natural gas - HMS Legal

Supplier Consolidated Billing Revisited

Todd Stewart on January 29, 2021

Back in 2018 I wrote an article explaining all the reasons why supplier consolidated billing (“SBC”) was a good idea.[1] Then, this morning, I saw an article in Energy Choice Matters, and it provided yet another reason why SBC should be the law.[2] In the ECM story, the recently announced strategic initiatives of FirstEnergy Corp. (“FE”) were discussed, including an initiative to expand its offerings of products and services other than commodity to its captive electric distribution customers. The FE press release extolled that these are “products and services that customers want” including energy efficient lighting, smart home products, maintenance, warranty, and home services. These are all products and services that electric generation suppliers (“EGS”) and natural gas suppliers (“NGS”) provide to their customers and similarly wish to bill along with the commodity charges on a single bill. The discussion makes it clear that FE believes that the billing relationship with customers is a key means of providing value to customers in the form of desirable products and services conveniently billed along with energy while providing incremental income opportunities for the provider of that commodity. The article reveals another data point and strengthens the argument for SBC on grounds that not allowing it demonstrates discrimination and lack of fairness.

It is ironic that it is FE that is making this announcement, because FE presently is involved in litigation over this very issue, i.e., that billing for its own products and services on the utility bill while refusing to bill for suppliers serving customers on its system, for the exact same products and services, is discriminatory. That matter is presently before the Pennsylvania Public Utility Commission and should be decided soon. Unfortunately, resolution of that case is not likely to result in supplier consolidated billing being permitted, but at least could provide more fairness, via access to the utility bill for non-commodity products and services, which is the second-best choice.

[1] https://www.hmslegal.com/why-the-skeptics-are-wrong-about-supplier-consolidated-billing

[2] http://www.energychoicematters.com/stories/20210128a.html.

PA Supreme Court Further Demolishes Act 13 in Robinson Township Remand Appeal

Whitney Snyder on September 30, 2016

On September 28, 2016, the Pennsylvania Supreme Court (Court) ruled[1] on a Commonwealth Court remand decision[2] of the Robinson Township 2013 Court decision,[3] where the Court held key provisions of Act 13[4] (the statute implementing major changes in Pennsylvania’s oil and gas laws and the ability of local government to regulate this industry) were unconstitutional (HMS Blog). In the 2016 Robinson Township decision, the Court: (1) upheld the Commonwealth Court’s holding that provisions related to Public Utility Commission (PUC) review of local ordinances are unseverable from unconstitutional provisions and thus unenforceable, and (2) held four additional provisions of Act 13, including the grant of eminent domain, unconstitutional.

The Supreme Court Decision

The Court agreed with the Commonwealth Court’s decision (HMS Blog) that provisions of Act 13 related to PUC and Commonwealth Court oversight of municipal zoning laws are unseverable from Sections 3303 and 3304, which prohibited local governments from enacting or enforcing environmental legislation regulating oil and gas operations and mandated that all ordinances regulating oil and gas be uniform, and that certain drilling activities be allowed in all zoning districts regardless of existing zoning laws. The Court’s 2013 plurality opinion found Sections 3303 and 3304 of Act 13 unconstitutional under the Environmental Rights Amendment of the Pennsylvania Constitution. Here, the Court held Act 13 Sections 3305 through 3309 are unseverable from Sections 3303 and 3304, and thus unenforceable, completely stripping the PUC of local zoning oversight under the Act.

The Court disagreed with the Commonwealth Court and ruled unconstitutional four other sections, including the Act’s grant of eminent domain power to entities transporting, selling, or storing natural gas that are not public utilities. Section 3241 granted corporations transporting, selling or storing natural gas the right to appropriate an interest in real property located in a storage reservoir or reservoir protective area if the area is or has been commercially productive of natural gas The Commonwealth Court had upheld the constitutionality of Section 3241 because its grant of eminent domain power to a corporation “empowered to transport, sell, or store natural gas in this Commonwealth” is the equivalent of the power traditionally conferred on public utilities that engage in similar activities. The Supreme Court disagreed, reasoning that Section 3241 conferred the power on a class of entities much broader than public utilities, and that corporations exercising eminent domain power under Section 3241would be acting with a primarily private purpose as opposed to a public purpose, in violation of both the Fifth Amendment of the U.S. Constitution and Article 1, Sections 1 and 10 of the Pennsylvania Constitution.

