NiSource subsidiary Northern Indiana Public Service (NIPSCO) filed a motion for clarification of an order issued by Indiana regulators in September that will require the utility to refund gas customers $3.8 million and make significant modifications to its use and valuation of gas storage, and its hedging and gas volatility mitigation measures. However, the company decided late on Friday not to appeal the order, said NIPSCO spokesman Larry Graham.

It was the first time Indiana regulators had ordered a refund based on NIPSCO’s purchased gas adjustment (PGA) mechanism. State regulators agreed with the state consumer advocate that NIPSCO’s gas purchasing and hedging methods were flawed and in some cases even exposed customers to greater price volatility than the wholesale spot market.

The Indiana Utility Regulatory Commission (IURC) ordered NIPSCO to make the refund in three installments beginning in November. It works out to about $1.20 per month for a typical residential customer.

The Office of Utility Consumer Counselor (OUCC) protested a 28% hike in NIPSCO’s gas prices in March. The rate hike was made through the utility’s PGA, which is supposed to reflect the actual cost of gas purchased by the utility. However, the OUCC said the utility relied almost solely on storage gas as its volatility mitigation strategy, and its storage costs were unusually volatile because of a complex method NIPSCO uses to price storage.

It uses a predicted cost of gas rather than its actual purchase price. “Consequently, the price of storage gas reflected in NIPSCO’s GCA filings is actually more volatile — not less — than comparable wholesale market prices,” the OUCC told the commission.

In addition, it said NIPSCO’s gas purchasing strategies lacked what most individual retirement plans require: diversification. The utility purchased little, if any, of its gas on long-term contracts and instead relied on volatile spot market and first of the month index purchases to meet customer needs.

Under the utility’s PGA, it must prudently endeavor to purchase gas at the lowest cost available and with the least amount of volatility possible. State regulators agreed with the OUCC that the utility was not following those guidelines and ordered the refund.

The IURC also ordered NIPSCO to put in place effective April 1, 2004, a new methodology for pricing storage gas based on actual purchase costs and Nymex futures prices for expected forward costs. In addition, the utility must implement additional hedging methods to ensure that costs are locked in for a larger portion of its gas purchases.

The utility provides natural gas service to 700,000 customers in 28 counties throughout northern Indiana.

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