October 6, 2000

Frances Smith, Esq.
Secretary
Board of Public Utilities
Two Gateway Center
Newark, New Jersey 07102

RE: Gas Utilities’ Requests for Provisional Rate Increases

Dear Ms. Smith:

Enclosed please find the certification of Richard LeLash, witness on behalf of the Division of the Ratepayer Advocate, filed in support of the rate mechanism proposed by the Ratepayer Advocate in this office’s October 5, 2000, letter response to the gas utilities’ request for a provisional rate increase.

SHS/mg
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My name is Richard W. LeLash and my address is 18 Seventy Acre Road, Redding, Connecticut. I am submitting this Certification in support of the Ratepayer Advocate’s proposed mechanism for reflecting recent increases in the wholesale price of natural gas in the Levelized Gas Adjustment Clause ("LGAC") rate of the four New Jersey gas utilities, which was filed with the Board on October 5, 2000.

Since 1999, I have been an independent regulatory consultant. Before working as an independent consultant, I worked with the Georgetown Consulting Group, Inc., a financial management firm specializing in utility regulation.  I was with Georgetown for over 20 years. As a consultant, I have been hired by state attorneys general, public advocates, and commissions to present testimony in regulatory cases concerning the rates of telephone, water, electric and gas utility companies throughout the United States.

During my affiliation with Georgetown, and continuing to date, I have testified on rate base, cost of service, rate of return or tariff design issues in approximately 230 regulatory proceedings.  These testimonies were presented before the Philadelphia Gas Commission, the Federal Energy Regulatory Commission and in the following jurisdictions:  Alabama, Arizona, Colorado, Delaware, District of Columbia, Georgia, Illinois, Kansas, Maine, Maryland, Minnesota, Missouri, New Jersey, New Mexico, New York, Ohio, Oklahoma, Pennsylvania, Rhode Island, U.S. Virgin Islands, and Vermont.

I graduated in 1967 from the Wharton School with a BS in Economics and in 1969 from the Wharton Graduate School with an MBA. During the past thirty years I have been a member of and have worked with various professional and trade organizations.  I have conducted lectures and seminars involving economic, financial, regulatory, and accounting topics such as return on investment, cash forecasting, planning, cost accounting, project and cost control, and accounting systems. Additionally, I serve as the President and Trustee of a private foundation where my responsibilities include managing the foundation's overall operations.

Since 1980 I have worked extensively on gas policy and procurement issues. In addition to testifying in about 50 gas cases, I have reviewed and analyzed many other gas policy filings which were resolved through stipulation. Among other issues, my testimonies have involved gas service unbundling, physical and economic bypass, gas supply incentives, gas plant remediation costs, gas price hedging, demand and capacity planning, gas storage options, gas price forecasting, and least cost gas standards. In addressing these issues, I have analyzed gas regulatory filings involving about 30 different local distribution companies.

I have been retained by the New Jersey Division of the Ratepayer Advocate to review the current Levelized Gas Adjustment Clause filings of Public Service Electric and Gas ("Public Service"), New Jersey Natural Gas Company ("New Jersey Natural") and South Jersey Gas Company ("South Jersey"). I have thoroughly reviewed these companies’ filings and the underlying projections and calculations which have been provided by the companies in response to Ratepayer Advocate discovery requests. I have also reviewed the Elizabethtown Gas Company ("Elizabethtown") LGAC filing, and have discussed this filing with the Ratepayer Advocate consultants retained to review this filing, Frank Hollewa and Robert Henkes. Additionally, I have reviewed all four utilities’ petitions for provisional rate relief filed with the Board this week.

As part of my work on gas policy and procurement issues, I closely monitor the wholesale natural gas markets on a continuing basis. As a result of my work on natural gas matters in New Jersey, I am familiar with the natural gas purchasing strategies followed by all four of New Jersey’s natural gas utilities.

It is a matter of common knowledge that wholesale natural gas prices have escalated sharply during the past few months. From relatively moderate gas price levels, as measured by the New York Mercantile Exchange ("NYMEX") Henry Hub rate, during the winter of 1999-2000, prices have increased by well over 100%. For example, the settle price on the December 1999 futures contract was $2.14 per dekatherm, while the comparable December 2000 price is $5.18 per dekatherm. This current price is considerably higher than last year’s, and it illustrates the price escalation which began in the spring of this year. On a simplified basis, the underlying gas price increases are the result of several natural gas demand and supply factors.

