PUBLIC SERVICE COMMISSION OF WEST VIRGINIA. CHARLESTON Entered: August 1, 1988 ADMINISTRATIVE LAW JUDGE'S RECOMMENDED DECISION

Transcription

1 TERE CHARLESTON Entered: August 1, 1988 CASE NO G-PC WAGNER GAS COMPANY, a corporation, Clay, Clay County. Petition to assign various lines, wells, leases, and customers located in the Newton area of its distribution company to Megan Oil and Gas Company. ADMINISTRATIVE LAW JUDGE'S RECOMMENDED DECISION On October 13, 1987, Wagner Gas Company, a corporation, Clay, Clay County, filed a petition for permission to sell, assign, grant, convey, deliver and set over to Megan Oil and Gas Company all of its portion of wells, leases, pipelines, rights of way, gas purchase contracts and customer accounts in Calhoun County and all of the same in Roane County, down to the westerly edge of the 8-inch gas line at the easterly edge of the Village of Newton in Geary District, Roane County. The described properties are situated in Washington District, Calhoun County, and in Smithfield and Geary Districts, Roane County. By orders entered on April 19 and May 2, 1988, public hearings in the matter were scheduled to commence on Monday, May 23, 1988, at 1O:OO a.m. and 7:OO p.m., EDST, in the Community Building, Newton, West Virginia. The hearings were conducted as scheduled. At the beginning of the hearing, intervention status was granted to Hope Gas, Incorporated and the Consumer Advocate Division of the Public Service Commission. Appearances were made by Wayne King on behalf of John Habjan, owner of Wagner Gas; Thomas N. Hanna, on behalf of Megan Oil and Gas Company; Daniel L. Frutchey on behalf of Commission Staff; Denise Goulet on behalf of the Consumer Advocate Division; and, E. Dandridge McDonald on behalf of Hope Gas, Incorporated. During the course of the hearings, Wagner Gas Company and Megan Oil and Gas Company informed the Administrative Law Judge that the scope of the proposed acquisition was expanded to encompass additional lines, facilities and customers in the Newton area. This proposed acquisition of the larger territories was conditioned upon specific ratemaking treatment of the future operations of these facilities, including an immediate $1.00 reduction in the rates and charges, a self-imposed five year moratorium on rate increases and rate decreases for the affected customers in the Newton area, and the adoption of a ratemaking methodology which provides for the

2 establishment of utility rates by proxy at the end of the five-year period. At the conclusion of the first hearing, a procedural schedule was established for the submission of post-hearing request exhibits and the filing of statements of position by the parties. Accordingly, all post-hearing exhibits were to be submitted on or before Tuesday, May 31, 1988, initial briefs were to be filed on or before June 27, 1988 and reply briefs were to be filed on or before July 1, On June 13, 1988, the Consumer Advocate Division filed a motion to modify the briefing schedule to provide for the filing of initial statements on or before June 17, 1988 and the filing of reply briefs on or before June 22, This motion was granted and the briefing schedule was modified as requested. Further, the Administrative Law Judge observed that Request Exhibit No. 3, which was to be the revised and expanded agreement between Megan and Wagner setting forth all terms and conditions to be attached to the transfer, had not been submitted as of the date of that order. Therefore, the Administrative Law Judge ordered that the amended transfer agreement, with all relevant terms and conditions, be submitted on or before June 17, Initial briefs in this proceeding were filed by Wagner Gas Company, Megan Oil and Gas Company and Hope Gas, Incorporated, and an initial brief was jointly submitted by the Staff and the Consumer Advocate Division of the Public Service Commission. The only reply brief was submitted by Megan Oil and Gas Company on June 23, Wagner Gas Company and Megan Oil and Gas Company have yet to submit Request Exhibit No. 3, as originally requested at the May 23, 1988 hearing (Tr. Vol. I., pp. 115 and 134), although that request for information was repeated in the June 14, 1988 Procedural Order. The Administrative Law Judge shall proceed to issue an order as if the oral statements of Megan Oil and Gas Company and Wagner Gas Company have been reduced to a tangible written agreement which has been properly submitted for the Commission's prior consent and approval in accordance with the requirements of West Virginia Code $ EVIDENCE Testimony in this proceeding was given by John Hildreth, Vice President of Megan Oil and Gas Company; Mr. John Habjan, owner of Wagner Gas Company; and Doyle Tawney, an affected customer. Mr. Hildreth described the terms of the proposed transfer, the conditions to be attached to the transfer, and Megan Oil and Gas Company's proposed operations after acquisition of the system. Mr. Habjan reaffirmed the terms of the proposed transaction and described how the transaction would benefit customers to be transferred to Megan Oil and Gas Company, as well as the customers who were to remain a part of the Wagner Gas system. At the conclusion of the statements and testimony describing the terms of the proposed transfer, members of the public were given an opportunity to make public statements on the record either in support or against the proposed transfer. All customers who were in attendance were -2-

