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Ban on IT Gas Contracts Sought in New Jersey

Ban on IT Gas Contracts Sought in New Jersey

New Jersey regulators were asked last week to re-evaluate the policy of gas utilities regarding interruptible contracts, with some critics calling for a state-wide ban on IT service to provide some relief from the spikes in heating-oil prices witnessed this winter.

Eric DeGesero, executive vice president of the Fuel Merchants Association (FMA) of New Jersey, urged the New Jersey Board of Public Utilities (BPU) to consider such a ban on IT contracts, which allow gas utilities to temporarily halt service to their large industrial and commercial customers when temperatures dip below freezing. The customers, which have dual-fuel capability, then switch to the fuel oil market for supplies.

"This policy systematically allows the natural gas utilities to oversell their capacity knowing that their competitors' customers will have to bail them out," DeGesero said last week during a hearing before the BPU to investigate the price spikes in the heating-oil market.

Other less-drastic measures suggested by DeGesero included: limiting gas utilities to shutting off only a "fixed percent" of their IT customers; or mandating that IT customers purchase a certain amount of fuel product from their alternate suppliers each year. He particularly favored legislation that has been introduced in Connecticut, which would require IT gas customers to buy a three-week supply of alternate fuel each year.

As another option, DeGesero proposed that the temperature level at which IT customers are shut off by the utilities be raised. This would increase the "likelihood that they will be forced to use their alternate source of supply more than once every few years, and [as a result would allow] the suppliers and distributors of their alternate fuel to more accurately anticipate the impact of these customers and better prepare for the incredible increase on demand."

But New Jersey regulators, as well as gas utilities in the state, don't believe IT gas contracts had much influence over the state's heating-oil prices, which exceeded $2/gal. in early February at the retail level. In a preliminary review, BPU staff said "we cannot conclude that the interruptible natural gas customer class contributed in any meaningful way to the recent escalation in heating oil prices." In the worst-case scenario, BPU staff estimated IT gas customers in New Jersey consumed about 741,000 barrels of fuel oil in January, which it said was about 4.89% of the state's total demand.

That "equates" to about 1.7 million gallons of fuel oil per day that were used by IT gas customers during a two-week period in late January and early February, countered DeGesero. This, he said, represents half of the state's average consumption of heating oil of 3,300,000 gallons/day during the heating season.

Moreover, he pointed out that IT customers "were not cut off of their natural gas supply until the middle of January, so the consumption [of 741,000 barrels] represents only half of the month and makes their impact all the more obvious..." Also, DeGesero noted the figure doesn't factor in February consumption of fuel oil by IT customers. Nor does it include the "many more millions of gallons of kerosene, diesel fuel and residual oil [that] were diverted to keep interruptible customers warm," he told New Jersey regulators.

"This additional demand came at the time of peak demand and.....already tight supply. For the BPU to state that this had no impact defies logic," said DeGesero, whose group represents retail heating oil dealers and wholesale gasoline distributors in New Jersey.

Assuming BPU's conclusions are correct, he asked the state regulators to "explain why the Department of Energy is conducting a study to find ways to lessen the impact of natural gas interruptible customers on heating oil customers." Also, why did New Jersey Gov. Christine Whitman work "to see that the interruptible customers stayed on gas" during the critical period?

The BPU staff review agreed with DeGesero on one point --- it suggested that IT customers be required in the future to show proof of adequate back-up supplies. "Given the magnitude of the volumes involved, it is unlikely that this would have a significant effect [on] the price of heating oil," it said, but it's "worth considering as part of a future, overall response plan."

But any proposal that would require New Jersey utilities to continue serving IT gas customers during the peak winter period would do more harm than good, the review warned. First, it would lead to the "subsidization of these customers by all firm [gas] customer classes, including residential customers." DeGesero criticized the BPU for failing to recognize that heating-oil customers are the ones subsidizing the IT customers. Also, it would require "significant investment and take years to install" a distribution system to serve IT customers on a year-round basis," the BPU staff review noted.

Moreover, the resulting high tariff rates "would undoubtedly make it uneconomical for large [IT] customers to avail themselves of the year-round service," causing them to "burn an alternative fuel continuously and further complicate the [fuel-oil] supply situation," according to the BPU staff.

But DeGesero disagreed. "If interruptible customers were more frequent consumers of their alternate fuel source, it would have less of an impact since refiners, wholesalers and retailers could more accurately gauge the consumption and plan for it."

Although the rate of service interruptions to industrial and commercial customers on its system during January was the highest in five years, a Public Service Electric and Gas Co. (PSE&G) official told New Jersey regulators the impact of the interruptions on the usage and price of home-heating oil was "negligible."

For starters, the percentage of gas load that was interrupted, forcing customers to switch to heating oil as a back-up fuel source, accounted for a small portion of PSE&G's total sendout Jan. 14-26, ranging from 6% (125,000 Dth/d) to 16% (380,000 Dth/d), David W. Wohlfarth, general manager of gas supply, said at the hearing last week.

Wohlfarth also pointed out the largest class of PSE&G's IT customers, which are served under its IT transportation tariff, uses No. 6 oil as an alternate fuel, not the No. 2 fuel oil commonly used by homeowners to heat their houses. And none of its large IT contract cogeneration customers use No. 2 oil, but rather consume Jet A fuel, kerosene or butane as alternative fuels. "There's no difference" between kerosene and fuel oil, FMA's DeGesero shot back. "It's the same product."

The IT customers play a "critical role" in PSE&G's supply and capacity mix, said Wohlfarth, who added that any move to require them to contract for year-round service would "undermine" that delicate balance.

Susan Parker

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