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The Gas Executives Forum: Gas Pains

Commodity price upheavals are energizing gas utilities to evolve their business models.

Fortnightly Magazine - May 2006

policies to help low-income customers, from credit plans to weatherization services to outright financial support. We put up our own money for energy assistance programs, we advocate for policies to help low-income customers, and we work with organizations like the Salvation Army to try to reach people. It is a huge task, and an important part of our business plan.

Fortnightly: What other gas-related regulatory issues dominate Xcel’s priorities?

Bonavia: We hope we can persuade regulators to embrace more long-term contracting. Typically LDCs have been short-term index buyers, and regulators have shied away from longer-term contracts because they don’t want ratepayers locked into prices that are out of the market. 

We don’t make money on the commodity; we can only lose, and we run a severe risk of disallowance if we enter long-term contracts. Not contracting, however, exposes ratepayers to unacceptable risks. We need policy structures in place so we can enter long-term contracts for some portion of the portfolio with some security that we won’t be second-guessed five years from now. 

The amount of hedging we do varies from state to state, and the time of year. But we try to hedge more than half of the winter season before we get there. We hope policymakers will get more comfortable with different hedging instruments, which can take some volatility out of the market.

PSEG

Merging two large utilities is never an easy task. But during a time of rate pressures and supply uncertainties, growth strategies become complicated by price concerns. In its merger with Chicago-based Exelon, Public Service Enterprise Group of Newark, N.J., faces a variety of questions about commodity prices, investment needs and rates of return. 

Ralph Izzo, president and COO of PSEG subsidiary Public Service Electric & Gas, explains how the utility’s approach to managing commodity prices affects the parent company’s growth strategy.

Fortnightly: How has gas-price volatility affected PSEG’s strategic outlook?

Izzo: In the gas utility we used to say although we were the smallest part of the monthly bill, we gave customers the largest value for their money. But that [was] when supply was 60 percent of the gas utility bill. Now supply costs are 80 percent.

We find we must make a concerted effort to help customers manage their overall bills. We are emphasizing customer-service programs, budget billing and conservation education. 

What gas prices mean for our parent company is the strategy for growing the business needs to account for the future of gas prices and supplies. M&A plans must account for the bigger portfolio and risks involved. That’s why we emphasize our merger with Exelon as a route to a nuclear future.

Fortnightly: What are PSEG’s regulatory and ratemaking priorities in the gas business?

Izzo: Right now, number one is the effort to conclude our merger with Exelon. Since we announced the merger in December 2004, we’ve gotten through about 16 of the 18 regulatory approvals we need. The two that remain are the Department of Justice and the [New Jersey] Board of Public Utilities (BPU).

Also, we have a pending rate case at the