Gas marketers said last week a preliminary unbundling ruling bythe Connecticut Department of Public Utility Control (DPUC) allowsthe state’s local distribution utilities to erect “insurmountablebarriers to entry” into the retail gas market and will snuff outwhat little competition exists today.

The major areas of concern are the steep penalties for dailybalancing and monthly cash-out provisions in the unbundling tariffsof Yankee Gas Service (YGS) and Connecticut Natural Gas (CNG).Marketers say the penalties can be “75 times greater” than those ofupstream pipelines and the cash outs allow the LDCs to chargebasically whatever they want.

“The commission has a stated policy of increasing transportationand making sure all the customers in Connecticut enjoy the benefitsof competition. We don’t think this decision is going to get usthere,” Statoil Energy’s Martha Duggan said on behalf the marketersparticipating in the unbundling proceeding, who include AllEnergyMarketing, Conectiv/CNE Energy Services, Enron Energy Services andUtiliCorp United.

“All of the marketers are very concerned about the penaltyprovisions generally that are related to daily balancing. We findthose proposed by Yankee Energy particularly [onerous],” said SusanKovino, director of government affairs for Enron Energy Services.

Yankee is proposing a $30/Dth penalty and a 10% tolerance ondaily deliveries throughout the year. Connecticut Natural isproposing an initial penalty of $15/Dth for being out of balance ona daily basis, but the penalty can escalate to $238/Mcf by thefifth imbalance offense, the marketers noted in an Exception filedwith the DPUC last Wednesday. “That contrasts very sharply withwhat other LDCs are requiring,” said Kovino. “The kinds ofpenalties Yankee is proposing usually are associated with acritical day, a very cold day in winter. Not only would this beyear-round but it also would apply to over-deliveries.”

Yankee’s Chuck Goodwin, however, said the penalty levels arenothing new. They’ve been in use for two and a half years. “Why dowe have a $30 penalty charge? We’ve had a $30 penalty charge sinceour firm transportation program was approved in April 1996. Andwe’ve had a $30 penalty charge in other rates for several years.The difference is up until this point there has been no dailybalancing provision in our FT2 rates,” which typically are moreeconomic for mid-sized commercial and industrial customers ratherthan the largest customers. Without a balancing penalty in the FT2rate schedule, however, many larger FT1 transportation customershave migrated over to the more expensive FT2 service. Over time,the more expensive FT2 service actually has been more economicbecause transporters can avoid paying steep balancing penalties.But that has meant Yankee’s firm bundled sales customers have hadto pick up a growing tab for marketer and large transportationcustomer imbalances.

“All [we’re] doing is to take the FT1 balancing and penaltyprovisions and applying them also to FT2 rates for the purpose ofeliminating the [subsidy] that is today being paid for by our salescustomers,” said Goodwin. Yankee estimates the annual cost ofproviding free balancing to FT2 customers over the last 12 monthswas $2.1 million, paid for by bundled firm sales customers throughYankee’s purchased gas adjustment mechanism. “It’s the DPUC’sobjective to see that that subsidy goes away,” he said. All of therevenue generated from penalties will flow back to bundled salescustomers through the PGA.

But marketers claim charging daily balancing penalties to FT2customers “threatens to eliminate not only the possibility of aworkably competitive marketplace in Connecticut, but also theeconomics of the current transportation programs offered by YankeeGas Service Co. and Connecticut Natural Gas Corp.”

Not true, says Goodwin. Most marketers doing business behind thecitygate currently can avoid paying penalties by buying Yankee’soptional balancing service for a fee based on upstream pipeline andstorage tariffs. The service allows marketers to deliver whateverquantity they want to the citygate. “That same service will existin the future. So the issue they have most disagreement with usabout frankly doesn’t impact the majority of the load that they areserving. I think their comments are somewhat overstated,” saidGoodwin.

In their exception last week, the marketers said Yankee’sargument about the optional balancing service is what “one wouldexpect from a protected, regulated monopoly. Essentially, YGS issaying, if a supplier does not like or cannot take the risk ofincurring YGS’s excessive daily balancing penalties, it canpurchase another monopoly service that no other entity can provide.Therefore, in practice, the ‘optional’ balancing service is nooption at all.” Furthermore, the marketers said, the optionalbalancing service fees are nearly as excessive as the dailybalancing penalties.

The marketers urged the DPUC to reject, modify or at minimumdelay implementation of daily balancing penalties until LDCs fileanother unbundled rate schedule next year with different balancingrequirements. If in its final ruling the department allow the LDCsto go forward with their proposed penalties, it should at leastallow marketers to trade imbalances as FERC has done in theinterstate pipeline transportation market, the marketers said.

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

“Unlike the fair indexed-based cash outs the marketers thoughtwere required by the department’s decision.as adopted by SouthernConnecticut Gas Co., YGS and CNG are able to set their own cash outprices by running their propane-air peaking systems in off-peakperiods or imprudently buying above-market-priced gas whenmarket-priced gas is available,” marketers said. “If YGS or CNGbuys 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 therange of $2/Mcf.”

Statoil’s Duggan noted Yankee’s cash out provisions are muchmore strict and onerous than what the LDCs themselves live underwith the interstate pipelines. “It’s a big risk for any marketer toget into that market. We’re hopeful that with a few months ofoperational experience under these new rules that we can go back tothe commission and say this isn’t working. We would hope thecommission would then take another look at its decision.” The DPUCdraft order ruled the LDCs can use the cash-out proposals filed butalso must calculate cash out using a spot market index. The twomethods will be evaluated at a later date.

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

Rocco Canonica

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