Because of the magnitude of the gas cost increases, customers, especially those who heat with natural gas, will be burdened with winter bills which will be significantly higher than the bills they have received during the past few years. In addition, it is likely, without conservation efforts, that customer usage will also increase this winter relative to the usage levels during the past three years when New Jersey had milder than normal winter weather. As a result, if the New Jersey gas utilities do not receive some adjustment in their gas cost recovery rates, there will be large under-recovered gas cost balances which could distort gas prices for consumers well into the future. With New Jersey’s implementation of unbundled retail gas choice under the provisions of the Electric Discount and Energy Competition Act ("EDECA"), major variations from pricing which reflects market rates would frustrate the basic objectives of EDECA.

While no consumer price increase is desirable, increases of the current magnitude present particularly difficult choices. Because of delays by the utilities in recognizing the adverse trends in gas prices, consumers now face unreasonably high increases over a very short time interval. In order to mitigate, to some degree, the adverse impact, and to facilitate prompt rate decreases if gas prices decline, it would be beneficial to adjust gas prices in stages. While such a mechanism may not fully cover the projected cost increases, it will bring the gas cost recoveries much closer to market rates.

The Ratepayer Advocate’s proposed LGAC mechanism is based on recommendations developed by me in consultation with Mr. Hollewa and Mr. Henkes. While there are many alternative approaches to adjusting LGAC levels, there are two basic policy objectives that must be considered: (1) minimizing deferred fuel balances which are carried from year to year, and (2) avoiding an unnecessarily high LGAC factor in the event natural gas prices moderate either this winter or in the spring. To meet these dual objectives, I recommended the following approach:

First, the utilities’ recovery rates should be increased on an interim, emergent basis by $1.40. per dekatherm. Such increases, which will result in approximately a 17% increase in a residential heating customer’s total annual gas bills, would reflect about 70% of the difference between the gas cost reflected in the utilities’ current LGAC rates and the prevailing gas prices as reflected by current NYMEX prices. This increase, if implemented in the near future, will minimize deferred fuel balances by allowing the utilities to collect the increased rates during the upcoming heating season, when most gas is used by consumers who pay the LGAC, while avoiding an extreme increase that may prove unnecessary if gas prices moderate during the winter or spring.

Given the volatility of the wholesale natural gas markets, there is a need for a mechanism to review and, if necessary, adjust the utilities’ LGAC rates during the winter and spring. Three of the utilities, Elizabethtown, New Jersey Natural, and Public Service, have proposed that rates be subject to automatic adjustment on a monthly basis. This approach would allow the utilities’ LGAC rates to follow the market, but it has a number of disadvantages. The mechanisms proposed by New Jersey Natural and Public Service would allow an adjustment of up to $.35 per dekatherm each month, while Elizabethtown’s proposed mechanisms would allow unlimited adjustments to reflect 70% of the difference between the then current LGAC rates and NYMEX prices. Both mechanisms would allow significant changes in LGAC rates each month, and could potentially create customer confusion and rate shock. In addition, by permitting automatic rate increases, these mechanisms do not provide the level of regulatory review that is appropriate during a time of unusually high natural gas prices.

Instead of a monthly adjustment, my second recommendation is that the utilities’ LGAC rates be subject to adjustment, if necessary, on January 1, 2001 and April 15, 2001. January and February are the two months of heaviest usage for natural gas heating customers. Approximately 35% of the utilities’ sales to LGAC customers, by volume, occurs during these two months. Thus, if any further adjustments, either upward or downward, are needed to reflect market rate during the winter, they should be considered for implementation in January. In recognition of the hardships to consumers that will result from a further rate increase, any increase that may be found necessary in January should be limited to $.50 per dekatherm. A further adjustment in April may be appropriate based on the potential that gas prices may moderate by next spring.

Because of the impact of high gas prices on consumers, any further rate adjustments should be reviewed by the Ratepayer Advocate and the Board’s Staff, and implemented only upon a Board Order. To provide the information necessary for this review, the utilities should be required to file with the Board and the Ratepayer Advocate, no later than December 1, 2000 : (1) calculations of their estimated monthly and cumulative deferred fuel balances to the end of the new LGAC period; (2) monthly gas price assumptions for the remainder of the LGAC period; and (3) calculation of the impact on their projected incurred cost of gas. Updates of the December filing should be required each month thereafter.