3 c in support of the proposed transfer of the described lines and territories to Megan Oil and Gas Company, although one customer did indicate an objection to Megan Oil and Gas Company's proposed rates after its acquisition of the system. (Tr. Vol. I., pp , Tr. Vol. II., pp.25-27). As stated in the October 8, 1987 agreement attached to Wagner Gas Company's original application, Megan Oil and Gas Company originally proposed to acquire all wells, leases, pipelines, rights of way, gas purchase contracts and customer accounts of Wagner Gas in Calhoun County and Roane County, down to the westerly end of an 8-inch gas line at the edge of the Village of Newton in Geary District, Roane County, for a purchase price of $100. Under the terms of this proposal, Wagner Gas Company was to transfer its distribution and transmission lines in the described territory, as well as leaseholds and production connected to those lines. Further, Wagner Gas Company was to transfer all purchased gas contracts with suppliers whose lines connect to any point on the transferred pipelines. At the hearing, the parties revealed to the Administrative Law Judge that the parties now wish to transfer all of Wagner Gas Company's facilities and customers within the Newton section of its system to Megan Oil and Gas Company. The record developed at the hearing was unclear as to the exact number of customers and facilities to be transferred from Wagner Gas Company to Megan Oil and Gas Company. This discrepancy could have been clarified by the proper submission of an amended agreement, which the parties failed to provide despite a specific request from the Administrative Law Judge. This discrepancy continues to be reflected in the respective briefs submitted by the parties. Wagner Gas Company stated that it proposed to transfer approximately 80 customers, nine wells and/or leases, 20 miles of pipeline and associated property situated in Roane County and Calhoun County. (See, Wagner Initial Statement of Position, June 15, 1988, p. 2). Megan Oil and Gas Company represented that it agreed to acquire all of Wagner's system and customers in the Newton area of Calhoun and Roane Counties, which consisted of approximately 40 miles of gas pipeline, nine gas wells, four gas leases and 56 utility customers, subject to the Public Service Commission's approval. (See, Megan Initial Statement of Position, submitted on June 17, 1988, p. 1). The Staff and the Consumer Advocate Division represented that the system be transferred consisting of approximately 50 customers, spread out over 25 miles of pipeline running from Newton in Roane County over to Mud Fork and Stinson in Calhoun County. (See, Staff and Consumer Advocate Division Initial Statement of Position, submitted on June 17, 1988, p. 2). For the purposes of discussion, the Administrative Law Judge is going to assume that Mr. Habjan's description of the system to be transferred and the number of affected customers, which included certain clarifications and corrections to Mr. Hildreth's testimony, constitutes the most reliable description of the system to be transferred, since Mr. Habjan should be most familiar with the Newton territory and the associated facilities of Wagner Gas Company. -3-

4 As stated by Mr. Habjan, Wagner Gas Company's system can be conceptually divided into two areas, one area in Newton and one area in and around Clay, Ivydale and Big Otter. The two sections are not currently physically connected, and each system is served by its own distinct gas supply. Approximately 50 of Wagner's 180 customers are located on the Newton section of the system, and the total lines to be transferred to Megan Oil and Gas Company consist of approximately 25 miles of pipeline. The only facility in the Newton area which will not be transferred to Megan Oil and Gas Company is a line running from Sand Creek to Granny's Creek which serves only two customers. The two customers on this line have agreed to transfer to receive gas service from Mountaineer Gas Company. However, since the two customers have not yet been terminated from Wagner Gas Company's system, Mr. Habjan is of the opinion that these two customers have the flexibility of backing out from the service arrangement with Mountaineer to become customers of Megan Oil and Gas Company. (Tr. Vol. I., pp , 64, and 66). In exchange for its ac uisition of the system, Megan Oil and Gas Company agreed to pay up to 3 10,000 to retire portions of an outstanding debt owed by Wagner Gas Company to Hope Gas, Incorporated. The parties agreed to allocate the outstanding Hope debt, as of the date of closing, between Wagner Gas Company's Ivydale and Newton systems according to the 1987 customer usage levels on the respective systems. As a condition of its acquisition, Megan Oil and Gas Company agreed to pay $10,000 of the outstanding debt which is apportioned to the Newton system. Mr. Habjan agreed to personally pay any difference between the portion of the debt which is allocated to the Newton system and the $10,000 payment, to completely retire the Newton system' s obligation. Based upon available information, the balance of the outstanding Hope debt was approximately $56,000 as of the date of the hearing. (Tr. Vol. I., pp. 8, 15, and 71; Tr. Vol. II., 8; Post-Hearing Ex. Nos. 1 and 2). Based upon the 1987 consumption levels for Wagner Gas Company's customers, approximately $14,000 would be allocated to the Newton system. Therefore, if the closing had occurred on the date of hearing, Mr. Habjan would have been obligated to pay approximately $4,000, and Megan Oil and Gas Company would have paid $10,000 to Hope Gas Company. (See, Post-Hearing Ex. Nos. 1 and 2). The existing lines in the Newton area are very old and worn out, and Wagner Gas Company has been experiencing significant line losses through this portion of its system. The level of unaccounted-for gas on the total Wagner system are approximately 60%. Based upon leakage surveys and analysis conducted by Wagner Gas Company, line losses in the Ivydale section less than lo%, while line losses in the Newton segment are approximately 85%. Therefore, substantial upgrading needs to be done to the Newton system. (Tr. Vol. I., pp ). Upon acquisition of the system, Megan Oil and Gas Company represented that it would substantially upgrade the Newton system immediately. The Newton system currently has an excessive level of unaccounted-for gas, and substantial leaks exist throughout that system. Megan Oil and Gas Company represented that it would spend between $50,000 and $100,000 to improve the system by the heating season. Further, depending upon the -4-

5 needs of the system, Megan Oil and Gas Company represented that it planned to spend between $200,000 and $250,000 over the next four or five years to upgrade the system. These improvements would be performed by the use of Megan Oil and Gas Company's own men or performed by Roy Hildreth & Son, an affiliated contractor. Mr. Hildreth indicated that Megan Oil and Gas Company intended to improve as much of the line as possible within a short period to fix the worst leaks on the system, and it would take several years to totally rebuild the system. The Company's immediate focus would be to work on the system's regulators, focus on identified problem areas in the lines, and insert new plastic pipe in some of the old iron lines on the system. If the Company received approval of the acquisition in time to have a sufficient construction season, Mr. Hildreth estimated that the Company could lay and replace approximately 5 to 10 miles of that line prior to the heating season this year. (Tr. Vol. I., pp. 8-10; Tr. Vol. II., pp ). As described by John Hildreth, Megan Oil and Gas Company is primarily an oil and gas production system, and it is a local producer or oil and gas. Primarily, Megan's oil and gas interests are located in Calhoun County, around Grantsville and towards Smithfield. Although it currently has no gas production interest in the Newton area, Megan is considering acquiring some wells in the area, and approximately 80 wells close to the Newton area are owned by affiliated companies owned and operated by the Hildreths. (Tr. Vol. I., pp. 6, 23-24, 27-28, 36-37). As described by Mr. Hildreth, Megan Oil and Gas Company anticipated using the upgraded Newton lines for transporting gas owned by Megan O il and Gas Company, affiliates, or other local producers. Mr. Hildreth was hoping to transport gas during shut-in periods on existing wells during the summer and transport other gas to available markets as soon as the lines are satisfactorily upgraded. (Tr. Vol. I., pp ; Tr. Vol. XX., pp ). Mr. Hildreth was further of the opinion that the gas needs for the Newton system can be met by wells in the area if the line was in adequate condition, even though production from existing local producers serving the Newton system has been declining. If necessary, Mr. Hildreth indicated that additional gas supplies, as needed, can be secured from undedicated leases of Megan Oil and Gas Company and affiliates in the area. (Tr. Vol. I., pp ). Upon acquisition of the system, Megan Oil and Gas Company proposed to charge a rate of $5.92 per Mcf, which is approximately $1.00 per Mcf lower than Wagner Gas Company's current rates. As a condition of its acquisition of the system, Megan proposed that this $5.92 per Mcf rate be maintained for a period of five years after acquisition. Thereafter, Megan Oil and Gas Company proposed that it be permitted to assess a rate equal to the lowest rate charged by the three major gas utilities providing service in the general territory. (Tr. Vol. I., pp. 15, 19-22). Unless these specific ratemaking proposals are specifically adopted by Commission order, Mr. Hildreth represented that Megan Oil and Gas Company would walk away from the transaction. (Tr. Vol. I., pp , 55-56). I1-5-

