natural gas - HMS Legal

PA PUC Requested by Statutory Advocates and Two NGDCs to Examine The Practice of Natural Gas Flexible Pricing or Negotiated Discount Rates

Thomas Sniscak on July 6, 2012

Historically the Pennsylvania Public Utility Commission (PUC) has permitted natural gas distribution companies (NGDCs) to use flexible pricing or “flex” contract rates to attract or retain large customers who have other energy alternatives. The reasoning has been that “half a loaf is better than none,” and that such revenues, which cover and exceed marginal cost, contribute positively to overall cost of service. The result is a benefit to the large customer, the utility, and all customers generally. Moreover, in terms of retaining a customer, the argument in favor of the status quo is that other ratepayers benefit as they do not bear the revenue burden of stranded investment or a smaller revenue pot over which to apply costs. The NGDCs have generally been able to recover from other ratepayers the difference between the “flex” rate and what would have otherwise been charged under an ordinary general tariff rate.

Just as historically, the statutory advocates that represent residential ratepayers, small business ratepayers, and PUC prosecutorial rate staff, oppose the practice as uneconomical or inequitable. Specifically, they dislike the PUC’s allowing the NGDC to recover the flex discount from other customers. They are focused, at this point, on the use of flex contracts in portions of western Pennsylvania where NGDCs often have overlapping territories and compete for customers.

The statutory advocates have been able to convince two NGDCs, Peoples Natural Gas Co. and Columbia Gas of PA, as part of rate case settlements, to agree to be parties with them to ask the PUC to institute a generic proceeding to examine whether flex rates should continue in “gas on gas” competition instances. That joint petition has been submitted at PUC Docket No. P-2011-2277868.

While supporters of the request to investigate the practice maintain that it only applies to “gas on gas” competition, the proceeding may have, or at a minimum may lead, to broader implications as the arguments for and against flex rates for “gas on gas” competition could be used by those who oppose the practice to challenge any flex rate situation that was created to address competition by energy options other than from NGDCs. Clearly, this proceeding will impact large customers with energy alternatives, and presents important policy considerations involving Pennsylvania’s ability to attract or retain large customers and the many jobs and contributions to the economy they create.

One would expect any involved NGDC , particularly those who have “gas on gas” based flex agreements in place, and the large customers under those agreements, to defend and support the practice vigorously. It is important to large business and to NGDCs to keep rate flexibility to address competition and avoid loss of customers or to attract new customers or additional usage.

There is no deadline under the PUC’s regulations as to when it must decide if the subject should be examined. The firm’s contact on these issues is tjsniscak@hmslegal.com.

Act 13’s Local Zoning Provisions Put On Hold

William Lehman on April 16, 2012

Commonwealth Court Grants Preliminary Injunction Halting Zoning Limits in Act 13

The Pennsylvania Commonwealth Court preliminarily enjoined operation of the provision of Pennsylvania’s new Marcellus Shale Law that limits the power of municipalities to regulate the booming natural gas exploration industry. The court enjoined the effectiveness of Section 3309 of the Act for 120 days, and denied the motion to enjoin the remainder of the Act’s provisions. The court stated that the original period of 120 days under the Act to amend local zoning ordinances to comply with Act 13 was not sufficient. “[M]unicipalities must have an adequate opportunity to pass zoning laws that comply with Act 13 without fear or risk that development of oil and gas operations under Act 13 will be inconsistent with later validly passed local zoning ordinances. For that reason, pre-existing ordinances must remain in effect until or unless challenged pursuant to Act 13 and are found to be invalid,” Senior Judge Quigley stated. He went on to suggest that the wider challenge to the constitutionality of the local zoning limitations is questionable, saying that he is not convinced that the “likelihood of success on the merits is high.” The Commonwealth may appeal the ruling as a matter of right to the Pennsylvania Supreme Court, and if it does, the Commonwealth Court’s order will be subject to an automatic stay, thereby nullifying the effect of the injunction, pending further order of either the Commonwealth Court or the Supreme Court.

For the complete text of Act 13, please see: Act 13.pdf

Pennsylvania Gets the Cracker

Judith Cassel on March 26, 2012

Shell Oil Co. chooses Pennsylvania as home for its new natural gas processing facility.

According to the Pennsylvania Petroleum Marketers & Convenience Store Association, Shell Oil Co. announced today that it will build its $3.2 billion dollar Ethane cracker plant in Beaver County, Pennsylvania resulting in excess of ten thousand jobs while providing a convenient location to convert Pennsylvania Marcellus Shale Gas into ethylene. Ethylene is used to make the raw material for the production of plastic products. The Marcellus Shale Gas contains higher quantities of ethane and other thicker liquid gases that can be more valuable than regular methane because of their use in the production of plastics.

