Provisional Rate Dockets Summary of R

Provisional Rate Dockets
Summary of R.W. LeLash Testimony

My direct testimony in these dockets principally addresses the appropriate regulatory response to what has been, and continues to be, an extraordinary increase in the cost of wholesale natural gas supplies. These increases, and their impact on ratepayers' gas bills, effectively define the issues in these cases--namely, how much of the cost increases should be passed through to ratepayers, and what should be the timing of any pass through.

In my testimony, I concur with the Board's deferred implementation of a portion of the LGAC increases. I specifically do not concur with the gas utilities' request for interest on associated under recovered balances. The gas distribution companies, in my opinion, are seeking to undermine the Board's long standing precedent on interest accruals for fuel balances and, indeed, the very logic of the Board's deferred LGAC recovery mechanism.

It is illogical for the gas utilities to assume that the Board, in limiting gas cost recoveries to mitigate the impact of wholesale price increases, would then authorize the gas utilities to add interest to the already excessive amounts to be recovered. The gas utilities clearly take the position that, at a time when New Jersey ratepayers will be liable for about one billion dollars of incremental gas costs for their essential gas service, utility shareholders should be immune from any associated economic consequence.

This Board has often utilized a sharing concept in order to mitigate the effect of extraordinary events on ratepayers' cost of utility service. To not do so, under the current circumstances, would be to ignore the plight of ratepayers and to unreasonably favor shareholder interests. I do not believe that this was the Board's intent in limiting the level of LGAC increases, and I do not believe that having utility shareholders finance an interest free deferred recovery plan is unreasonable at this time.

As addressed in my testimony, there is also an issue concerning the prudence of the gas utilities in procuring gas supplies for the current LGAC period. Wholesale natural gas prices have been quite volatile for several years, and as a result, it has been recognized that gas price hedging is an effective way to stabilize resultant gas cost recoveries from ratepayers. In my opinion, three of the New Jersey gas distribution companies failed to adequately protect their ratepayers from market price variation. In the case of Public Service, it had recognized the need for hedging to mitigate gas costs, but it chose to eliminate such hedging in order to implicitly protect the interests of its shareholders. As for South Jersey and Elizabethtown, they have not developed adequate price hedging programs, and they too chose to leave their ratepayers vulnerable rather than risk potential gas cost disallowances which would adversely affect their shareholders.

Such policies by these gas utilities warrant some gas cost disallowance to compel them to absorb, at least to some degree, a portion of the adverse effect of their inaction and to also send them a message that ratepayers, as well as shareholder interests, must be considered when making procurement decisions.

Over the past two decades, local gas distribution utilities have obtained access to many more supply options. These include spot markets, the futures market, the forward contract market, and the long term market. The multiplicity of options available over these years have provided opportunities for a prudent gas utility to assemble a portfolio of reliable gas to meet demand. Shareholders as well as customers must bear rewards as well as risks of gas procurement policies. The Ratepayer Advocate believe that this Board should begin to consider performance benchmarks as part of future regulatory oversight

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