6 Mr. Hildreth acknowledged that Megan Oil and Gas Company's proposed rates and ratemaking methodologies substantially deviated from the Commission's normal ratemaking process. However, based upon circumstances of this case, the small number of customers to be served on the system, and in view of the substantial investment to be made by Megan Oil and Gas Company in upgrading the system, Mr. Hildreth believed the rate proposals were reasonable and appropriate. Mr. Hildreth observed that the $5.92 rate for the initial five years is lower than the rate currently charged to those customers, and Megan Oil and Gas Company is willing to hold to that rate level regardless of how much money it spends on upgrading the system. Further, by establishing its rates in subsequent years according to the cheapest rate of the three major systems in the area, Megan Oil and Gas Company would not be subject to the regulatory hardships of filing its requested rate changes every year for such a small utility. (Tr. Vol. I., pp ). Megan Oil and Gas Company already operates one public utility which is subject to the full ratemaking process of the Comission. Mr. Hildreth testified that Megan Oil and Gas Company also owned and operated a gas utility serving 200 customers in the northern part of Calhoun County. This system was obtained from Bowser Oil and Gas Company in March of After acquiring the system, Megan Oil and Gas Company performed an extensive upgrade on that system, working on approximately 20 miles of that line in a two-year period. A significant amount of those improvements were booked to the oil and gas production operations of Megan Oil and Gas Company, and Megan Oil and Gas Company is invoicing all parts, labor and materials between the Company's utility customer expenses and production expenses. Although the Company has not requested or received any special ratemaking treatment for its operation of that system, and it is currently before this Commission in a Rule 19-A application, Mr. Hildreth was dissatisfied with the Rule 19-A ratemaking methodology due to the Company's limited ability to challenge the findings and determinations of the Public Service Commission Staff. (Tr. Vol. I., pp , 56-58). If the acquisition is approved, Megan Oil and Gas Company proposed to conduct its utility operations for the Newton area out of the Company's Spencer office. Approximately 50 people, including office staff, work out of that office, and it has employees experienced in line repair and maintenance. As needed, employees would be dispatched to respond to the needs of the public utility, both on an emergency basis and a day-to-day basis. The Company also maintains a 24-hour number at the Spencer office for receiving customer complaints and recorded emergencies. Mr. Hildreth estimated that it was 25 to 28 miles from Spencer to Newton, and approximately 20 miles to the first customer on the Newton system. Due to the rural nature of the system, Mr. Hildreth acknowledged it would take at least a half hour to travel from Spencer to Newton, and substantially more time to reach certain remote area of the system. Therefore, the Company is also contemplating hiring someone located in the Newton area to work as a well tender, line maintenance person and utility manager. (Tr. Vol. I., pp , 45-46). Mr. Habjan testified that the proposed transfer would benefit both the customers on the Newton system and the customers which will remain on Wagner Gas Company's system. Based upon surveys and studies performed by I' 11-6-

7 ~ Mr. ~ believed, Wagner Gas Company in response to Commission directives, Wagner Gas Company determined that 85% of the gas traveling through the Newton system leaks out of the line before it reaches the customer. Without substantial upgrading, such as proposed by Megan Oil and Gas Company, these leaks cannot be satisfactorily eliminated. The Ivydale system is in much better condition, and the unaccounted-for gas level on that system runs less than 10%. Mr. Habjan stated that the proposed transfer would allow Wagner Gas Company's employees to focus their efforts on serving the Ivydale system, and the Newton system will be upgraded in a manner which could not otherwise be afforded by Wagner Gas Company without a significant rate increase. Therefore, the needs of both service areas will best be met by this transfer. (Tr. Vol. I., pp ). Further, by transferring the Newton area of the system, Wagner Gas Company will be able to pay off its outstanding Hope debt in a timely fashion. As stated previously, the needs of each system are met by different supply sources, and only the Newton system currently purchases gas supplies from Hope to satisfy its requirements. The rates and charges of both Newton and Ivydale customers reflect a $2.65 surcharge which was set aside to pay off the outstanding Hope debt. However, due to the amount of leaks on the Newton system and the diminishlng production of local wells serving that system, Wagner Gas has been required to make increasing purchases of natural gas from Hope to meet the needs of Newton customers. Therefore, Mr. Habjan testified that Wagner Gas Company cannot make significant inroads toward reducing the Hope debt as long as the Newton system continues to purchase gas from Hope in its current condition. As a part of the transfer, the Newton portion of the Hope debt will be completely satisfied. If the transfer is completed, the Ivydale system will no longer purchase any gas from Hope, and the entire amount of the $2.65 surcharge assessed to Ivydale customers can be applied to satisfy the remaining Hope debt. Based upon Mr. Habjan's testimony, the Ivydale portion of the outstanding Hope debt can be totally satisfied within two years if the system is transferred, but the Hope debt will never be extinguished if the system remains combined. (Tr. Vol. I, pp , 96-97). Further, since Hope represented the highest priced gas used by Wagner Gas Company's system, it is anticipated that the Ivydale systems' purchased gas expenses can be significantly reduced if it is no longer required to purchase gas from Hope. (3.). Doyle Tawney, a customer of Wagner Gas Company to be transferred to Megan Oil and Gas Company, testified that he has been receiving poor service, and has experienced many gas outages and low pressure problems over the years. He has sought the Commission's assistance by filing formal complaints which sought receivership for the entire Wagner system. (Tr. Vol. I., pp ). Tawney is in fully support of the proposed transfer of the entire Newton system. He had personally reviewed the proposal, and numerous meetings had been conducted between the Commission Staff, the Consumer Advocate Division and the affected Wagner customers to discuss the various options, including the current proposal before the ALJ. As described, he the customers would benefit from the transfer, and he was willing -7-

