well as the prices charged for BGSS, and thus lies squarely within the Board's ratemaking authority.

The Public Service proposal has implications that will affect the Company's BGSS customers for years to come, both through their rates and through the development of a competitive natural gas marketplace in New Jersey. In light of the significant public interest concerns discussed above, the Board should issue a Declaratory Order asserting its jurisdiction over this and similar proposals.

IV. THE BOARD SHOULD DISMISS PUBLIC SERVICE'S PREVIOUSLY FILED PETITION TO TRANSFER ITS NATURAL GAS CAPACITY AND SUPPLY CONTRACTS TO AN AFFILIATE, WHICH HAS NOT BEEN ACTIVELY PURSUED BY THE COMPANY SINCE EARLY 1998.

To date, Public Service has not formally apprised the Board of the status of the FERC proceedings, nor has it actively sought to prosecute its BPU filing. It also has not moved to withdraw that filing. For those reasons, as well as the fact that the current filing supersedes the filing made in BPU Docket No. GM97100758, that Docket should be dismissed.

For the foregoing reasons, the Board should issue an Order (1) dismissing the Petitions filed by Public Service in Docket Nos. GM00080564 and GM97100758, and (2) declaring that the transactions contemplated in these petitions are subject to the Board's jurisdiction.

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