The Corbett Administration won the much coveted cracker facility over the strong sales pitches of the Ohio and West Virginia Governors. Last month’s passage of Act 13 was one of Pennsylvania’s selling points, giving up to five percent of natural gas impact fees to “infrastructure projects related to the natural gas industry.” Adding to Act 13’s allure was the Keystone Opportunity Zone, which offers tax breaks of up to fifteen years for those companies investing at least $1 billion in new Pennsylvania projects.

In light of the recent refinery closings by Sunoco at Marcus Hook and ConocoPhillips in Trainer, as well as the soon to be closed Sunoco Philadelphia refinery, Pennsylvania could use the Shell Oil cracker facility to replace some of the lost jobs.

PA PUC Enters Written Decision In Hms’laser Marcellus Pipeline Application Case

Thomas Sniscak on June 17, 2011

On June 4, 2011, the PUC reduced its majority motion to a written order and has remanded the case to an Administrative Law Judge for a ruling on whether the service and terms of the partial settlement are in the public interest. The Order essentially follows Commissioner Wayne E. Gardner’s Motion, which was joined by Chairman Robert F. Powelson and Vice-Chairman John F. Coleman, Jr. at the May 19, 2011 public meeting. It accepted the position of Laser and other parties, such as the PUC’s Office of Trial Staff, that the service proposed by Laser will be public utility service because it will be open to any member of the public requiring service to the extent of capacity.

Notably, the Order states that “not all gathering and transportation service providers will be considered public utilities and subject to the Commission’s jurisdiction.” Specifically, in resolving public utility status questions, the Commission will consider whether “service is provided to a defined, privileged and limited group when the provider [pipeline] reserves its right to select its customers by contractual arrangement so that on one outside of the group is privileged to demand service.”

The Order also clarifies the law regarding the imposition of voluntary versus involuntary conditions to a certificate of public convenience. In doing so, the majority found that the settlement conditions do not result in an expansion of PUC jurisdiction.

Finally, the Order leaves the door open for light-handed regulation of service and rates akin to present natural gas transportation service under the PUC’s regulations. Under that, a maximum approved tariff rate is filed and approved but the utility and customer more commonly negotiate a tailored contract rate and individualized service terms.

HMS’ Thomas J. Sniscak and William E. Lehman represent Laser in this proceeding.

Natural Gas Pipeline Safety Bills Driven by Marcellus Shale Development In PA Move Forward

Thomas Sniscak on April 15, 2011

There are two natural gas pipeline safety bills pending before the Pennsylvania General Assembly: House Bill 344 and Senate Bill 325. Each was met with overwhelming approval in the chamber in which it was proposed, and the passage of either would result in additional safety regulation of the natural gas industry in Pennsylvania by the Pennsylvania Public Utility Commission.

As the law currently stands, the United States Department of Transportation’s Pipeline and Hazardous Material Safety Administration may inspect natural gas pipelines or systems unless they are pipeline public utilities or local distribution public utilities in Pennsylvania that are inspected or regulated by the PUC. The implication of the two bills is that the Federal government cannot keep pace with such non-public utility pipelines or systems particularly due to the need for public utility and non-public utility transport of gas to market in the Pennsylvania Marcellus Shale play. Of the 31 states producing natural gas, Pennsylvania is one of only two that have not charged a state agency with regulatory and safety oversight of natural gas pipelines. The Bills would relieve some of the Federal government’s burden by conferring upon the PUC jurisdiction over intrastate gas transmission, distribution and regulated on-shore pipelines or operations if such pipelines are not public utility pipelines.

After unanimous approval in the House of Representatives, House Bill 344, the natural gas pipeline safety bill sponsored by Rep. Matt Baker and supported by Rep. Tina Pickett, was passed through to the Senate. Similarly, Senate Bill 325, proposed by Sen. Lisa Baker, was passed along to the House of Representatives after nearly unanimous approval by the Senate (but for Senator John Eichelberger).