8 L to accept service from Megan at the proposed $5.92 per Mcf rate. Vol. I., pp ). DISCUSSION (Tr. All parties supported the proposed acquisition of the entire Newton and Calhoun County segments under Wagner Gas Company's utility system by Megan Oil and Gas Company. However, the Staff and the Consumer Advocate Division could not recommend adoption of Megan's proposed ratemaking methodology for establishing future rates for the Newton system according to the lowest of the three major gas utilities in the area. The Consumer Advocate Division and the Commission Staff also stated certain reservations about the Commission's ability to authorize the $5.92 per Mcf rate for the first five years in a manner which was consistent with the Commission's obligations and ratemaking authority as established by the applicable statutes. However, under the unique circumstances of this case, the Consumer Advocate Division and the Staff recommended that the Commission adopt the five-year moratorium at a $5.92 per Mcf rate, due to the uncertainty of the level of investment to be made in renovating the lines, and due to the fact that the $5.92 per Mcf rate is partially derived from Wagner's existing rate structure, which is based on the existing cost of service for the overall system. (See, Joint Initial Statement of Position filed by Staff and the Consumer Advocate Division, submitted on June 17, 1988). Although they encouraged Megan's acquisition of the Newton system, and accepted the five year rate moratorium, the Consumer Advocate Division and Commission Staff could not commit to a ratemaking mechanism which would take effect five years into the future, to reference prices paid to other utilities as a proxy for Megan Oil and Gas Company's cost of serving these customers. Further, if the Commission is to consider accepting a proxy for ratemaking purposes, the Staff and the CAD represented that an appropriate proxy should not exceed the rates paid by existing Wagner customers. (See, Joint Initial Statement of Position filed by Staff and the Consumer Advocate Division, submitted on June 17, 1988). In reply to the Staff and Consumer Advocate Division, Megan Oil and Gas Company represented that it was not interested in acquiring a gas utility system that has approximately 85% line loss and committing $250,000 in capital funds over five years to improve the system without some assurance from the Commission that it will be able to charge a rate to its customers that is at least equal to the lowest rate charged by the three major gas utilities. While the Staff and the Consumer Advocate Division's recommendation would have the Commission agree to consider the methodology in the future, without adopting it, they would further require that the resulting rate be no higher than the rates paid by the customers on the remaining portion of the Wagner system. This was simply not acceptable to Megan. While Megan is aware that all Commission decisions are subject to change, depending on changing conditions and circumstances, Megan would nevertheless urge this Commission to approve, in advance, all of Megan's proposed ratemaking methodology without any conditions. (Megan Reply Statement of Position, submitted on June 23, 1988). m -8-

9 Hope Gas, Incorporated was in support of the proposed transfer to the extent that its conditions adequately protected the interests of Hope Gas, Inc. by fairly allocating the outstanding Hope debt between the two systems and taking appropriate measures to ensure that the portion of the Hope debt which would have been recovered from the Newton area customers is satisfied as a part of the transaction. (Hope Initial Statement of Position, submitted on June 17, 1988). There is no question that the record in this case fully establishes that the proposed transfer of the entire Newton system to Megan Oil and Gas Company would further the interests of both the customers to be transferred in the Newton area, as well as the remaining customers on the Wagner system. The problems experienced on the Wagner Gas system have been well documented in prior Commission cases. In Wagner Gas Company, Case No G-GI and Tawney, et. a1 v, Wagner Gas Company, Case No G-C, this Commission did a comprehensive investigation into the service problems and deteriorated conditions which have plagued the Wagner Gas system. By order entered on May 20, 1986 in those cases, Wagner Gas Company was directed to file a report on the repair, renovation, sectionalization and abandonment of lines in the Newton section of its system, and adopt and file customer service line standards. Further, Wagner Gas Company was directed to establish a program for the resolution and correction of small scale problems on the Wagner Gas system, conduct a complete leak survey of the system, and establish a construction and maintenance program for its entire system. Further, if it was determined that various sections of Wagner Gas lines had been effectively abandoned, Wagner Gas Company was directed to specify the sections of lines and customers which have been abandoned, and submit specific plans and courses of action to correct or rectify this problem. As a result of these and related directives, the Commission and its Staff have been effectively monitoring Wagner Gas Company's efforts to rectify the severe service problems experienced on its system. As stated by Mr. Habjan, a significant portion of these service problems are experienced on the Wagner Gas Company's Newton section of its system. This section has a low customer density and a very high level of unaccounted-for gas which cannot be rectified without substantial and costly upgrade to its system through extensive line replacement and repair. In many remote areas of the Newton system, necessary repairs would involve the replacement of several miles of lines to serve a handful of customers. There is concern as to whether Wagner can afford to perform such necessary improvements without drastically escalating its existing rates, and Wagner Gas Company has indicated that it may seek to abandon certain sections of its Newton system. Based upon testimony developed at the hearing, the proposed transfer of the entire Newton system will allow Wagner Gas Company to eliminate its dependence on supplies from Hope Gas, Inc., thereby allowing it to reduce its cost of gas supply, as well as enable the Company to pay an outstanding debt to Hope Gas, Inc. D -9-

