New York State regulators Wednesday voted to adopt, with modifications, the terms of an amended joint proposal raising the rates of Corning Natural Gas Corp., but requiring the company to credit customers with $1.4 million for “excessive gas commodity costs” last winter when the utility had to receive emergency supplies of natural gas from other utilities because it was running out of gas and credit. The regulatory action came after a Pennsylvania distribution company, C&T Enterprises, earlier in the month agreed to buy Corning.

Last winter the New York Public Service Commission (NYPSC) issued an emergency call for gas supplies for Corning because the utility failed to fill storage last spring and early summer when prices were much lower and then ran into a cash flow problem as gas prices rose into the late summer and shot sharply higher following the hurricanes. From downstate, KeySpan Energy stepped into the breach to guarantee firm deliveries for the winter to Corning’s 14,500 gas customers in a 400-square-mile gas distribution territory in the Finger Lakes area of New York (see Daily GPI, Oct. 28, 2005; Nov. 14, 2005; Nov. 28, 2005).

The NYPSC comprehensive plan approved Wednesday resolves several issues related to the rates and operations of the company. Besides the customer credit, it includes an end to the $1.50/Mcf surcharge on gas costs as of May 31, new delivery rates that will take effect on June 1 and specific steps the company must take to improve operations.

The commission also voted to adopt terms that differ from the joint proposal, including the elimination of proposed rate recovery of salary increases and bonuses for executive officers.

“Back in October, there was a great deal of uncertainty and concern about Corning’s ability to provide gas supply and service to its customers,” said commission Chairman William M. Flynn. “The plan adopted today specifies in great detail what must be done to improve the operations of Corning Natural Gas, and establishes a clear road map for the future by providing the resources necessary to provide safe and reliable gas delivery service.

“The performance targets, and the negative financial consequences the company will incur for failing to achieve them, will help to ensure that the necessary improvements are made.”

In order to ensure that the company receives the necessary revenues required to effectively operate and maintain its gas distribution system, Corning’s rates for gas delivery service will increase by $2.7 million per year effective June 1. The $2.7 million revenue increase is based on an extensive cost-of-service evaluation. Besides administrative expenses, the additional revenues will strengthen the company’s ability to repair and replace portions of the gas delivery system and to obtain financing to support the new gas asset management agreement under which gas procurement, pipeline capacity management and gas storage functions would be performed by Virginia Power Energy Marketing.

The comprehensive plan also includes a number of terms, performance targets and incentive mechanisms designed to ensure that the company avoids a recurrence of the operating problems experienced in the past, and to ensure that management improves operations in the future. The areas covered are diverse and well beyond what is normally necessary to ensure reasonable utility operations, the commission said. To the extent that Corning fails to meet the performance standards for distribution system improvements, health and safety reporting, gas procurement, management of gas storage and transmission capacity, and accounting procedures, money that would otherwise go to company shareholders will be credited to customers.

Under the incentive program, Corning will be at risk each year for more than $519,000, or approximately 100% of the company’s expected annual profits. Comments in support of the joint proposal and amendment were submitted by Corning Natural Gas; the Bath Electric, Gas & Water Systems; Multiple Intervenors (an association of more than 50 industrial, large commercial and institutional energy consumers); and the NYPSC staff. Fortuna Energy Inc. (a large gas producer) also supports part of the joint proposal.

The proposed acquisition of Corning Natural Gas by C&T Enterprises was not addressed by the state regulators Wednesday and will require future consideration and action by the commission. On May 15, Corning and C&T filed a joint petition requesting commission approval of their proposed transaction. That petition will be considered in the near future.

C&T Enterprises, based in Lewisburg, PA, has agreed to acquire the stock of Corning Natural Gas, subject to customary conditions. C&T Enterprises is a jointly owned subsidiary of Claverack and Tri-County Rural Electric Cooperatives, which owns one natural gas distribution company, Valley Energy of Sayre, PA, along with two electric utilities, Wellsboro Electric Co. of Wellsboro, PA and Citizens’ Electric Co. of Lewisburg. C&T will pay to the holders of Corning’s common stock $6.94 million in cash at closing, plus an amount equal to cash on the books of Corning’s subsidiary at the time of closing. The purchase price is subject to other potential upward and downward adjustments.

The gas company will be governed by a board of directors made up of citizens from the Corning community as well as directors from the C&T operating companies. The company will continue to be regulated by the NYPSC.

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