New Jersey’s largest publicly owned utility has asked stateregulators to take natural gas competition to its next logical stepby giving it the green light to begin selling gas to all customerclasses at market-based rates in 2003.

Specifically, Public Service Electric and Gas (PSE&G) haspetitioned the state Board of Public Utilities (BPU) to eliminatethe existing levelized gas adjustment clause (LGAC) — an annualmechanism on which gas prices to utility customers are based — infavor of commodity prices being adjusted on a month-to-month basis”subject to the vagaries of the market.” The utility proposes tomake “extensive use” of NYMEX pricing in developing market-basedprices for industrial, commercial and residential gas customers.

The current pricing mechanism for gas has stalled unbundling inthe New Jersey gas market because it has created the misconceptionthat it’s more economically attractive for customers to purchasetheir gas from PSE&G than from competing, third-party gassuppliers, said David Wohlfarth, the utility’s general manager ofgas supply.

“A customer buying from us under the levelized cost mechanism[is] buying gas at a price one half of the market [price]. Athird-party supplier, who is buying gas at that market price,obviously can’t compete [with us],” he noted. “Now that doesn’tmean our customers are getting some ride because sooner or laterthey’re going to have to pay that higher price” under the currentmodel. “It’s just a matter of timing.” The LGAC mechanism allowsutilities to pass through higher costs to customers.

Even though the payment of market prices has simply beendeferred under the LGAC, utility gas customers in New Jersey havechosen for the most part to stay with their regulated utilityproviders, said Wohlfarth, who added this has been “verydisruptive” to the gas competition because it “affects the abilityof third-party suppliers to sell into the market.”

While PSE&G’s 1.6 million gas customers have had choice fornearly a year now, “the residential market.has hardly moved at all[from the utility], and the industrial and commercial market hasactually seen a migration away from third-party suppliers to ourown sales service,” he noted.

In filing this petition, PSE&G is attempting to “move wayfrom a [pricing] model that doesn’t work for a competitive market.”In fact, if the BPU should approve the utility’s request, Wohlfarthbelieves it would be the “final step” in the unbundling process inthe state.

Critics questioned the wisdom of removing the state from itsrole in setting gas commodity prices. In response, PSE&G notedthat its proposal incorporates protections for customers. For one,it seeks to freeze the rate component for Non-Gulf Coast Costs —fixed costs incurred by the utility to buy firm gas supply andtransportation from pipelines and other providers — at 12.487cents/therm for the winter months and 5.296 cents/therm for summeruntil Jan. 1, 2003. At that time, the utility would move tocomplete its transition to full market-based pricing, which wouldinclude a floor and a ceiling to protect customers, according toWohlfarth.

Moreover, its proposal seeks to shift risk for recovery ofPSE&G’s costs from utility customers to an unidentifiedunregulated affiliate, he said. To accomplish this, the utilityproposes to transfer its gas supply, transportation and storagecontracts to the unregulated affiliate, which then would contractwith PSE&G so it can supply those customers who have chosen toremain with the utility rather than switch to third-partysuppliers. The PSE&G affiliate would assume the risk for all ofthe transferred contracts until “at least” Dec. 31, 2002, and would”permanently” take on the risk for “at least half” of the contractsafterwards.

It’s been estimated that the costs of PSE&G’s existingcontract portfolio exceeds its market value by $174 million. Bytransferring the contracts to an unregulated affiliate, the utilitycontends customers would avoid “a portion and potentially theentirety of this potential liability.”

“Finally, in order to further improve access to our market, wehave proposed a voluntary capacity release program. This wouldallow third-party suppliers to obtain firm capacity from theunregulated entity at its average cost” to serve customers inPSE&G’s market area, Wohlfarth said.

Susan Parker

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