10 As related by the initial brief of Hope Gas, Inc., Wagner Gas Company built up a significant debt owed to Hope for purchased gas. In Case No G-30C, Hope intervened in Wagner's 1985 PGA case and requested that certain measures be taken to help ensure that the existing debt owed to Hope and new ongoing obligations would be honored. In that case, the Commission ordered Hope to install an emergency tap at Newton. Wagner, among other things, was required to establish an escrow account into which all purchased gas and surcharge revenues would be deposited, to be used solely to pay Wagner's gas suppliers. The Commission instituted a special surcharge of $1.063 per Mcf to be included in rates to retire a past due debt owed to Hope by Wagner, and provided that a surcharge of $1.59 per Mcf to pay an outstanding indebtedness of Wagner to Columbia Gas Transmission Corporation was to remain in effect and be utilized to retire the outstanding debt owed to Hope after the Columbia Gas Transmission Corporation debt has been satisfied. Wagner Gas Company was also directed to sell excess gas to Hope during the months of May through September to help reduce its outstanding indebtedness. (See, October 4, 1985 Order on Motion and October 31, 1985 Final Order in Case No G-30C). While the measures taken in Case No G-30C and subsequent 30-C cases have kept the outstanding Hope debt from growing substantially, Wagner Gas Company has not been able to significantly reduce the balance of the Hope debt, despite the continuing surcharges. In Case No G-30C, it was determined that Wagner Gas Company owed Hope $53, by the end of July, (See, Final Order, Case No OC). Based upon Post-Hearing Exhibit No. 1, Wagner Gas Company owed Hope $57, after Hope's April 1, 1988 meter reading. Testimony at the hearing indicated that Wagner's debt to Columbia Gas Transmission Company was paid off in January of 1988, and Hope has been receiving revenue from both surcharges, totaling $2.64 per Mcf of gas sold, to retire the outstanding Hope debt. (Tr. Vol. I., p. 72). Hope's initial brief indicated that Wagner Gas Company has made a payment of $3, since Post-Hearing Exhibit No. 1 was prepared. (See, June 17, 1988 Initial Statement of Hope, pp. 3-4). As proposed, the Newton customers will be entirely relieved of the Hope debt upon closing, since the debt will be satisfied by Megan and Mr. Habjan as a condition of the transfer. While the Ivydale portion of the debt will remain, it can be reasonably paid off by continuing the existing surcharge to the remaining Wagner customers over the next two years, since no new purchases of Hope gas are projected for the Ivydale system. Therefore, it is apparent that the only realistic chance for eliminating the Hope debt and the associated surcharge in the foreseeable future is presented by this transfer. Further, based upon the evidence presented at the hearing, service to all customers would be improved as a result of the transfer. Wagner Gas Company would be able to focus its resources and manpower on the Ivydale system, which already has an acceptable level of unaccounted-for gas and a better customer density than the Newton system. Also, with the contemplated improvements by Megan Oil and Gas Company, the Newton customers would receive better service as a result of immediate and future improvements to its system. Were it not for the fact that Megan Oil and Gas Company intended to use these same lines to transport gas for affiliated

11 suppliers and other local suppliers in the area to other markets, it is unlikely that Megan Oil and Gas Company would be willing to place such an investment in such a rural system. Therefore, it is apparent that the only manner in which the Newton system will be significantly improved in the foreseeable future is as a result of the proposed transfer. The only portions of the proposed transfer which are of concern to the Consumer Advocate Division, Commission Staff and this Administrative Law Judge are the proposed rates and ratemaking methodologies proposed by Megan Oil and Gas Company as a condition of the transfer. The Public Service Commission is a creation of the Legislature, and it has no power or authority except that which has been granted to the Commission by statute. The Public Service Commission has no inherent - jurisdiction, power or authority and can exercise only such as is authorized by -statute. Eureka Pipeline Company v. Publi-c Service Commis- -3 sion 148 W.Va. 674, 137 S.E.2d 200 (1964); Wilhite v. Public Service Commission. 150 W.Va S.E.2d 273 (1966). The Commission's legislative mandate to regulate the rates of public utilities is succinctly set forth in West Vir inia Code (a), which stated that the Public Service Commission - h duty and authority to regulate the rates of public utilities to "ensure that rates and charges for utility services are just, reasonable, applied without unjust discrimination or preference,... and based primarily on the costs of providing these services." (Code (a)(4)). The Commission's general authority to establish and regulate rates of public utilities to carry out this mahdate is set forth &West - Virginia Code $24-2-3, which provides in part: The commission shall have power to enforce, originate, establish, change and promulgate tariffs, rates, joint rates, tolls and schedules for a11 public utilities... and whenever the commission shall, after hearing, find any existing rates, tolls, tariffs, joint rates or schedules unjust, unreasonable, insufficient or unjustly discriminatory or otherwise in violation of any of the provisions of this chapter, the commission shall by an order fix reasonable rates, joint rates, tariffs, tolls or schedules to be followed in the future... West Virginia Code $ also provides: In determining just and reasonable rates, the commission may audit and investigate management practices and policies, or have performed an audit and investigation of such practices and policies, in order to determine whether the utility is operating with efficiency and is utilizing sound management practices. Further, West _I Virginia Code $ provides that: -11-

12 In determining just and reasonable rates, the commission shall investigate and review transactions between utilities and affiliates. The commission shall limit the total return of the utility to a level which, when considered with the level of profit or return the affiliate earns on transactions with the utility, is just and reasonable. Rates and charges may be modified in three general ways: (1) by application or petition of the public utility, (2) by show cause or investigation initiated upon the Commission's own motion, or (3) by show cause or investigation instituted by motion or complaint of affected customers or other interested parties. The statutory framework for submitting and processing a rate case is set forth in West Virginia Code $24-2-4a. This established procedure provides standards for providing notice to the affected public, suspending the proposed rates during review as appropriate, conducting public hearings as necessary to adequately protect the public interest, and establishing the burden of proof applied by the Commission. West Virginia Code a clearly places the burden of proof upon the utility seeking a rate change, as follows: At any hearing involving a rate sought to be increased or involving the change of any rates, charges, classification, regulation or practice, the burden of proof to show the justness and reasonableness of the increased rate or proposed increased rate, or the proposed change of rate, charges, classification, regulation or practice shall be upon the public utility making application for such change. Further, West Virginia Code a also provides in part, that: no public utility subject to this chapter (Chapter 24)... shall change, suspend or annul any rates, joint rate, charge, rental or classification except after thirty days' notice to the commission and the public, which notice shall plainly state the changes proposed to be made in the schedule then in force and the time when the changed rates or charges shall go into effect... provided, the commission may, in its discretion, and for good cause shown, allow changes upon less time than the notice herein specified, or may modify the requirements of this section in respect to publishing, posting and filing of tariffs, either by particular instructions or by general order. Pursuant to its authority to establish ratemaking methodologies by General Order, this Commission has established alternate procedures to respond to the needs of utilities and their customers. General Order established a separate ratemaking procedure in which the cost of a gas utility's purchased gas is treated as a separate rate element to be scrutinized either semi-annually or annually to accurate reflect the cost of a utility's purchased gas expenses. This procedure, which is set forth 1-12-