The Court held the other three sections of Act 13 unconstitutional as “special legislation” forbidden by Article III, Section 32 of the Pennsylvania Constitution:

Section 3218.1, requiring DEP to notify, after investigation, any public drinking water facility that could be affected by a spill;
Section 3222.1(b)(10), (the medical “gag rule”) limiting disclosure by the fracking industry to health professionals of identities and amounts used of chemicals claimed to be proprietary or trade secrets and only allowing disclosure where medical professional executes a confidentiality agreement and a statement that the information is needed for diagnosing or treating an individual; and
Section 3222.1(b)(11), allowing health professionals limited opportunity to request such information in a medical emergency and verbally agree to confidentiality and acknowledge purpose of information.

The Court enjoined further application and enforcement of these provisions, but stayed the injunction with respect to 3218.1, DEP spill notifications, for 180 days in order to give the General Assembly time to enact remedial legislation.

Justice Todd authored the opinion, in which Justices Donohue, Dougherty and Wecht joined, Chief Justice Saylor concurred and dissented, and Justice Baer concurred and dissented.

Public and Industry Reaction

The decision is clearly a win for both environmentalists and municipalities, which describe the decision as a recognition of citizen’s rights over the gas industry’s political power.[5] On the other hand, the industry claims the decision will not actually provide any environmental or safety benefits all the while increasing difficulty of investing and creating jobs.[6]

With many of Act 13’s provisions now unenforceable, it remains to be seen whether the General Assembly will be able to strike a balance between oversight and regulation of oil and gas drilling with the interests of citizens and the industry in future legislation. However, the 2013 plurality opinion in Robinson Township has given the Environmental Rights Act teeth and the Court’s 2016 decision has reinforced that the Court will closely scrutinize legislation that encourages natural resource development at the expense of private property rights and environmental concerns.

[1] Robinson Township v. Commonwealth of Pennsylvania, 104 MAP 2014, ___ A.3d ___ (Pa. Sept. 28, 2016).

[2] Robinson Township v. Commonwealth of Pennsylvania, 96 A.3d 1104 (Pa. Cmwlth. 2014).

[3] Robinson Township v. Commonwealth of Pennsylvania, 83 A.3d 901 (Pa. 2013).

[4] Act 13 of Feb. 14, 2012, P.L. 87 (Act 13).

[5] Susan Phillips, PA Supreme Court rules with environmentalists over remaining issues in Act 13, StateImpact (available at https://stateimpact.npr.org/pennsylvania/2016/09/28/pa-supreme-court-rules-with-environmentalists-over-remaining-issues-in-act-13/); see also Don Hopey, High court strikes down Pa. law on shale gas, Pittsburgh Post-Gazette, PowerSource (Sept. 28, 2016) (available at http://powersource.post-gazette.com/business/legal/2016/09/28/US-appeals-court-hears-arguments-in-Clean-Power-Plan-case-2/stories/201609280043).

[6] Id.

Despite Drilling Downturn, PA Natural Gas Production Grows

Melissa Chapaska on August 2, 2016

On August 1, 2016, The Pennsylvania Department of Environmental Protection (DEP) released its 2015 Oil and Gas Annual Report (Report).[1] In additional to natural gas production details, the Report provides information on natural gas data trends in Pennsylvania and details on DEP inspections. 2015 was a difficult year for the natural gas industry as it faced record inventory levels, declining prices, and decreases in newly drilled wells.[2] DEP confirms Pennsylvania was not immune to the national downturn in natural gas drilling with only 1,070 newly drilled wells in 2015 – more than a 50% decrease from the 2,163 new wells drilled in 2014.[3]

However, as the natural gas industry struggles to cope with a downturn in drilling, Pennsylvania maintains its position as the second-largest natural gas producer in the United States.[4] Pennsylvania was responsible for 4.6 trillion cubic feet of natural gas production in 2015 – a 13% increase from the 4.05 trillion cubic feet of natural gas produced in 2014.[5] While Marcellus Shale is still the main source of production, the Utica and Point Pleasant shales also contributed to Pennsylvania’s 2015 natural gas output.[6]

In addition to providing details on natural gas drilling and production, the Report highlights DEP’s regulatory compliance activities in 2015. While the number of well inspections increased in 2015, it wasn’t all bad news for the natural gas industry with DEP reporting a decrease in the number of violations associated with both unconventional and conventional wells.[7] Even more good news for natural gas producers is that DEP’s collection of fines and penalties related to noncompliance was down to a little over $3.41 million in 2015 – a substantial decrease from the approximate $7.14 million in fines and penalties assessed in 2014.[8]