Of equal priority, the utilities must be required to take all practical steps to mitigate the adverse effects of the rate increases. Ratepayers should be informed about existing programs to assist customers who will not be able to afford the higher gas costs. In addition to promoting existing extended payment and budget billing programs, the eligibility for New Jersey SHARES should be expanded. The utilities should likewise increase their efforts to promote conservation through weatherization projects, energy audits, and use reduction methods.

The utilities should also be required to directly contribute to programs which will reduce the rate increases’ impact on these customers. As the magnitude of the envisioned rate increases has been recognized across the country, various mitigation initiatives are being taken. For example, in the State of Washington, Cascade Natural Gas has committed to an additional $100,000 of low income energy assistance above and beyond its customary "Winter Help" program. New Jersey utilities should, likewise, increase their contribution to help needy customers cope with the far higher gas bills. The contributions that should be required of the New Jersey utilities are detailed in the Ratepayer Advocate’s October 5, 2000 filing.

There is also a need for the New Jersey utilities to expand their customary customer education programs to address the current gas market conditions and to provide information on support and conservation programs. Customers need to be informed on why gas prices have increased and how such prices affect the LGAC recovery rate. They also need to be advised about the availability of government and utility energy assistance programs and be provided with eligibility and enrollment requirements.

It is recommended that each utility be required to provide two special billing inserts which specifically address bill payment assistance and energy conservation programs which will help to mitigate the effects of the envisioned rate increases. These and other necessary educational and informational initiatives are set forth the Ratepayer Advocate’s October 5, 2000 filing.

In the longer term, the utilities should be required to integrate gas price hedging into their procurement plans. Ratepayers are entitled to protection against price escalations such as those which have been experienced during the past several months. In addition to the price hedging which can be accomplished through gas storage transactions, the utilities need to utilize a diverse portfolio approach to their procurement, utilizing both physical and financial hedging contracts and both short and long-term contract durations. New Jersey Natural, as the only New Jersey utility which utilized significant non-storage hedging transactions, was able to reduce its cost of gas by more than $20 million when measured against prevailing index rates. Prospectively, the other New Jersey utilities must commit to programs which can lessen gas price volatility for their ratepayers.

During the past few months I have been involved in proceedings in other states where the large gas price increases are being addressed by the regulatory commissions. The actions in these proceedings have been similar to the recommendations which I am making here. For example, in Delaware, Conectiv Energy is redefining its gas price hedging program in order to ensure adequate price stability in the future even under market conditions such as those experienced this summer.

In Pennsylvania, under a new gas cost recovery mechanism, the Utilities are able to take price increases in quarterly adjustments which are very similar to the adjustment procedure recommended for the New Jersey Utilities. Such quarterly adjustments allow the Utilities’ prices to generally track market levels without the need for monthly revisions. At the same time, the mechanism prevents large under-recoveries which would otherwise adversely affect Pennsylvania’s recently enacted customer choice program.

In Rhode Island, Provgas, which is about to end a three year price stabilization plan, is also seeking to adjust its previously fixed commodity rates to reflect current market conditions. In that proceeding there are issues concerning the utility’s failure to implement timely hedge positions to lessen the effects of price volatility. Other issues which are being addressed include the need for consumer education, the promotion of extended payment plans, the phasing in of recovery rate increases, and the expansion of energy assistance for low income customers.

In all regards, the Ratepayer Advocate’s generic proposals are compatible with the issues and positions which are being reviewed in these and other jurisdictions. Effectively, the typical approach calls for staged increases, with the flexibility to adjust, up or down, for subsequent changes in market prices, along with extensive customer communication to explain the price increases and offer various alternatives to mitigate their impact.

In summary, it is my belief that these various actions will address the gas price increases in a balanced and reasonable fashion. They will ensure continued timely recovery of gas costs by the Utilities, while mitigating their impact on New Jersey gas consumers. It is therefore recommended that the Board consider and adopt these measures as more fully described in the generic proposal of the Ratepayer Advocate.

I hereby certify that the foregoing statement made by me are true. I am aware that if any of the foregoing statements made by me are wilfully false, I am subject to punishment.

_____________________________________

Richard W. LeLash
Dated:

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