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NY PSC Cites LDC for Failing to Line Up Winter Supply; Takes 'Extraordinary' Actions

November 14, 2005
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While the major gas distributors in the state of New York are close to meeting their Nov. 1 storage inventory targets despite hurricane curtailments, the New York State Public Service Commission (NY PSC) said last Thursday it was concerned about the preparedness and reliability of one smaller investor-owned utility, Corning Natural Gas Corp. The commission took the "extraordinary actions" of calling on other gas companies in the state to provide supply to Corning on a mutual-aid assistance basis, and ordered Corning to show cause why a temporary operator should not be appointed to manage the utility.

The NYPSC's winter preparedness review unearthed concerns about Corning's ability to provide adequate service to 14,500 gas customers in the Finger Lakes region of New York State this winter. Corning has a 400-square-mile gas distribution territory including 15 townships. Staff's concerns stem from the combination of significantly higher gas costs, the company's cash-flow situation, and its failure to procure fixed-price commodity hedges. A commission spokesman said a real concern is that the Corning, NY-based company has failed to contract adequate deliveries for the winter. The company also has had problems with its gas acquisition during the past two winters.

In the Order Instituting Proceeding and to Show Cause (CASE 05-G-1268), the New York Commission staff estimated the company would run out of cash and credit during the period of December 2005 through February 2006 and would not be able to purchase adequate gas supplies after that. The commission staff already had urged Corning to seek the assistance of other gas corporations that could supply gas to Corning on a mutual-aid basis, but the company has been unsuccessful.

The NY PSC's proceeding will examine whether a public emergency exists, identify other gas corporations with access to needed gas supplies, and establish conditions for the transfer of available gas supplies to Corning. It also will examine why a temporary operator should not be required to manage the company's gas procurement, accounting and fiscal operations.

The order noted that in December 2002, the commission acted to bolster the company's equity position after Corning's management drained the company's equity base by declaring large shareholder dividends over a period of several years.

This year since the company did not start its storage fill early in the season, it has been disproportionately affected by the recent hurricane-related price spikes. As of Aug. 31, 2005, Corning's storage was only 57% full, compared to a fill level range of approximately 75 to 80% for the other gas LDCs. So rather than storage fill in the $6-$7/Dth range, it has been forced to make up the deficit at a price of nearly $14/dth.

The staff "is concerned that Corning customers will see winter bills that are approximately 55% higher than last year, compared to statewide average bill impacts of approximately 30-45%." The average cost of gas in storage for all the state's utilities for the upcoming winter season is $7.02/Dth, an increase of 24% compared to last year's average storage cost of $5.66/Dth.

To sign on supplies Corning has had to sign a stringent pre-payment agreement, making payments about two months before it receives revenues, which aggravates the cash flow problem.

The volume of Corning's gas storage and customer requirements is relatively small when compared to the other major gas LDCs in the region, the Commission noted and under normal circumstances, it would not be a problem for these larger gas LDCs to share the job of providing gas to Corning. Because of this summer's hurricanes, however, there is some supply uncertainty.

The PSC notes the law provides that upon finding after investigation and a hearing, that a public emergency exists as a result of a shortage of gas, the Commission may require an LDC with excess gas to share with a company in need. It would be compensated for the gas, possibly by having payments by customers after the gas is delivered, put in an escrow account to pay the contributing LDCs.

The PSC order said its staff believes Corning has demonstrated it is incapable of performing procurement and related fiscal tasks to run a gas distribution company effectively or even maintain adequate records, so it "may be appropriate to require that a temporary operator assume responsibility for Corning's gas procurement, accounting and finance functions." The company was directed to show cause why a temporary operator should not be installed.

Corning officials could not be reached for comment.

Commission Chairman William M. Flynn has sent a staff team from the department for on-site monitoring at the company's headquarters. In addition, the Commission will schedule informational forums in Corning's service territory to explain last Thursday's actions and answer questions.

The rest of New York's local distribution companies (LDCs) as of this week have successfully replaced over three-quarters of the supplies lost to this summer's hurricanes, reducing to approximately 1.2% the amount of the state's overall winter requirement still in question, the staff report said. "As a result of the tighter than normal gas supply situation, it's possible that interruptible customers could face more frequent service interruptions than in previous years."

New York's Department of Public Service staff monitors, among other things, gas supply portfolios, pipeline capacity, storage inventories, contract strategies and commodity pricing. Staff reported that Hurricanes Katrina and Rita initially disrupted 5% to 10% of winter gas supply, depending on the utility.

The Commission already has enhanced and expanded its "Have an Energy Smart Winter" consumer energy-saving campaign, and its chairman asked each of the utilities to voluntarily expand their customer outreach and education efforts as well. Each of New York's natural gas utilities has responded to the critical need to raise awareness about higher natural gas prices and the steps consumers can take to better manage winter heating bills, the PSC said.

In New York State, there are about 3 million customers or 50% of the households in the state which heat with natural gas.

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