Refusing to go down without a fight, Salt Lake City-based Questar Corp. said Sunday that it would pursue available legal and regulatory alternatives in response to a Utah Supreme Court decision on Aug. 1, which rejected the recovery of certain natural gas-processing costs incurred by its retail natural gas distribution subsidiary Questar Gas Co.

The court on Friday reversed an order by the Public Service Commission of Utah (PSCU) allowing Questar Gas to collect $5 million a year in rates to recover costs associated with removing carbon dioxide in gas prior to delivery to its residential customers. The court ruled that the PSCU, in an Aug. 11, 2000, order approving a stipulation, did not comply with its statutory responsibilities and regulatory procedures.

The supreme court’s order was issued in response to an appeal by the Committee of Consumer Services, a Utah state agency. The committee opposed the PSCU decision. The State Division of Public Utilities and various industrial customers supported the commission’s decision.

The court said the PSCU “correctly recognized Questar Gas’s obligation to secure the safety of its customers …” but made an error in not formally determining the prudence of the utility’s actions.

“We intend to work with the PSCU to resolve this,” said Keith O. Rattie, Questar CEO. “Questar Gas had to respond to a serious safety situation that we had to address. The court’s concerns about the commission’s decision-making process notwithstanding, Questar Gas did the right thing for its customers and should be allowed to recover its costs.”

Questar Gas said it will continue to seek recovery of CO2-processing costs incurred since June 1999, and to ensure recovery of future processing costs. Under past commission orders, the company has recovered in rates approximately $21 million for gas processing.

The problem dates back to the early 1990s, when the heat content of gas flowing on Questar Pipeline started declining for a variety of reasons, Questar said. The declining heat content of gas flowing into Questar Gas’s system from Questar Pipeline — while meeting pipeline specifications — could eventually pose a serious safety hazard for Questar Gas customers.

In the long term, Questar Gas said its customers will have to adjust their appliances to burn the lower-Btu gas safely. However, in 1997, Questar Gas found that the lowest cost alternative was to contract with Questar Pipeline to extract CO2, which has the effect of raising the heat content. This would give Questar Gas customers several years to adjust their appliances.

For CO2 removal, the average customer would pay about $5 to $6 more per year, far less than the next best alternative. Questar noted that Questar Gas customers historically have their appliances set to burn gas with a higher heat content than what is typical for other LDCs throughout the U.S. because of the composition of regional gas supplies.

Pending the outcome of the company’s initiatives, Questar Gas and Questar Corp. are reflecting in their second-quarter results a liability for revenues that had been included in rates. With the estimated $13.6 million, or $0.16 per diluted share, after-tax liability, Questar Gas had an adjusted loss of $16.5 million dollars in the second quarter of 2003 versus the previously announced $2.8 million loss. As a result, Questar Corp.’s adjusted second-quarter net income was $20.3 million, or $0.24 per diluted share, compared with the previously announced $33.9 million, or $0.40 per share. The companies added that recording the liability will have no material impact on their credit, cash or liquidity.

Seeking to put the order into “proper perspective,” Rattie reaffirmed the company’s previous guidance that 2003 earnings — excluding the one-time charge — would be in the range of $2.10 to $2.25 per share. He said the guidance is based on the assumption that natural gas prices remain at or near the levels reflected in the forward commodity-price curve on Thursday, July 31.

“We acted responsibly and effectively to protect the safety of our customers,” said Alan K. Allred, Questar Gas CEO. “We incurred these costs in good faith. This was the lowest cost solution for our customers. We thought this issue had been resolved at the PSCU in 2000. We are surprised and dismayed that we have not finally resolved the question of our ability to recover these necessary and legitimate costs. We will pursue this issue to show that we acted prudently. We continue to believe that past and future costs are recoverable in our rates.”

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