The passage of either Bill will not change the PUC’s existing jurisdiction over public utility pipelines or local distribution utilities, but will authorize the PUC to inspect and regulate for safety purposes additional non-public utility intrastate natural gas pipelines or systems under the requirements of federal natural gas regulations. Non-compliant companies or system operators would be subject to fines payable into the Commonwealth’s General Fund. Both Bills require all natural gas and hazardous liquid pipeline operators to register with the Commission and require the Commission to investigate pipeline operators, pipeline systems, and reports of unsafe conditions involving pipeline facilities. Under the House Bill, these new responsibilities would be financed by companies’ registration fees and substantial increases in fines for non-compliance; companies could face liabilities up to $100,000 per day and up to $1 million total – more than enough to recover the expected $1.3 million increase in the PUC’s annual costs. The Senate Bill would recover the PUC’s new inspection and regulation costs in the form of an annual per-pipeline-mile assessment.

Both Bills were referred late last week to committees of the General Assembly, and the current versions under consideration may be found by following the links below:

House Bill 344:
http://www.legis.state.pa.us/CFDOCS/Legis/PN/Public/btCheck.cfm?txtType=PDF&sessYr=2011&sessInd=0&billBody=H&billTyp=B&billNbr=0344&pn=0919

Senate Bill 325:
http://www.legis.state.pa.us/CFDOCS/Legis/PN/Public/btCheck.cfm?txtType=PDF&sessYr=2011&sessInd=0&billBody=S&billTyp=B&billNbr=0325&pn=0981

Columbia Gas Files for $37.8 million Rate Increase

Todd Stewart on February 3, 2011

After only a few months of collecting the newly increased rates from its 2010 Rate Case, Columbia Gas of Pennsylvania is back before the Pennsylvania Public Utility Commission seeking an additional $37.8 million in annual revenue.

Columbia’s January 14, 2011 filing is notable for more than the timing of the filing, however. Columbia has proposed a distribution system improvement charge, often referred-to as a “DSIC”. The DSIC, which has been held to be unavailable to natural gas utilities under 66 Pa C.S. § 1307(a), would allow Columbia to collected a return of and a return on its investment in plant–between base rate cases–by means of a surcharge mechanism. Columbia also has proposed a levelized distribution charge that would allow it to collect the costs of operating its system on a non-volumetric basis. This concept is known as de-coupling. Columbia argues in its filing that without decoupling, its revenue stream is tied to volumes of gas delivered, which are subject to variance for reasons beyond the control of the Company; while at the same time, its operating costs are unrelated to the volume of gas delivered. Columbia argues that the current rate methodology puts the company at risk, and therefore, Columbia seeks to de-couple its revenue stream from the volume delivered, providing it with far more stable revenues. Rate requests of this magnitude are nearly always suspended and investigated for seven months by an order of the Commission issued under, 66 Pa. C.S. § 1308(d), and this case will most likely be assigned to an Administrative Law Judge for hearings.

PUC Approves New Rules Aimed at Improving Retail Natural Gas Competition

hmslaw1 on January 13, 2011

Today, in split vote, the PUC approved new regulations intended to level the playing field for natural gas competition.

PROPOSED RULEMAKING-PROMOTION OF COMPETITIVE RETAIL MARKETS, L-2008-2069114. While the final rulemaking order may not be publicly available for a few days, it appears that the new rules will require Natural Gas Distribution Companies to remove certain costs of providing default service from the base rate distribution charge, which all customers pay, and instead collect those charges as part of the gas cost rate, which is paid only by customers who remain on default service.

Based upon comments and earlier iterations of the rulemaking process, it appears likely that the Commission also will address Natural Gas Supplier requests to eliminate or shorten the recovery of prior period gas costs from customers who switch to a competitive provider from default service. These payments are collected through a mechanism referred to as a “migration rider” and are now recoverable for a full year after a customer switches. The new rules are expected to shorten the time period over which those costs may be recovered.

One other important change proposed by the new rules will be a further refinement of the Price to Compare. The PTC, as it is known, is intended to assist customers in evaluating competitive offers by presenting the “rate” that the customer pays, in theory, to their local gas utility for the commodity portion of service. The goal has always been for the PTC to provide a meaningful comparison point for competitive offers. Up till now, however, the PTC has not reflected a similar basket of costs as those faced by competitive suppliers, some of which change significantly over time. The new rules will require that additional costs that customers now pay as part of default service be explicitly included in the price to compare. Significant among those currently unrecognized costs that will in the future be included in the PTC is what is known as the e factor, which varies quarterly and is intended to recover or refund differences in actual prior period gas costs from projected prior period gas costs. It is the projected costs that form the basis of the rates customers actually pay. Including the e factor in the PTC is intended to make the PTC a better comparison point by making it more representative of the costs that a customer avoids by taking service from a competitive supplier.

The Final Rulemaking Order should be available within two weeks.