Marketers Slam CT Draft Unbundling Ruling

Gas marketers said last week a preliminary unbundling ruling by the Connecticut Department of Public Utility Control (DPUC) allows the state's local distribution utilities to erect "insurmountable barriers to entry" into the retail gas market and will snuff out what little competition exists today.

The major areas of concern are the steep penalties for daily balancing and monthly cash-out provisions in the unbundling tariffs of Yankee Gas Service (YGS) and Connecticut Natural Gas (CNG). Marketers say the penalties can be "75 times greater" than those of upstream pipelines and the cash outs allow the LDCs to charge basically whatever they want.

"The commission has a stated policy of increasing transportation and making sure all the customers in Connecticut enjoy the benefits of competition. We don't think this decision is going to get us there," Statoil Energy's Martha Duggan said on behalf the marketers participating in the unbundling proceeding, who include AllEnergy Marketing, Conectiv/CNE Energy Services, Enron Energy Services and UtiliCorp United.

"All of the marketers are very concerned about the penalty provisions generally that are related to daily balancing. We find those proposed by Yankee Energy particularly [onerous]," said Susan Kovino, director of government affairs for Enron Energy Services.

Yankee is proposing a $30/Dth penalty and a 10% tolerance on daily deliveries throughout the year. Connecticut Natural is proposing an initial penalty of $15/Dth for being out of balance on a daily basis, but the penalty can escalate to $238/Mcf by the fifth imbalance offense, the marketers noted in an Exception filed with the DPUC last Wednesday. "That contrasts very sharply with what other LDCs are requiring," said Kovino. "The kinds of penalties Yankee is proposing usually are associated with a critical day, a very cold day in winter. Not only would this be year-round but it also would apply to over-deliveries."

Yankee's Chuck Goodwin, however, said the penalty levels are nothing new. They've been in use for two and a half years. "Why do we have a $30 penalty charge? We've had a $30 penalty charge since our firm transportation program was approved in April 1996. And we've had a $30 penalty charge in other rates for several years. The difference is up until this point there has been no daily balancing provision in our FT2 rates," which typically are more economic for mid-sized commercial and industrial customers rather than the largest customers. Without a balancing penalty in the FT2 rate schedule, however, many larger FT1 transportation customers have migrated over to the more expensive FT2 service. Over time, the more expensive FT2 service actually has been more economic because transporters can avoid paying steep balancing penalties. But that has meant Yankee's firm bundled sales customers have had to pick up a growing tab for marketer and large transportation customer imbalances.

"All [we're] doing is to take the FT1 balancing and penalty provisions and applying them also to FT2 rates for the purpose of eliminating the [subsidy] that is today being paid for by our sales customers," said Goodwin. Yankee estimates the annual cost of providing free balancing to FT2 customers over the last 12 months was $2.1 million, paid for by bundled firm sales customers through Yankee's purchased gas adjustment mechanism. "It's the DPUC's objective to see that that subsidy goes away," he said. All of the revenue generated from penalties will flow back to bundled sales customers through the PGA.

But marketers claim charging daily balancing penalties to FT2 customers "threatens to eliminate not only the possibility of a workably competitive marketplace in Connecticut, but also the economics of the current transportation programs offered by Yankee Gas Service Co. and Connecticut Natural Gas Corp."

Not true, says Goodwin. Most marketers doing business behind the citygate currently can avoid paying penalties by buying Yankee's optional balancing service for a fee based on upstream pipeline and storage tariffs. The service allows marketers to deliver whatever quantity they want to the citygate. "That same service will exist in the future. So the issue they have most disagreement with us about frankly doesn't impact the majority of the load that they are serving. I think their comments are somewhat overstated," said Goodwin.

In their exception last week, the marketers said Yankee's argument about the optional balancing service is what "one would expect from a protected, regulated monopoly. Essentially, YGS is saying, if a supplier does not like or cannot take the risk of incurring YGS's excessive daily balancing penalties, it can purchase another monopoly service that no other entity can provide. Therefore, in practice, the 'optional' balancing service is no option at all." Furthermore, the marketers said, the optional balancing service fees are nearly as excessive as the daily balancing penalties.

The marketers urged the DPUC to reject, modify or at minimum delay implementation of daily balancing penalties until LDCs file another unbundled rate schedule next year with different balancing requirements. If in its final ruling the department allow the LDCs to go forward with their proposed penalties, it should at least allow marketers to trade imbalances as FERC has done in the interstate pipeline transportation market, the marketers said.

Marketers also took issue with the DPUC's preliminary approval of monthly cash-out provisions for Connecticut Natural and Yankee that will charge the LDCs' highest monthly commodity costs to marketers for under-deliveries of more than 5% to the citygate during the month and will allow the LDCs to pay their lowest commodity costs to marketers for over-deliveries more than 5%. Marketers recommended using a well known index for calculating cash-out payments for imbalances. Goodwin said Yankee chose not to use the index-based method because Yankee believes it would be more different from actual costs of service that the high-low method. Southern Connecticut was the only LDC willing to use an index-based cash out.

"Unlike the fair indexed-based cash outs the marketers thought were required by the department's adopted by Southern Connecticut Gas Co., YGS and CNG are able to set their own cash out prices by running their propane-air peaking systems in off-peak periods or imprudently buying above-market-priced gas when market-priced gas is available," marketers said. "If YGS or CNG buys 1 Mcf of $10 gas in a month, the cash out base will be $10, even if the published indices throughout the month were in the range of $2/Mcf."

Statoil's Duggan noted Yankee's cash out provisions are much more strict and onerous than what the LDCs themselves live under with the interstate pipelines. "It's a big risk for any marketer to get into that market. We're hopeful that with a few months of operational experience under these new rules that we can go back to the commission and say this isn't working. We would hope the commission would then take another look at its decision." The DPUC draft order ruled the LDCs can use the cash-out proposals filed but also must calculate cash out using a spot market index. The two methods will be evaluated at a later date.

Oral arguments in this case take place Oct. 26 and a final department decision on the matter is due Oct. 28.

Rocco Canonica

©Copyright 1998 Intelligence Press, Inc. All rights reserved. The preceding news report may not be republished or redistributed in whole or in part without prior written consent of Intelligence Press, Inc.