DEP concluded its annual report with a forecast of DEP initiatives for 2016. These initiatives include: implementing a methane reduction strategy through gas leak detection and repair measures; revising regulations for subsurface activities associated with oil and gas exploration and development; evaluating the existing oil and gas fee structure; and developing an electronic reporting mechanism for well operators.[9] These state DEP initiatives come on the heels of the newly enacted federal initiatives of the U.S. Pipeline and Hazardous Materials Safety Administration (PHMSA). For more details on PHMSA’s new regulations, see our “PIPES Act Update” and stay tuned to our blog for more up-to-date information as DEP begins implementation of its 2016 initiatives.

[1] Pennsylvania Department of Environmental Protection, 2015 Oil and Gas Annual Report, available at http://www.elibrary.dep.state.pa.us/dsweb/Get/Document-113887/8000-RE-DEP4621.pdf (2016).

[2] U.S. Energy Information Administration, Average annual gas spot price in 2015 was at lowest level since 1999, available at http://www.eia.gov/todayinenergy/detail.cfm?id=24412 (January 5, 2016).

[3] 2015 Oil and Gas Annual Report, at p. 13.

[4] Id. at p. 5.

[5] Id. at p. 6.

[6] Id. at p. 8.

[7] Id. at p. 19.

[8] Id. at p. 21.

[9] Id. at pp. 29-31.

PIPES Act Update

Judith Cassel on June 23, 2016

Yesterday, President Obama signed into law the “Protecting our Infrastructure of Pipelines and Enhancing Safety” (PIPES) Act. This bi-partisan bill was the culmination of efforts by both the Energy and Commerce Committee and the Transportation and Infrastructure Committee. This Act is intended to increase the efficiency and transparency of the Pipeline and Hazardous Materials Safety Administration (PHMSA) while enlarging safety inspections and audits of the natural gas pipeline industry.

PIPES focuses on PHMSA almost as much as it focuses on pipelines. The Act reauthorizes PHMSA’s pipeline safety program for another 4 years. The Act forces PHMSA to complete the directives it was supposed to complete by 2015, but failed. PHMSA must now update Congress every 90 days on outstanding statutory mandates. Additionally, the Government Accountability Office (GAO) will conduct studies into the effectiveness of PHMSA’s integrity management programs.

The Act also focuses on additional inspections and scrutiny for pipelines in coastal areas, marine waters, and the Great Lakes. These pipelines will now have a new designation of “unusually environmentally sensitive.” But along with the heightened scrutiny is an effort to help the industry comply with new safety regulations by sharing new technologies that increase safety and protect the environment.

President to Sign New Natural Gas Safety Act

Judith Cassel on June 16, 2016

Tuesday night, the U.S. Senate passed the Protecting our Infrastructure of Pipelines and Enhancing Safety Act (PIPES Act). This bill is now headed to President Obama to be signed into law. In addition to reauthorizing the U.S. Department of Transportation’s Pipeline and Hazardous Materials Safety Administration (PHMSA) through FY2019, this soon-to-be law enacts substantive changes in the pipeline industry’s regulatory landscape.

Highlights of Act

Increases authority for the Secretary of Transportation to quickly impose restrictions in the event of a serious accident
Increases state funding to run more aggressive pipeline inspections
Institutes state and federal collaboration on pipeline mapping
Insures collaboration between state and federal investigators on regular safety, as well as post-accident, inspections and investigations
Assesses PHMSA’s integrity management programs for liquid and natural gas pipelines
Provides for greater transparency and publication of reportable releases
Contemplates creation of new safety standards for underground natural gas storage facilities with permission for states to go above these standards
Creates task force to investigate causes and impacts of the Aliso Canyon natural gas leak
Imposes new fees on entities operating underground natural gas storage facilities
Increases inspection requirements of specific underwater oil pipelines
Mandates research, testing, and publication of innovations in pipeline materials, corrosion prevention, and training
Authorizes PHMSA to establish a nationwide database of oversight activities

This bill was originally introduced in the Senate by Nebraska Republican Senator, Deb Fischer, but gained overwhelming bi-partisan support, passing the House with very few amendments and the Senate with unanimous consent.

