New Jersey’s largest publicly owned utility has asked stateregulators to give it the green light to begin selling natural gasat market-based rates in 2003.

Specifically, Public Service Electric and Gas (PSE&G) haspetitioned the state Board of Public Utilities (BPU) to eliminatethe existing levelized gas adjustment clause (LGAC) — an annualmechanism on which gas prices to utility customers are based — infavor of commodity prices being adjusted on a month-to-month basis”subject to the vagaries of the market.”

The current pricing mechanism for gas has stalled unbundling inthe New Jersey gas market because it has created the misconceptionthat it’s more economically attractive for customers to purchasetheir gas from PSE&G than from competing, third-party gassuppliers, said David Wohlfarth, the utility’s general manager ofgas supply.

“A customer buying from us under the levelized cost mechanism[is] buying gas at a price one half of the market [price]. Athird-party supplier, who is buying gas at that market price,obviously can’t compete [with us],” he noted. “Now that doesn’tmean our customers are getting some ride because sooner or laterthey’re going to have to pay that higher price” under the currentmodel. “It’s just a matter of timing.”

Even though the payment of market prices has simply beendeferred, utility gas customers in New Jersey have chosen for themost part to stay with their regulated utility providers, saidWohlfarth, who added this has been “very disruptive” to the gascompetition because it “affects the ability of third-partysuppliers to sell into the market.”

While PSE&G’s 1.6 million gas customers have had choice fornearly a year now, “the residential market…has hardly moved atall [from the utility], and the industrial and commercial markethas actually seen a migration away from third-party suppliers toour own sales service,” he noted.

In filing this petition, PSE&G is attempting to “move awayfrom a [pricing] model that doesn’t work for a competitive market.”In fact, if the BPU should approve the utility’s request, Wohlfarthbelieves it would be the “final step” in the unbundling process inthe state.

Critics questioned the wisdom of removing the state’s role insetting gas commodity prices. In response, Wohlfarth noted thatcurrent rates would be frozen until 2003, and assuming there hasbeen a migration of customers from PSE&G to third-partysuppliers by then, the utility would move to complete itstransition to full market-based pricing, which would include afloor and a ceiling to protect customers.

Moreover, its proposal seeks to shift risk for recovery ofPSE&G’s costs from utility customers to an unidentifiedunregulated affiliate, he said. In a related move, the utilityproposes to transfer its gas supply, transportation and storagecontracts to the unregulated affiliate, which then would contractwith PSE&G to provide capacity so the utility can continue tosupply customers who have opted to remain rather than switch tothird-party suppliers.

“Finally, in order to further improve access to our market, wehave proposed a voluntary capacity release program. This wouldallow third-party suppliers to obtain firm capacity from theunregulated entity at its average cost,” Wohlfarth said.

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