13 in Rule 30-C of the Commission's Rules and Regulations for the Government of the Construction and Filing of Tariffs of Public Utilities and Common 'Carriers by Motor Vehicle, essentially allows the utility to include an increment which is designed to recover the utility's projected purchased gas expenses, as well as true up any underrecovery or overrecovery of prior period purchased gas expenses. Therefore, this procedure essentially allows the gas utility to recover its reasonable purchased gas expenses dollar for dollar. The standards of review for a purchased gas proceeding are supplemented by Code c, which provides that before a utility's rates are increased to reflect increasing purchased gas costs, the utility must establish that lower priced supplies are not readily available from other sources and contracts between the utility and its suppliers are negotiated as arm's length and are not detrimental to its customers. The utility's base rates can be established in a separate proceeding I/ in accordance wcth the provisions of West Virginia Code a and Rule 42 of the Commission's Rules and Regulations for the Government of the Construction and Filing of Tariffs of Public Utilities and Common Carriers Y by Motor Vehicle. In a general rate case, the utility's non-purchased gas operating expenses are reviewed, and a base rate is established to recover the utility's reasonable and necessary operation and maintenance expenses and provide a fair and reasonable rate of return for the utility. A small utility such as Megan Oil and Gas Company may take advantage of a simplified ratemaking procedure for establishing base rates through Rule 19-A of the Commission's Rules and Regulations for the Government of the Construction and Filing u of Tariffs of Public Utilities and Common Carriers by Motor Vehicle. Under this shortened ratemaking procedure, the II Commission Staff performs the initial audit and review of the utility's books and records- and recommends rates designed to recover the utilitjt's reasonable costs and expenses and provide a reasonable rate of return. The Staff audit, conclusions and recommendations are then submitted for the utility's review and comment. By proceeding in this manner, a small utility is able to avoid the cost and expense of preparing the substantial supporting data needed to justify a rate increase, and it need only challenge or supplement the Staff study as it deems appropriate. This method is particularly useful to small utilities who cannot afford to maintain in-house rate experts and accountants, and who wish to keep the costs of outside services to a minimum. Under normal circumstances, when a utility undergoes a change in ownership, the existing rates are adopted and continued to the existing customers. Rule 31 of the Commission's Rules and Reeulations for the Government of the Construction and Filing of Tariffs ok Public Utilities and Common Carriers by Motor Vehicle provides as follows: In case of change of ownership or control of a utility, or when a utility or a part of its business is transferred from the operating control of one company to that of another... the company which will thereafter operate the utility business must use the rates, classifications and regulations of the former operating company, (unless authorized to change by the Commission) and shall issue, file and post an adoption -13-

14 notice, on a form furnished by the Commission, adopting, ratifying and making its own all rates, rules, classifications and regulations of the former operating utility, on file with the Commission and effective at the time of such change or ownership or control. In this particular case, Megan Oil and Gas Company is requesting the Commission's authority to change the rates by lowering them from their existing levels. The existing rates and charges of Wagner Gas Company on file with the Commission are as follows: First Mcf $ Mcf to 99 Mcf 6.92 per llcf All over 100 Mcf 6.84 per Mcf Wagner's existing rates are comprised of three components. First, Wagner Gas Company has a PGA increment of $2.20 per Mcf which reflects its cost of securing its gas supplies or its customers. Second, Wagner's rates include the previously described surcharge of $2.65 per Mcf to pay the outstanding indebtedness to Hope Gas, Inc. Finally, the balance of the rates for the various rate blocks reflects the base rates which have been approved and adopted for Wagner Gas Company. Megan Oil and Gas Company's proposed rates are somewhat higher than the rates which would be assessed to customers if the Hope Gas surcharge is removed, but they are appreciably lower than the existing rates of Wagner Gas Company. Although the Administrative Law Judge would have permitted Megan Oil and Gas Company to charge the existing rates of Wagner Gas Company to the Newton customers as long as Megan Oil and Gas Company absorbed a proportionate share of the outstanding Hope debt, in view of the proposal, it is now necessary to review the reasonableness of the stipulated $5.92 per Mcf rate. In this case, Megan Oil and Gas Company is effectively requesting a waiver of the Commission's normal ratemaking framework by placing a $5.92 rate into effect for five years. While the utility would be allowed to not seek an increase in its base rates for whatever period it desired, Rule 30-C of the Commission's Tariff Rules would have otherwise required Megan Oil and Gas Company to file annual statements of its projected and prior period purchased gas expenses to be recovered through a PGA increment. Therefore, Megan Oil and Gas Company's proposal also effectively freezes the PGA increment for a period of five years. Further, Megan's proposal effectively prevents the Commission for closely scrutinizing Megan's supply contracts and other interactions with its affiliates. While the affiliated contracts would still be submitted for approval in accordance with West Virginia Code , the prices under the various contracts would apparentlyxve no ratemaking effect under Megan's proposal since rates are not based on costs. Under the unique circumstances of this case, the Administrative Law Judge finds that Megan Oil and Gas Company's proposal to freeze its rates at a level of $5.92 per Mcf will be permitted as long as Megan Oil and Gas Company acquires the entire Newton system, and undertakes the improvements to the Newton system as described at the hearing. As described by Megan -14-

