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Washington Gas Light Plan to Acquire Upstream Interest Rejected in Virginia

The Virginia State Corporation Commission (SCC) has rejected a proposal from Washington Gas Light Co. (WGL) to acquire a non-operating interest in 25 Pennsylvania wells through a deal with Energy Corp. of America.

The proposal would have seen the Washington, DC-based utility spend approximately $122 million to acquire a 96% interest in 22 wells in Greene County and three wells in Clearfield County, according to an SCC order denying WGL’s request.

The acquired gas reserves would have replaced a portion of WGL’s commodity purchases over the 20-year life of the proposal, with the costs associated with the plan recovered through ratemaking procedures.

According to the commission’s order, WGL had argued that the plan “is in the public interest in that it offers reasonably anticipated benefits to its Virginia customers in the form of savings in the delivered costs of gas versus current long-term forward market projections. The company further asserts that the plan also benefits Virginia customers by reducing the company’s overall portfolio price volatility for base gas volumes.”

But the SCC ultimately determined that WGL’s proposed acquisition asked ratepayers to take on all of the risks related to potential changes in commodity prices or the productivity of the wells.

A WGL witness “acknowledged that his estimates of the natural gas reserves and production volumes are just that -- estimates -- and there remains a risk that production volumes could fall below the levels needed for customers to reap any savings benefit,” the SCC said. The proposal contains no contingency in the event the wells produce below projections, according to the order.

An SCC staff witness testified that WGL’s supply could actually be at greater risk under the plan since “the company would be relying on gas from 25 wells that are located in close proximity to one another and to additional wells operated for others (and thus susceptible to ‘interference’), to procure [a substantial portion] of its annual firm sales demand.”

The SCC also took issue with the inherent risk in relying on pricing forecasts to judge whether the proposal would yield value for consumers over the 20-year agreement.

The SCC noted that “forecast confidence generally decreases as the forecast period extends, and, in this instance, the 20-year plan requires a 20-year forecast” before going on to state that “the risk of overestimating future natural gas prices is entirely on WGL’s customers; WGL’s shareholders bear none.”

The WGL proposal was the first submitted under a section added to Virginia state code in 2014 that allows regulated utilities to propose investments in upstream infrastructure.

Utilities have established similar upstream arrangements in other states. In June, the Florida Public Service Commission gave Florida Power & Light Co. (FPL) blanket approval to invest up to $500 million/year of ratepayer funds on natural gas exploration without case-by-case approval (see Daily GPI, June 18). At the time that decision was made, FPL had already received the OK from regulators to invest in an Oklahoma gas drilling venture (see Daily GPI, Dec. 19, 2014; June 25, 2014).

Rapid City, SD-based Black Hills Corp. has also been moving forward on plans to implement a natural gas reserves program to provide cost-of-service arrangements for its utilities in eight states (see Shale Daily, Nov. 5, Oct. 5).

A WGL spokesman declined comment for this report, citing a company “quiet period” in the lead-up to an earnings call with investors next week.

WGL serves more than 1.1 million customers across Virginia, Maryland and the District of Columbia.

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