[BETA] Fortnightly

Who will pay the costs incurred by regulated utility companies as they shift to competitive markets under plans engineered at the federal and state levels? This question is part of the debate over electric industry restructuring, but any payments lie in the future. For ratepayers in the gas market, however, the time has come. So far, state regulators have interpreted the law as prohibiting any sharing of gas market "transition" costs between shareholders and ratepayers. In recent cases, state commissions (PUCs) have decided that the "filed rate" doctrine requires a passthrough to consumers once the Federal Energy Regulatory Commission (FERC) approves the charges in pipeline rates. The question now concerns how to allocate costs between customers who rely on the local utility for service and those who do not. Whether the same lines will be drawn for electric customers remains to be seen, but the battle is worth watching.

Once the pipelines finalized their restructuring tariffs under FERC Order 636, many local distribution companies (LDCs) began passing the charges through their adjustment-clause mechanisms like other pipeline billings. But the rate recovery issue itself involves two questions that deserve closer scrutiny. First, should Order 636 charges be recovered through adjustment-clause tariffs currently employed by LDCs? And does FERC approval of the charges limit the discretion of state regulators in deciding whether LDCs should recover the full amount from ratepayers? Second, how should PUCs allocate the charges among LDC customer classes, for sales as well as for transportation? And third, which is most appropriate (em a charge based on volume or one based on demand?

What are Gas Transition Costs?

Order 636 required pipelines to separate or "unbundle" their merchant and transportation functions. The FERC realized that the pipelines would incur four types of "transition" costs:

s Account 191 balance costs (em unrecovered gas costs/credits remaining in the pipelines' purchased-gas cost-adjustment accounts after the implementation of market-based pricing and the termination of pipeline purchased-gas adjustment tariffs.

s GSR costs (em gas supply realignment costs incurred when the pipelines reform or terminate their existing supply contracts with producers.

s Stranded costs (em costs originally incurred by the pipelines in connection with bundled services, which cannot be allocated to customers purchasing unbundled services.

s New facilities costs (em investment required to implement the new services required under Order 636.

State rate regulators have focused on these cost categories in determining the appropriate method of recovery and allocation between customer groups.

The Take-or-Pay Analogy

Purchased-gas adjustment (PGA) clauses were created to avoid the need for a new base rate case every time the commodity price of gas changed. The variable PGA rate gave LDCs financial security, while avoiding the windfalls that might occur if actual gas costs were significantly lower than projected. As defined by regulation and statute, only costs directly related to the purchase of gas supplies are eligible for direct passthrough to ratepayers via the adjustment clause. Other costs are recovered through base rates, as are special surcharge mechanisms proposed by some LDCs to recover Order 636 costs. In both cases, LDCs must show that