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 the pipeline charges qualify for special rate treatment.

The same argument arose the last time the FERC created a special class of costs to be billed by the pipelines to their LDC customers. Most PUCs found these "take-or-pay" costs eligible for gas cost recovery, as the Illinois Commerce Commission pointed out in deciding to allow recovery of the transition costs billed to Illinois LDCs. The commission found that the FERC chose to restructure the industry in a series of steps. The first step, Orders 436 and 500, eliminated part but not all of the pipelines' merchant function. The initial costs of restructuring contracts for gas supply were called take-or-pay costs because of the nature of pipeline contracts with natural gas producers. The next, and perhaps last step, was Order 636, which eliminated the remaining pipeline merchant obligations. Illinois regulators could find no "valid policy or legal rationale to treat the recovery of GSR costs in a different manner than take-or-pay costs." Re FERC Order 636 Transition Costs, 155 PUR4th 331 (Ill.C.C.1994).

In other cases customers have argued that only Account 191 costs truly qualify as gas costs. LDC payments for other types of transition costs would not result in additional capacity or gas for the utility, and therefore do not qualify as gas costs. Cost-recovery opponents further argue that GSR costs are directly associated with implementation of Order 636 rather than with gas transactions. In rejecting this line of argument, the Indiana Utility Regulatory Commission (URC) reasoned that, prior to Order 636, sales volumes purchased by LDCs included in one price individual components for gas commodity, transportation, facilities, and storage costs. The URC concluded that all four types of transition costs fell under the statutory definition of "other expenses relating to gas costs" eligible for adjustment clause treatment. Re City of Indianapolis, 158 PUR4th (em , Cause No. 37399-GCA41, Jan. 18, 1995 (Ind.U.R.C.).

The take-or-pay analogy also applies to LDC use of the "filed-rate" doctrine to thwart calls for an "equitable sharing" of the transition costs between ratepayers and utility shareholders. LDCs contend that, under the Supremacy Clause of the U.S. Constitution, this doctrine preempts PUCs from challenging the reasonableness of FERC-approved rates charged by a pipeline. In other words, a PUC must allow costs in rates unless it finds that an LDC imprudently incurred a certain level of transition charges. In addition, LDCs note that the courts had found PUCs preempted from performing a prudence review with respect to direct billed take-or-pay costs because there was no way for the LDCs to avoid paying such costs. See General Motors Corp. v. Illinois Commerce Commission, 143 Ill.2d 407 (Ill.C.C.1992).

Interruptible Customers Held Liable

The issue of whether LDCs should be required to spread transition charges among all ratepayers, including interruptible transportation customers, has caused the most trouble for state regulators (see box insert). In Tennessee, state regulators found that LDCs were collecting fees using a wide variety of recovery and class allocation methods. The Tennessee Public Service Commission (PSC) noted that the FERC had not spelled out how the pipelines should pass costs on to their customers, including LDCs. It found that some pipelines billed their LDC customers as a demand surcharge, while others included a lump-sum amount on the monthly bill. Some Tennessee LDCs aggregated the costs and spread them evenly over their entire customer base; others spread the demand surcharge Order 636 costs to firm customers only, and allocated the lump-sum charges to all customers. The PSC also noted that one utility had recently negotiated an agreement to change its flow-through method so that interruptible transportation customers pay approximately one-half of the transition cost amount paid by other customers. Finding such wide variance in collection methods troubling, the PSC opened a proceeding to investigate the issue. Re Nashville Gas Co., 158 PUR4th 387 (Tenn.P.S.C.1995).

Indiana allowed LDCs to recover Account 191 balance costs from sales customers only, but directed them to spread the stranded and GSR costs among all customer classes on a volumetric basis. The URC explained that Account 191 balance costs are related to recent gas contracts entered into solely for the benefit of the LDC's current sales customers. The GSR and stranded investment costs, on the other hand, are related to gas-supply contracts "which clearly benefitted the transportation customers who were then solely sales customers." Re Northern

Indiana Public Service Co., 157 PUR4th 206 (Ind.U.R.C.1994).

The Illinois commission had to try twice before settling on a solution. The commission's original order permitted state LDCs to allocate GSR transition costs solely to sales and transportation customers with firm standby service. The Illinois commission said it would be inappropriate to allocate transition costs to customers that do not impose demand requirements on an LDC's system, and unfair to allocate the charges evenly since transportation customers already pay transition costs directly to pipelines. Re FERC Order 636 Transition Costs, 150 PUR4th 181 (Ill.C.C.1994).

On rehearing, however, the commission found it had incorrectly relied on statements that the FERC made when it approved full recovery of transition costs for pipelines. At that time the FERC said that absent Order 636 the pipelines would likely have continued, through a purchased-gas adjustment or gas inventory charge, to bill LDCs for gas costs associated with above-market contracts in the same manner as demand-related gas costs (em that is, through their adjustment-clause tariffs from sales and transportation customers with firm standby service. On rehearing, the commission upheld its earlier finding that GSR costs are gas costs, but rejected the conclusion that the LDCs should recover them from ratepayers on a demand basis. It noted that despite its speculations about how things might have turned out absent Order 636, the FERC spread transition costs at the wholesale level among all participants, including interruptible transportation customers. According to the commission, the "FERC recognized that all customers stood to benefit as a result of the industry's restructuring." It concluded that a uniform volumetric charge to recover GSR costs would not penalize transportation customers as long as LDCs credited those who could show that they paid the GSR charges to a pipeline that was also billing the costs to the LDC. Re FERC Order 636 Transition Costs, 155 PUR4th 331 (Ill.C.C.1994). t

Articles found on this page are available to Internet subscribers only. For more information about obtaining a username and password, please call our Customer Service Department at 1-800-368-5001.