October 5, 2000
RE: Gas Utilities' Requests for Provisional Rate Increases
Dear Secretary Smith:
This letter is submitted on behalf of the Division of the Ratepayer Advocate ("Ratepayer Advocate") in response to the various motions made by the New Jersey gas utility companies requesting immediate emergent rate relief, on an provisional basis, due to the rapid increase in the wholesale costs of natural gas over the last few months. The utilities have requested immediate rate increases as high as 40%. The Ratepayer Advocate's proposal, outlined below, is a balanced proposal which provides for an emergent rate increase of approximately 17%, but also includes measures to assist consumers who will be paying these hefty increases.
The Ratepayer Advocate has been concerned about the escalating costs of natural gas and the effects on consumers this coming winter. Because of these concerns and in order to mitigate consumer impact as much as possible, a meeting was held on July 18, 2000 at the Ratepayer Advocate's office with the four gas utilities and the Board Staff to discuss these issues. At that meeting the parties discussed the reasons for the steep rise in gas costs, which include a combination of increased usage, especially by electric generation, decreased gas production due to low gas prices at the wellhead and the warmer than expected winters over the last few years, as well as the escalation of oil prices. The recent run-up in gas prices and the increase in demand in turn has led to increased drilling, which should be reflected next year in greater natural gas availability. That in turn should lead to lower rates.
However, it is still necessary to deal with the high gas costs that prevail now. The Ratepayer Advocate has developed a proposal taking into account not only the dramatic increases in the cost of gas, but also the impacts on customers and ways of mitigating those impacts. The proposal was devised based on three basic premises: (1) expeditious rate relief to the utilities during the heavy winter usage period; (2) measures to mitigate the impacts of the rate increase on consumers; and (3) an education program to inform all New Jersey consumers how they can conserve energy, and where to find assistance if they need it. The intent of this proposal is simple--to provide a balance between the utilities' need for the rate relief to avoid large cost under-recoveries and the consumers' needs for assistance and education. This proposal has been informally presented to the utilities and the Board Staff this past week. The next few paragraphs will summarize the proposal, a copy of which is attached to this letter.
The Ratepayer Advocate's proposal for cost recovery by the utilities takes into account not only the actual steep increases in the cost of gas to date, but also projections for the future and expectations of increased gas availability next spring. Based upon a projected overall gas cost of $4.80 per dekatherm for this winter, the Ratepayer Advocate has proposed an immediate interim emergent increase of $1.40 per dekatherm. This would be followed by a second adjustment effective January 1, 2001, based on a filing to be submitted by the utilities on December 1, 2000. If justified, rates could be increased by no more than $.50 per dekatherm in January. In the event this winter proves to be warmer than normal, or additional gas wells come on line sooner than expected, resulting in greater gas availability leading to lower gas costs, ratepayers should receive a rate decrease promptly on January 1, 2000. Finally, rates would be automatically decreased in April, 2001, if justified, based on monthly updates of the December filing. This proposal uses the same assumptions for all four utilities, since most of their suppliers come from the Gulf region with similar costs. The Ratepayer Advocate's proposed rate mechanism will provide the utilities immediate rate relief, coupled with rate decreases for consumers once gas costs come down.
The second part of the proposal includes measures to help customers who may have difficulty paying these increased costs. The utilities should offer extended payment plans depending on customer circumstances, and expand customer eligibility for New Jersey SHARES benefits by eliminating the "one time only" grant requirement and easing other restrictions. The utilities should contribute to these measures by funding special initiatives such as increased utility contributions to New Jersey SHARES, and other ventures such as joint weatherization projects with other New Jersey retail businesses. The utilities should also be required to provide free energy audits, especially for low-income consumers, including some on-the-spot weatherization measures, since, as energy costs rise, conservation efforts will have a larger impact on keeping down rising costs. The utilities should also absorb some portion of the increase in gas costs, by reducing their share of margin sharing revenues by an additional 5% as an offset to gas costs. Margin sharing should terminate for Public Service Electric and Gas Company ("Public Service") when its current mechanism expires on December 31, 2000.
The third part of the Ratepayer Advocate's proposal is education. Although it is quite likely that consumers by now are aware of the increase in gas costs because of the extensive news coverage, it is not at all clear that consumers are aware of the many steps they can take to conserve energy, and the myriad of energy assistance programs available to consumers who cannot afford a rate increase.
The most important step consumers can take to respond to high energy costs is to reduce the amount of energy they use. The utilities, in cooperation with the Board and the Ratepayer Advocate, should undertake a statewide education campaign to inform consumers how they can conserve energy. It is important for all consumers to know the many measures that are available to them to conserve energy, such as turning thermostats down at night or when they are away from home, caulking and weather-stripping doors and windows, and making sure appliances are in good working order.
Even with these measures, however, there will be many New Jerseyans who cannot afford higher gas rates. It is important that these consumers have adequate information about available energy assistance programs. The Ratepayer Advocate is proposing that the utilities include at least two bill inserts to their customers detailing information about available government and utility energy assistance programs, such as LIHEAP, Lifeline, and NJ Shares. The bill inserts should also provide eligibility information for each program, including examples of income levels needed to qualify for each program, and whom to contact. This information should also be available through utility 1-800 numbers and utility websites. Additionally, all utilities should install the "Chronicles" computer program to provide their customer service and collections personnel with ready access to information on available energy assistance programs for eligible customers.
While the proposals outlined above will provide a balanced response to the current high gas prices, it is also important for the Board to consider the longer term. In order to mitigate future price spikes, all the gas utilities should institute a flexible, mixed gas portfolio purchasing strategy consisting of fixed gas price contracts (both short- and long-term), storage, financial instruments, and spot market purchases. With regard to financial hedging, each utility should include appropriate parameters, trigger points, and estimated costs (with caps). This last recommendation is included because prudent financial hedging should be an integral component of gas purchasing strategies. Indeed, one utility, New Jersey Natural Gas Company, hedged a portion of its gas supply for this winter, resulting in substantial savings for its customers. Public Service successfully included hedging strategies in its gas portfolio over the past few years, but for some reason, decided not to do so this year. The stated reason was "unbundling" and migration of customers. That simply makes no sense, since only an infinitesimal numbers of customers have "left", far offset by customer growth. Hedging is an essential component of a prudent gas purchasing strategy. A purchasing strategy which includes hedging should be required for all of the utilities.
Finally, in addition to the generic proposal described above, the Ratepayer Advocate wishes to note its opposition to South Jersey Gas Company's ("South Jersey") request that the Board grant it an additional rate increase to recover a projected under-recovery balance of $29 million that has been accruing the past two years. South Jersey has no one to blame but itself for being in such an under-recovered position. The company did not file its 1999 LGAC case until April 28, 2000 and supporting documentation was not submitted until August 2000. A timely filing of the 1999-2000 LGAC would have eliminated or greatly reduced this under-recovery. It would be highly unfair to charge South Jersey's ratepayers now for this under-recovery at a time when high natural gas prices will already result in larger than normal gas bills. Further, South Jersey's request for an immediate ruling on its request to charge ratepayers interest on this under recovery is wholly inappropriate. The proper role of provisional relief is to address an emergency situation. South Jersey's request for interest will affect LGAC rates for future years but need not be resolved now to address an immediate emergency.
In summary, the Ratepayer Advocate believes that the above proposal is fair to both the utilities and their customers. The utilities would receive an immediate and significant rate increase to cover the increased gas costs. In turn, the utilities would contribute to measures to help their customers through a variety of assistance programs and education initiatives. The Ratepayer Advocate urges the Board to consider and adopt this proposal, rather than the utilities' proposals to implement rate increases which do not balance their interests with the interests of consumers.
| Very truly yours,
BLOSSOM A. PERETZ, ESQ. |
BAP/bj
encl.
| c: | President Herbert
H. Tate Commissioner Carmen J. Armenti Commissioner Frederick F. Butler John Valeri, Chief of Staff |
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