naruc energy regulatory partnership program the georgian national energy regulatory commission

NARUC Energy Regulatory Partnership Program

The Georgian National Energy Regulatory Commission and

The Vermont Public Service Board

by June E. Tierney

Staff Attorney

Vermont Public Service Board

July 1, 2008

Natural Gas

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Background: Vermont Gas, Inc. Vermont imports all natural gas from Canada

The TransCanada pipeline is regulated by the National Energy Board in Canada

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Background: Vermont Gas, Inc.

Vermont Gas serves over 40,000 residential and business customers in Northwest Vermont.

Vermont Gas is Vermont’s only distributor of natural gas

– Franchise covers the state

– Regulatory policy encourages Vermont Gas to expand beyond current footprint

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Vermont Gas delivered first CCF of natural gas in Vermont in 1966

Vermont Gas converted a 100-year old manufactured gas system to a state-of-the-art natural gas transmission and distribution system

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Transmission System

– 113 Kilometers of HP Pipeline– 28 kilometers of 41 cm pipe (1440

psi)– 72 Kilometers of 25 cm pipe (600

psi)– 14.5 kilometers other

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Vermont Gas has an international corporate ownership structure

Its parent, Gas Metro, LP, is regulated by Canadian authorities

Gaz Metro, LP(Canadian Parent)

Green MountainPower

(U.S. Subsidiary)

Northern New England Investment Corporation

(U.S. Subsidiary)

Northern New EnglandEnergy Corporation

(U.S. Subsidiary)

Vermont GasSystems, Inc.

(U.S. Subsidiary)

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VGS’s business is very seasonal…residential customers use 80% of gas in winter.

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VGS Gas Supply – Portfolio Overview:

VGS uses combination of pipeline base load, storage, and peaking supplies to meet customer demand– Base load supply is 365 day service– Storage is winter-season storage and contract is with

Gaz Metro– Peaking supplies are most expensive and limited to 30-

45 days during the winter season

On-system propane air plant provides some peaking price protection and operational flexibility

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VGS’s gas supply objective is to have the least-cost approach to:

Meeting peak day needs– Peak day is defined as an 86 degree day or a day where

the average temperature is -21 Fahrenheit– Current peak day is about 65,463 Mcf

Meeting annual firm requirements– Annual firm load requirements are about 5,800,000 Mcf

Minimizing curtailments to interruptible customers– Customer satisfaction issue for interruptible customers– Margin maximization issue for firm customers

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Legal Aspects of Natural Gas Regulation

Regional:– Limited regulatory interface between

Vermont and U.S. federal authorities– Significant international regulatory

interface with Canada– Heavy reliance on contract law and

arbitration to resolve conflicts– Role of industry trade groups in

developing model contracts

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Vermont: Intrastate regulation only State statutory requirements Vermont Supreme Court case law

precedent Board case law precedent Board administrative rules

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Issues in regulating gas local distribution companies

– Promoting fairness, transparency, and non-discriminatory conduct

– Rules and procedures for conducting a tender/award

– Procedures for public notification of requests for a bid

– Procedures for submitting a bid

– Qualifications and disqualifications from participation

– Fiscal incentives for attracting LDCs

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Tools For Regulating Gas Utilities in Vermont

Certificate of Public Good (CPG) Rate Design Tariffs

– Special Contracts Service Quality Plan

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The Certificate of Public Good– CPGs are issued for different

purposes: To own or operate a gas utility To construct or expand facilities

– Land use considerations

– Application process is public and transparent

– No fees for applying

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Evaluation of CPG applications by the Vermont Public Service Board– Statutory guidelines

Standard: Promote the public good in Vermont

– Use of Board precedent– Board has significant discretion– Use of Board’s power to specify

conditions for approval

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Enforcement procedures and mechanisms to ensure compliance with CPG conditions

– Case specific mechanisms

– Formal and informal mechanisms

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Rate Design

– Regulatory objectives mostly the same as with electric utilities

Exception: Encouraging system expansion

– Economic and environmental benefits of expanding natural gas use in Vermont

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Tariffs– “traditional” cost of service regulation

Historic costs adjusted for known and measurable changes

Establish appropriate rate of return

If fully litigated may take 8 ½ months to change rates

Special Contracts– VGS has a capacity constrained distribution system;

therefore relies on interruptible service terms to smooth peaks in demand

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Alternative Regulation– VGS has an alternative regulation plan

– Approved and implemented in 2006 Three year duration

– Strategy for dealing with volatile gas supply costs

Automatic gas cost adjustment mechanism

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Wholesale natural gas prices in U.S. have been very volatile in recent years

Wholesale Natural Gas Prices

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$16

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Gas costs are largest share of VGS’s costs

Breakdown of Cost of Service

Distribution Costs25%

Wholesale Gas Costs75%

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VGS’s Gas costs have two components:

Demand or Capacity Costs: – Costs associated with moving gas from point A to point B– Generally incurred year round regardless of whether or

not gas is moved– Represent about 15% of total gas costs

Commodity Cost:– Cost associated with the actual molecule of gas– Generally incurred only as consumed– Market-based and very volatile– Represent remaining 85% of gas costs

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VGS Gas Supply Hedging Strategy:

VGS uses financial instruments (“hedging”) to address volatility

VGs aligns hedging strategy with gas cost recovery

Systematic hedging – Hedge Every Other Month– 12 months at a time– 3 months in advance

Primary objective is to reduce volatility, not necessarily to obtain “best” price

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Alternative Regulation Plan changes how VGS recovers its costs:

Gas cost recovery is treated separately from recovery of non-gas operating (distribution) costs – Quarterly gas cost recovery– Annual operating cost recovery

Includes provisions for on-going regulatory review, service quality requirements, and energy efficiency investments

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Automatic Gas Cost Adjustment Mechanism:

– Natural gas costs are separately identified on customers’ bills

– Natural gas costs include commodity costs and costs associated with transporting gas across Canada

– Natural gas costs change quarterly based on wholesale markets

– VGS continues to hedge to stabilize gas costs

– Deferral account captures 90% of variances in gas costs for future rate recovery/reduction

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Operating Cost Recovery – Base Rates and Earning Sharing Mechanism

All non-gas operating costs are recovered via:– Daily Access Charge– Distribution Charge

Annual filing– Operating cost per customer capped at inflation less

a productivity gain– Provision for sharing cost savings– Provision for sharing over/under earnings

naruc energy regulatory partnership program the georgian national energy regulatory commission

Documents

vermont gas

gas metro

gas utilities

ccf of natural gas

northwest vermont

vgss gas supply objective

gas supply portfolio

natural gasbackground