The Aliso Canyon natural gas leak, the San Bruno and Philadelphia gas explosions and the BP Gulf of Mexico Deep Horizon spill all served to highlight to the U.S. Congress, and its constituents, the inherent dangers that are possible with the exploration, transmission and use of natural gas. These natural gas accidents coupled with the proliferation of new pipelines serving the recently accessible shale gas in the Northeast, served as a motivation for the PIPES Act.

PHMSA Proposes Significant New Regulations Regarding Transmission and Gathering Pipelines

Whitney Snyder on April 1, 2016

On March 17, 2016 Pipeline and Hazardous Materials Safety Administration (PHMSA) released a 549 page Notice of Proposed Rulemaking (NPRM) that significantly changes regulations for transmission lines and imposes regulations on previously unregulated gathering lines carrying, inter alia, natural gas and petroleum products.

Key changes for transmission pipelines include: establishing new materials verification requirements, modifying maximum allowable operating pressure requirements (MAOP), and imposing requirements for verifying MAOP. PHMSA is also proposing a new classification area, a Moderate Consequence area, which would impose corrosion control, integrity management and assessment, and repair requirements on pipelines outside of High Consequence Areas. The NPRM also subjects certain in-service natural gas pipelines built prior to 1970 to pressure testing.

All gathering pipelines (determined per a new definition that no longer references American Petroleum Institute Standards) will now face reporting requirements per 49 CFR Part 191 with certain limited reporting process exceptions. PHMSA has also significantly expanded “regulated gathering lines” to include lines with 8 inch or greater nominal diameter in Class 1 areas (areas with 10 or fewer buildings meant for human occupancy) that have an MAOP that produces a hoop stress of 20 percent or more of specified minimum yield strength (SMYS) for metallic lines, or more than 125 psig for non-metallic lines. These lines will be classified as Type A, Area 2 lines and regulations will include design and construction specifications for new lines and safety standards and emergency response requirements in Part 192, and drug and alcohol requirements in Part 199 for new and existing lines. To put the scope of this regulation in perspective, PHMSA officials have stated that an additional 68,749 miles of gathering lines would be “regulated gathering lines” per the new Type A, Area 2 classification, and an additional 275,337 miles of gathering lines would be subject to additional reporting requirements. See PHMSA Proposes Expanding Regulatory Scope of Gathering Lines, Natural Gas Intelligence, March 21, 2016.

The NPRM is in response to the Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011. Section 21 of the Act requires PHMSA to conduct a study of the existing gathering line regulations, report to Congress, and recommend whether any additional laws are needed, analyzing economic impacts, risks, and whether the current exemption from regulation for certain gathering lines should be revoked. PHMSA completed this study in May of 2015.

In 2011 PHMSA issued an advanced notice of proposed rulemaking with many of the same features regarding regulation of transmission and gathering lines, which did not result in a final rule. PHMSA has responded to comments on the 2011 ANPRM in the NPRM. The increased regulation of the NPRM was spurred by the congressional mandates in the Act in response to the San Bruno pipeline explosion in 2011 and the increased use of higher pressure and size gathering lines due to hydraulic fracturing and increased shale production, especially in the Marcellus Shale region.

In Pennsylvania, the Pennsylvania Public Utility Commission regulates PHMSA regulated lines and has incorporated 49 CFR Parts 191-193 and 199, including any future amendments at 52 Pa. Code Chapter 59.

Once the NPRM is published in the Federal Register, interested parties will have 60 days to submit comments.

PUC Streamlines Gas Cost Rate Filings for Small Gas Companies

William Lehman on March 14, 2016

The Pennsylvania Public Utility Commission (PUC) recently issued a final rule making order concerning recovery of fuel costs by gas utilities at Docket No. L-2013-2346923. The full order can be found here: http://www.pabulletin.com/secure/data/vol46/46-4/110.html The Order is designed to simplify and streamline information and procedures for small gas utilities (gross intrastate operating revenues of $40 million or less) when submitting gas cost rate (GCR) filings with the PUC.

Specifically, in this Order, the PUC implements the following changes to its regulations: (1) classify all natural gas utilities not qualifying for 1307(f) treatment as small gas utilities; (2) modify the schedules included in small gas utilities’ GCR filings for purposes of efficiency; (3) provide small gas utilities with uniform time schedules to allow more accurate gas cost projections as winters approach; (4) allow small gas utilities to collect interest, at the prime rate for commercial borrowing, on both net over and under collections from ratepayers; (5) eliminate the requirement that at least 90% of a small gas utility’s annualized gas costs be rolled into base rates; and (6) implement a GCR interim tariff filing procedure to be effective on ten days’ notice.