15 Oil and Gas Company, the utility would be undergoing an extreme transition during the first five years as dramatic improvements are made to the system. If these improvements were done for no other purpose than serving utility customers, the Company would be allowed to file general rate cases to accurately reflect the total investment in its system so that it could recover a reasonable rate of return through its base rate increments. However, in this circumstance. Megan Oil and Gas Company also anticipates that the same lines would also be used for non-utility purposes, to transport gas for other local producers and affiliates in the area. At this time, it is uncertain what levels of through-put are anticipated for these lines, and there will be a substantial delay in the actual use of these lines for non-utility purposes until the lines are improved to an adequate level to transport such gas without significant line losses. Therefore, for a substantial period of time, it will be impossible to accurately determine how the substantial investment of Megan Oil and Gas Company should be allocated between utility and non-utility functions, or otherwise establish a cost of service for the utility customers which ensures that they will not be subsidizing Megan Oil and Gas Company's non-utility operations. Further, during this same five-year period, it is apparent that Megan Oil and Gas Company anticipates that the purchased gas expenses for the Newton area customers can be significantly reduced by reducing the reliance on Hope Gas, Inc. as a supplier and by significantly reducing the levels of line loss experienced on the system as a result of the improvements. Therefore, the increasing base rate as a result of Megan Oil and Gas Company's investment in the Newton system should be offset by a reduction in purchased gas expenses. These savings could be significant if Megan Oil land Gas Company can successfully reduce the Newton system's unaccounted-for gas to an acceptable level, as opposed to its current level of 85%. I Based upon these factors, under the Commission's normal ratemaking procedures, it is apparent that Megan Oil and Gas Company would be required to make a multitude of rate filings to accurately reflect the dramatic changes to the Newton system and to fairly and accurately recover its costs 'of providing service to those customers. Therefore, the Administrative Law Uudge determines that Megan Oil and Gas Company's proposal to freeze rates for a five-year period during this transition period is both just and reasonable, and provides for rate stability to the affected customers at a llower rate than the existing rates paid to Wagner Gas Company. While the $5.92 rate is not specifically based upon a cost of service, the Administrative Law Judge finds that it reasonably reflects the existing cost of providing service to those customers irmnediately after the transfer. Effectively, Megan Oil and Gas Company can be viewed as effectively eliminating approximately $1.00 of the existing surcharge which is being assessed for retiring the Hope debt. Although Mr. Habjan is paying a share of that Hope debt which is allocated to the Newton system, by the terms of this agreement, Megan Oil and Gas Company is absorbing a significant portion of Newton's share of the Hope debt. Therefore, it would have been reasonable to continue a reduced portion of the existing surcharge to compensate Megan Oil and Gas Company for its retirement of the customer's obligations. Therefore, the $5.92 rate can be viewed as accurately reflecting the existing cost of service to those customers, and L

16 it is a reasonable rate to apply for the five-year rate moratorium during the Newton system transition. After reviewing the ratemaking proposals advanced by all parties for the establishment of an acceptable rate at the conclusion of the five-year rate moratorium, and after review of the Commission's power and authority to establish rates and charges, the Administrative Law Judge is of the opinion that a prospective ratemaking methodology should not be adopted in this case. The application and public notice given to the public included no specific notice of the proposed ratemaking methodology, and it is impossible to project or evaluate the magnitude of the prospective rate increase or decrease which would be implemented at the end of the five year period, or thereafter as a result of the proposed methodology. Therefore, no notice has or can be given to the public which would adequately inform the affected customers of the impact of the proposed prospective change in rates. Essentially, by adopting the methodology at this time, the ALJ would be effectively prejudging the need for a rate increase five years from now without giving the affected customers notice and opportunity to be heard regarding the appropriateness of the rate increase. Therefore, any rate change as a result of the methodology could not be implemented without violating the affected customers' due process rights. Based upon the record in this case, the ALJ is also unable to establish the reasonableness of the proposed ratemaking proxy for cost for this utility, how ever it is fashioned. As stated previously, there is inadequate data available to establish Megan Oil and Gas Company's cost of providing service to the affected customers, the capital investment of Megan Oil and Gas Company in the facilities or determine a reasonable rate of return which fairly allows the utility adequate compensation for its investment at the end of the five-year period. Without an ability to examine the associated costs and expenses of Megan Oil and Gas Company's utility operations, the ALJ is not able to reasonably review the reasonableness of a proposed proxy rate to be used in five years, particularly due to the extreme system transition to be undertaken by Megan. While the Commission has the clear authority to waive its rules of practice and procedure and establish an alternate ratemaking methodology or utilize a proxy on an experimental basis, this Commission cannot permanently waive its ratemaking authority or otherwise escape its obligations mandated by statute. This Commission is required to investigate and review the transactions between utilities and affiliates in determining just and reasonable rates under West Vir inia Code , b and Further, the burden of Fo&abm the reasonableness of the proxy methodology is clearly upon Megan Oil and Gas Company, as set forth in Code a. None of these obligations or burdens can be properly dezarged by the prospective adoption of the proxy with this limited record. Finally, adoption of an undetermined rate by proxy is in direct contravention of the Commission's statutory obligation to ensure that a utility's rates are based primarily on the costs of providing these services. While the proxy would establish rates and charges for the Newton -16-

