EXECUTIVE SUMMARY OF
THE DIVISION OF THE RATEPAYER ADVOCATE’S
RESPONSE TO NATURAL GAS UTILITIES’
PROPOSED GAS COST RATE ADJUSTMENT MECHANISMS
Filed December 15, 2000
BPU Docket Nos. GR00070491, GR00070470, GR99100778 and GR00050293
In November, 2000 the New Jersey Board of Public Utilities ("Board"), in response to record high prices in the wholesale natural gas market, issued orders ("Provisional Rate Orders") granting emergent, provisional rate increases to New Jersey’s four natural gas utilities, Public Service Electric and Gas Company ("Public Service"), NUI/Elizabethtown Gas Company ("Elizabethtown"), New Jersey Natural Gas Company ("New Jersey Natural") and South Jersey Gas Company ("South Jersey"). The utilities were granted initial rate increases ranging from 16 to 19 percent, with possible additional two percent increases in December and January and the opportunity to seek additional two percent increases each month through April 1, 2000. On December 1, 2000 the four utilities submitted filings seeking to implement additional two percent increases each month through April, and also to extend the previously approved rate adjustment mechanism through July 1, 2000.
The following is an executive summary of the testimony of Richard LeLash, an expert in natural gas related issues, filed with the Board on December 15, 2000 on behalf of the Division of the Ratepayer Advocate in response to the utilities’ December 1, 2000 filings.
I. NATURAL GAS RATES FOR THE CURRENT WINTER HEATING SEASON
Since the spring of 2000, there has been an unprecedented increase in wholesale natural gas prices. While this has increased the utilities’ gas costs, there is also a need to consider the hardships which will be imposed on gas consumers. In light of current market conditions, the Board’s previously approved rate adjustment mechanism, which provides for limited rate increases through April if justified with appropriate documentation, appears reasonable. However, the Ratepayer Advocate objects to any automatic rate increases for the months of May, June and July as proposed by the utilities. The current rate adjustment mechanism should be extended beyond April only if the utilities demonstrate that an extension is needed. The current mechanism should be extended only after the submission and Board review of filings which fully document the need for additional rate increases and describe in detail the utilities’ efforts to assure reasonable and stable prices for next winter.
II. FUTURE RATE ADJUSTMENT MECHANISMS
The continuing two percent rate increases in effect this winter are appropriate only as an interim measure to address an extraordinary and atypical market price transition. After the expiration of the current mechanism, it should be replaced with a mechanism that provides for fewer rate adjustments, which should take place during the winter heating season when consumers use the most gas. Each of the utilities should be required to make an annual filing on or before August 1 of each year to document the basis for a gas cost recovery rate to take effect on October 1. This filing would include reconciliations, as well as a review of the utilities’ natural gas procurement practices and related policy issues. The utilities would then be permitted to request no more than two rate increases, after notice and review, during the November through February period. The utilities would be required to initiate rate reductions when indicated by market conditions.
This mechanism should remain in effect subject to the Board’s consideration of alternatives to the traditional Levelized Gas Adjustment Clause (" LGAC") recovery mechanism that may be more compatible with the transition of New Jersey’s retail natural gas marketplace to competition.
III. UTILITIES’ REQUESTS FOR INTEREST
The utilities have requested the Board’s authorization to accrue interest to the extent the Board defers recovery of the utilities’ gas costs beyond their current LGAC periods. The Ratepayer Advocate opposes these requests. The Board has followed a consistent policy of not allowing the utilities to accrue interest on LGAC under recoveries. The under recoveries being projected by the utilities are, to a large degree, due to their lack of adequate gas price hedging programs and their delays in seeking rate adjustments. Further, with the advent of a competitive market, the utilities should not be compensated for their failure to effectively mitigate gas price increases, when competitive third party suppliers do not have the luxury of interest accruals on under recoveries.
IV. UTILITIES’ FAILURE TO ADEQUATELY HEDGE AGAINST GAS PRICE INCREASES THIS WINTER
The New Jersey gas utilities did not take adequate measures to mitigate their exposure to natural gas price increases. Only one utility, New Jersey Natural, undertook any significant hedging activities on a timely basis. The Ratepayer Advocate is therefore proposing gas cost disallowances for the other three utilities, Public Service, Elizabethtown, and South Jersey. The Ratepayer Advocate is not proposing a disallowance for New Jersey Natural, because its hedging performance was good compared to the other three utilities. However, New Jersey Natural could have done more to hedge its gas costs, and accordingly the Ratepayer Advocate is proposing that New Jersey Natural, like the other three utilities, not be permitted to accrue interest on any under recovered gas costs.
V. FUTURE GAS PROCUREMENT AND HEDGING
Each of the utilities should be required to mitigate future gas price fluctuations using appropriate hedging techniques, including fixed-price contracts of varying durations and financial instruments such as calls and collars. The utilities should hedge at least 50% of their gas purchases in any twelve month period. The utilities should be required to prepare and submit their proposed gas price hedging programs. Once the submissions are made, the Ratepayer Advocate and other parties should be provided the opportunity to have input into the prospective programs. The programs should then be submitted to the Board for hearings and subsequent approval or modification.
The utilities should also explore other possible mitigation initiatives which could lower gas costs for consumers, including investigating additional underground storage projects, and possible expansion of their above-ground liquefied natural gas ("LNG") storage facilities. Subject to public policy constraints, the utilities should also reassess their interruption practices. During times of very high natural gas prices, economic curtailments of interruptible customers can be a means of mitigating firm ratepayers’ gas costs.
Finally, the utilities’ submissions should include their proposed alternatives to the traditional LGAC recovery mechanism. With the advent of competition, it is important that the Board evaluate alternatives that will be more compatible with a competitive market.
VI. UTILITIES’ COMPLIANCE WITH BOARD-ORDERED MITIGATION AND CONSUMER EDUCATION MEASURES
In its Provisional Rate Orders, the Board directed the utilities to implement a number of consumer education and mitigation measures. The utilities’ December 1, 2000 filings did not properly address many of these education and mitigation issues. All of the filings were incomplete, and the utilities failed to provide key information that the Board needs to determine whether or not the they have complied with the Provisional Rate Orders. The Board should require the utilities to submit supplemental testimony addressing in detail the various omissions and deficiencies within their filings, such as their failures to conduct an assessment of the impact of higher rates on low-income customers, and their incomplete descriptions of their efforts to educate consumers through individual efforts and through state-wide media initiatives.