Highlights of each Section:

52 Pa. Code 53.63 – classifies gas utilities into two types: Large (gross intrastate operating revenue over $40 million) and Small ($40 million or less).

52 Pa. Code 53.66 – sets filing requirements for small gas utilities when filing GCR tariffs under 1307. Subsection (a)(1) lists 11 Schedules that must be included with the filing. Subsection (a)(2) allows for small gas utilities to file a preliminary and a final GCR to be effective November 1. The preliminary filing is to be made by September 2. The final filing should be made on October 2. Subsection (c) requires small gas utilities to file a reconciliation statement under 1307(e) for the 12-month period running from Sept. 1 through August 31 by October 1. Subsection (d) allows small gas utilities to collect interest on both over and under collections from ratepayers. Subsection (e) states the notice requirements to customers when recovering fuel costs under the GCR and Subsection (g) requires small gas utilities to monitor GCR activity to avoid becoming materially over/under collected by more than 2% which would allow the small gas utility to submit an interim GCR filing to be effective on 10 days’ notice.

52 Pa. Code 53.68 – requires small gas utilities filing a GCR to provide notice within 5 days of the preliminary filing (or by Sept. 7) by publishing in a major newspaper within the utility’s service area.

Water and Natural Gas Remain High on EPA’s New and Expanded National Enforcement Initiatives

Judith Cassel on February 23, 2016

On February 18, 2016, EPA Announced its Triennial National Enforcement Initiatives (“Initiatives”). The EPA issues these Initiatives once every three years in order to help “focus time and resources on national pollution problems” according to Cynthia Giles, assistant administrator for enforcement and compliance assurance at EPA. The latest round of Initiatives will begin on October 1, 2016 and once again will list natural gas producers and water authorities as targets for EPA inspections and enforcement.

Natural gas producers and water authorities fall under the following Initiatives:

“Ensuring Energy Extraction Activities Comply with Environmental Laws” and
“Keeping Raw Sewage and Contaminated Stormwater Out of the Nation’s Waters”

In a related Initiative, EPA is also expanding its existing Initiative relating to leaks, flares, and excess emissions from refineries. The full list of EPA’s new Initiatives can be found at http://www.epa.gov/enforcement/national-enforcement-initiatives

Energy Extraction

Despite acknowledging that natural gas is an important “bridge fuel”, (epa.gov/enforcement-energy extraction) the EPA believes that current techniques for extraction pose intolerable and significant public health and environmental risks. Since 2011, the EPA has conducted more than 3000 inspections and evaluations that have resulted in more than 196 enforcement actions. Part of EPA’s motivation for keeping Energy Extraction on the Initiatives is that the Department of Energy projects that greater than 20% of the total U.S. gas supply will come from shale gas by 2020.

In September 2015 as part of the previous triennial Initiatives, EPA issued a Compliance Alert because it identified compliance issues with storage vessels, tanks, and containers at onshore oil and natural gas production facilities. The alert provided engineering and maintenance practices that could bring these facilities into compliance. The natural gas industry’s rapid growth in technology and production has also kept this Initiative on the list because EPA fears that such rapid growth will lead some of the industry participants to take short cuts.

An integral part of EPA’s renewed focus on the Energy Extraction Initiative will be “Next Generation Compliance” or NGC. NGC boils down to an increase in electronic monitoring and reporting in the hopes that non-compliance will be easier to detect and resolve. But as EPA’s own, Ms. Giles, acknowledged “the most effective way to achieve compliance with the law is to make it easier to comply than to violate.” So even before hi-tech monitoring and reporting equipment are implemented, the EPA regulations should be streamlined and redrafted so that compliance could be first more easily understood and second more easily instituted.

Water

EPA is taking enforcement actions against municipal sewer systems where violations of the Clean Water Act are found. Some of the major violations found at these systems were caused by stormwater runoff. EPA’s enforcement actions seek to reduce the negative impacts of stormwater runoff through long-term agreements with system authorities. Part of these long-term agreements contain “green infrastructure” improvements such as green roofs, rain gardens, permeable pavements, and revitalization of vacant lots.

Since 2011, the EPA has addressed over 850 water treatment systems resulting in over 60 enforcement actions. Additionally, in 2015 there were in excess of 30 civil judicial consent decrees addressing combined sewer systems.