17 eustomers according to another utility's cost of providing service to its eustomers, such a proxy may or may not reasonably reflect Megan Oil and Gas Zompany's costs for providing utility service to the Newton area. Various Jtilities have differing levels of investment per customer; various sources Df supply which may be priced at relatively higher or lower levels, depending on the available sources which can be secured for the utility; and may have increased or decreased operation and maintenance expenses ghich reflect the size of the utility operations, customer density on its system, and the relative age of the utility's system. The rates charged to a large utility may not accurately reflect Megan Oil and Gas Company's cost Df providing service, just like the future rates paid by the Ivydale customers on the Wagner system may not fairly and accurately recover the costs of Megan Oil and Gas Company for providing service to the Newton customers. With the limited information and uncertain costs and expenses for Megan Oil and Gas Company's utility operations in the future, it is virtually impossible to establish a reasonable and appropriate proxy to be used for Megan Oil and Gas Company's reconfigured system five years down the road. Therefore, based upon the Commission's limited statutory authority, its obligation to ensure that rates are just and reasonable, and its need to protect the rights of utility customers to challenge the need for increased rates and charges, the Administrative Law Judge shall not specifically adopt the proxy methodology to be used for ratemaking purposes after five years has passed, either as proposed by Megan Oil and Gas Company or as limited by the Commission Staff and Consumer Advocate Division. At the end of the five year moratorium, Megan Oil and Gas Company shall be free to submit an appropriate application for increased rates and charges if necessary to allow it to recover its costs of providing utility service and earn a fair rate of return on its investment in the system, or request that the Commission allow it to implement rates and charges according to an appropriate proxy methodology which can be reviewed for reasonableness in light of Megan Oil and Gas Company's cost of providing utility service. Further, the Administrative Law Judge observes that even if the proxy methodology were approved by this order, the Administrative Law Judge is of the opinion that such approval could neither properly bind the Commission nor obligate it to establish prospective rates and charges according to the requested proxy methodology. In view of the Commission's statutory obligations imposed upon it by the Legislature, such a proxy methodology could be struck down as against the public interest in spite of a prior order which purportedly adopts the methodology. Therefore, any assurance which can be given by the Administrative Law Judge at this time would purely be illusory and misleading, since the Commission does not have the statutory authority to establish and use a methodology by which rates and charges for Megan Oil and Gas Company can be established by proxy, - ad infinitum. The Commission's authority to grant its consent to the proposed sale of the Newton system to Megan Oil and Gas Company is governed by West Vir inia Code $ As provided by that section, the Commission s h x *pumc will be convenienced thereby, enter such orders as it may deem proper and as the circumstances may require, attaching thereto such conditions as it may deem proper, consenting to the entering into or the -17-

18 ll doing of the things herein provided, without approving the terms and conditions thereof, and thereupon it shall be lawful to do the things provided for in that order. Therefore, the Administrative Law Judge shall approve the proposed sale of the entire Newton system to Megan Oil and Gas Company, conditioned upon Megan Oil and Gas Company's proposed investment in the system, and the proposed retirement of the Newton portion of the outstanding Hope debt. This approving order shall grant Megan Oil and Gas Company the authority to impose rates and charges at $5.92 per Mcf for a period of five years, if it so desires. If it does not wish to impose the rates and charges for the five-year period as described at the hearing, Megan Oil and Gas Company may choose to adopt the existing rates and charges of Wagner Gas Company for providing service to its customers, in accordance with Rule 31 of the Commission's Tariff Rules. FINDINGS OF FACT 1. Megan Oil and Gas Company proposed to acquire all customers, facilities, leaseholds and related purchased gas contracts of Wagner Gas Company's Newton system, which consists of approximately 25 miles of pipeline, 50 customers, nine gas wells and four gas leases. (Tr. Vol. I., pp , 64 and 66). 2. The parties have proposed to allocate an outstanding Hope debt of approximately $56,000 between the Newton system to be transferred to Megan and the remaining Wagner system according to 1987 customer usage levels. As a condition of the transfer, Megan Oil and Gas Company shall pay $10,000 to retire portions of the outstanding Hope debt allocated to the Newton system. Mr. Habjan, owner of Wagner Gas Company, agreed to personally pay any difference between the Newton share of the allocated debt and the $10,000 payment, to completely retire the Newton share of the outstanding Hope debt at closing. (Tr. Vol. I., pp. 8, 15, and 71; Tr. Vol. II., p. 8; Post-Hearing Ex. Nos. 1 and 2). 3. The existing lines in the Newton area are deteriorated. Based upon leakage surveys, the level of unaccounted-for gas in the Newton area is approximately 85%. (Tr. Vol. I., pp ). 4. Upon acquisition of the Newton system, Megan proposed to spend between $50,000 and $100,000 to improve the system by the 1988 heating season, and it proposed to spend a total of $200,000 to $250,000 over the next five years to upgrade the system. (Tr. Vol. I, pp. 8-9; Tr. Vol. II., pp ). 5. Megan anticipated using the upgraded Newton lines for transporting gas owned by Megan, its affiliates or other local producers to transport gas during shut-in periods and transport other gas to available markets as soon as the lines are satisfactorily upgraded. (Tr. Vol. I., pp. 6, 23-24, 27-28, 36-37; Tr. Vol. IT., pp ). 6. If the line is substantially upgraded, Megan believed that the gas needs for the utility customers can be met by local producers, and additional gas suppliers can be secured from undedicated leases of Megan and its affiliates, if needed. (Tr. Vol. I., pp ). /I I' -18- I1

19 /I 7. By transferring the Newton system, Wagner Gas Company will be able to focus its manpower and resources on its remaining customers in the Ivydale system, which already has a higher customer density and a level of unaccounted-for gas below 10%. Further, the remaining customers will not need to rely upon Hope as a supplier, which represents Wagner's highest cost of gas supplies. This will allow the Ivydale customers to pay off their share of the Hope debt through an existing surcharge of $2.65 over two years, and reduce the system's cost of purchased gas. (Tr. Vol. I., pp , 72-82, 96-97). 8. After acquisition, Megan Oil and Gas Company proposes to assess a rate of $5.92 per Mcf for a period of five (5) years. Thereafter, Megan Oil and Gas Company proposes to establish rates according to the lowest rate among the three major gas utilities in the area. (Tr. Vol. I., pp. 15, 19-22).. 9. Unless those specific ratemaking proposals are specifically adopted by Commission order, Megan represented that it would not go forward with the transaction. (Tr. Vol. I., pp , 55-56). 10. The proposed $5.92 per Mcf rate is approximately $1.00 per Mcf lower than the existing rates of Wagner Gas Company on file with this Commission, which are stated below: First Mcf Next 99 Mcf Over 100 Mcf $9.00 per Mcf 6.92 per Mcf 6.84 per Mcf Wagner's rates include a purchased gas increment of $2.20 per Mcf and a surcharge of $2.65 per Mcf to retire the outstanding Hope debt. CONCLUSIONS OF LAW 1. The Public Service Commission is a creation of the Legislature, and it has no power or authority except that which has been granted to the Commission by statute. The Public Service Commission has no inherent jurisdiction, power or authority and can exercise only such as is authorized by statute. