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PSE&G Seeks End to State Regulation of Gas Prices

PSE&G Seeks End to State Regulation of Gas Prices

New Jersey's largest publicly owned utility has asked state regulators to take natural gas competition to its next logical step by giving it the green light to begin selling gas to all customer classes at market-based rates in 2003.

Specifically, Public Service Electric and Gas (PSE&G) has petitioned the state Board of Public Utilities (BPU) to eliminate the existing levelized gas adjustment clause (LGAC) --- an annual mechanism on which gas prices to utility customers are based --- in favor of commodity prices being adjusted on a month-to-month basis "subject to the vagaries of the market." The utility proposes to make "extensive use" of NYMEX pricing in developing market-based prices for industrial, commercial and residential gas customers.

The current pricing mechanism for gas has stalled unbundling in the New Jersey gas market because it has created the misconception that it's more economically attractive for customers to purchase their gas from PSE&G than from competing, third-party gas suppliers, said David Wohlfarth, the utility's general manager of gas supply.

"A customer buying from us under the levelized cost mechanism [is] buying gas at a price one half of the market [price]. A third-party supplier, who is buying gas at that market price, obviously can't compete [with us]," he noted. "Now that doesn't mean our customers are getting some ride because sooner or later they're going to have to pay that higher price" under the current model. "It's just a matter of timing." The LGAC mechanism allows utilities to pass through higher costs to customers.

Even though the payment of market prices has simply been deferred under the LGAC, utility gas customers in New Jersey have chosen for the most part to stay with their regulated utility providers, said Wohlfarth, who added this has been "very disruptive" to the gas competition because it "affects the ability of third-party suppliers to sell into the market."

While PSE&G's 1.6 million gas customers have had choice for nearly a year now, "the residential market.has hardly moved at all [from the utility], and the industrial and commercial market has actually seen a migration away from third-party suppliers to our own sales service," he noted.

In filing this petition, PSE&G is attempting to "move way from a [pricing] model that doesn't work for a competitive market." In fact, if the BPU should approve the utility's request, Wohlfarth believes it would be the "final step" in the unbundling process in the state.

Critics questioned the wisdom of removing the state from its role in setting gas commodity prices. In response, PSE&G noted that 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 and transportation from pipelines and other providers --- at 12.487 cents/therm for the winter months and 5.296 cents/therm for summer until Jan. 1, 2003. At that time, the utility would move to complete its transition to full market-based pricing, which would include a floor and a ceiling to protect customers, according to Wohlfarth.

Moreover, its proposal seeks to shift risk for recovery of PSE&G's costs from utility customers to an unidentified unregulated affiliate, he said. To accomplish this, the utility proposes to transfer its gas supply, transportation and storage contracts to the unregulated affiliate, which then would contract with PSE&G so it can supply those customers who have chosen to remain with the utility rather than switch to third-party suppliers. The PSE&G affiliate would assume the risk for all of the transferred contracts until "at least" Dec. 31, 2002, and would "permanently" take on the risk for "at least half" of the contracts afterwards.

It's been estimated that the costs of PSE&G's existing contract portfolio exceeds its market value by $174 million. By transferring the contracts to an unregulated affiliate, the utility contends customers would avoid "a portion and potentially the entirety of this potential liability."

"Finally, in order to further improve access to our market, we have proposed a voluntary capacity release program. This would allow third-party suppliers to obtain firm capacity from the unregulated entity at its average cost" to serve customers in PSE&G's market area, Wohlfarth said.

Susan Parker

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