Emissions from Refineries

Because EPA believes that refineries and other industrial plants emit more hazardous air pollutants (HAP) then they report, this Initiative will be expanded from its earlier position in the last triennial Initiatives. This Initiative will be expanded to include targeting large product storage tanks that treat, store, and dispose of hazardous waste. Some of the largest sources of HAP come from leaking equipment and improperly operated flares at natural gas extraction points and refineries. In the new Initiatives, the leaks and flares will be more closely monitored through NGC (new generation compliance) techniques.

Of all the Initiatives past and current, the EPA touts the reduction in HAP due to addressing illegal and excess emissions from leaks and flares at refineries as one of its most successful. EPA has a track record of success under its enforcement agreements that includes:

Over 2000 total facilities evaluated and
Over 500 total enforcement actions

No one appreciates overreaching regulation. Hopefully the EPA will not use these new Initiatives to stifle competition or innovation or put onerous and unnecessary additional costs on companies. Rather, EPA Initiatives should seek to level the playing field for responsible compliant companies.

Columbia seeks yet another rate increase

Todd Stewart on March 27, 2015

Almost one year to the day from its 2014 rate increase filing, Columbia Gas of Pennsylvania is back before the Pennsylvania Public Utility Commission seeking an additional $46 million in revenue.

Columbia has continued its streak of rate cases, filing almost annually since the General Assembly passed the DSIC bill that was touted as being the antidote for frequent rate cases. In addition to seeking recovery of main replacement costs in excess of the 5% cap imposed by the DSIC statute, Columbia’s rate filing includes an innovative approach to extending its gas infrastructure to reach more customers.

PUC regulars will recall that in its last rate case, Columbia proposed a New Area Service rider (“NAS”) that allowed customers that did not have the ability to pay an upfront deposit for extending Columbia’s facilities to their premises to pay that amount, either the full or partial deposit, over a period of 20 years on a monthly basis. The testimony that was included in Columbia’s filing correctly points out that while the NAS program does help to mitigate one barrier to extending facilities, i.e., the sometimes significant upfront costs, it does not eliminate the cost, and those costs can add to customer’s bills for a long period of time.

In order to help, Columbia has proposed to develop new incentives that would encourage more customers to switch to natural gas service. The first would be a footage allowance for up to 150 feet of main line extension per applicant without the need of a net present value (“NPV”) analysis that is normally done; the second would be an allowance of 150 feet of service line in normal situations for those portions of Columbia’s service territory where the Company has lines; and third would be reimbursement of up to $1,000.00 for installation of house piping where the projected revenues exceed projected costs by a certain threshold, when the Company does the (“NPV”) analysis. What this means in real terms is that new customers will have the opportunity to receive gas service with an allowance of 150 feet of main-line extension and 150 of service line—at no charge, which should allow many new customers to connect to Columbia’s facilities.

With all these innovative programs that Columbia is proposing, it seems inevitable that they will have included a few items that parties will not like. In this case, Columbia has resurrected, yet again, its intention to charge shopping customers for the right to shop, by seeking to impose upon them a substantial charge, Rider CAC (customer access charge) that purports to recover Columbia’s costs of providing choice service. Columbia proposed the same Rider in its last rate case but withdrew it as part of a settlement. It is interesting that this charge recovers substantially more dollars than Columbia purports to spend on its own gas acquisition; and, therefore, it is much larger in order of magnitude on a per customer basis than the charge that Columbia is proposing to recover for its gas procurement costs (“GPC”). This seems a little odd to this observer.

This matter has not yet been assigned to an administrative law judge. The Pennsylvania Office of Consumer Advocate has filed a complaint, which almost ensures that the rate filing will be suspended and sent for hearings before an administrative law judge sometime this summer. Stay tuned.

What does the future hold for Pennsylvania’s competitive energy markets?

Todd Stewart on October 17, 2014

As the PA PUC embarks on its investigation of the natural gas markets, what evidence can we discern about how the agency sees competitive energy markets and how those markets should evolve?

On August 21, 2014, the PUC issued a Tentative Order that identified a laundry list of issues that its Office of Competitive Market Oversight (“OCMO”) will be tasked with investigating. The list includes such items as the assignment of storage and pipeline capacity, tolerances/penalties for system balancing, customer education and switching timeframes, to name a few. However, the list is perhaps most notable for issues not included. There will be no discussion of the natural gas distribution companies (“NGDC”) exiting the merchant function and no discussion of standard offer referral programs.

Looking first at the issues that will be examined, many involve nuts and bolts operational issues. Capacity assignment, switching timeframes, access to on-system delivery points, and so on. Improvements in the efficiency and fairness of these aspects of the interaction between natural gas suppliers (“NGS”) and NGDCs will make the market more seamless, reduce costs for NGSs and potentially NGDCs, and will provide a better customer experience. All of these would be good outcomes, and I am not aware of any party that opposes taking a look to see what tweaks or even more substantial changes are needed. This operational focus– regulating the market and making sure the existing structure works as best it can – is something the PUC views as within its wheelhouse, an area of core competency.

Devoting time to competitive market operational details, however, diverts resources and attention from the larger issues that will decide whether Pennsylvania’s competitive market will endure and thrive. For now, at least, it appears the PUC wants nothing to do with any discussion of NGDCs exiting the merchant function. There could be several reasons for the Commission’s reticence, considering that only a few short years ago, the Commission appeared to be seriously considering programs in the electricity markets that could have transitioned many customers into the competitive market, and at least one electric distribution company was seriously considering a formal exit. One possible explanation is that the Commission has what golfers call a case of the “yips” — the inescapable feeling that you have lost your “game” which results, inexorably, in losing your game. The loss of confidence started with the abrupt manner in which the electric market RMI process was turned around at the last possible minute, dropping programs that would have transitioned many customers to competitive service. Last year’s “polar vortex,” which brought the PUC undeserved criticism for “allowing” a roiling of the retail electric markets, when the problem was a wholesale market issue, slowed forward progress even more. The fallout from that period is still being felt. The Commission promulgated regulations to police disclosure of variable rates; while House Consumer Affairs Committee Chairman Godshall wanted legislation that would have imposed rate regulation on “deregulated” retail EGS rates. The resulting, and rather public, falling out between Chairman Godshall and Commission Chairman Powelson seems to have made the PUC even more reluctant to take bold action. It seems clear that there simply is not the political will, and possibly not the political capital, to advance the deregulation agenda that the Commission clearly signaled in the past, especially in light of the impending gubernatorial election.

But neither the polar vortex aftermath nor politics explains why the PUC has shied away from at least examining whether standard offer programs, so successful in electric deregulation, should be used in natural gas retail choice programs. Standard offers were responsible for migrating many customers off of default service and into one year fixed rate electric contracts. Perhaps the Commission is taking a practical approach, waiting to see what happens at the transition when the one year electricity contracts expire to make sure that it has a handle on the issues that can crop up. Perhaps the Commission wanted to wait and see whom the voters pick on the first Tuesday in November, to see how things change across the street—if at all. Regardless, it may be that the very fact that the Commission chose to wait and see rather than move ahead with a program, even if doing so appears, by most accounts, to be rational, is a signal of a change in attitude at the PUC. More practical, less policy – at least for now. The recent focus on the passage of House Bill 939, the re-authorization of Chapter 14, which also includes the authorization for the Commission to assess NGSs and EGSs, may be further evidence of this approach.

What does all this mean for the future of energy markets, natural gas and electricity, in Pennsylvania? In the short term it probably means that the Commission will appear to be unwilling to go down the road of opening the natural gas RMI proceeding to include issues related to merchant function exit, even if the enabling legislation expressly provides for such a result. It means the RMI will remain focused on operational issues. In the electricity markets, it appears unlikely that there will be any new proceedings to address the competitive market, at least until people stop holding their collective breath over concern about the potential repeat of last winter’s extreme run-up in wholesale prices. In other words, nuts and bolts are fine, but let’s not get into any policy fights just now.

In the long term, things may be more hopeful for those seeking change in the structure of the retail energy markets, if we can put the remnants of the recent past behind us and step out from under the microscope long enough. Both gubernatorial candidates appear to favor competitive markets, although it is not clear how far either would go toward endorsing significant market changes at this juncture. It does not appear that the positions of the individual Commissioners on competitive markets have changed, either. Rather, it appears that circumstances outside their control have forced them to take the practical road for now.

So what does the future hold? The answer is, it depends. As is so often the case, policy in this area is dictated by reactions to current events. It depends on how volatile the retail markets become, and to a lesser extent, the cause of that volatility; it depends on who wins the race for governor, and the makeup of the Commission; and it depends on the marketers deciding to remain in Pennsylvania and staying engaged in the process. This last factor may be the most important.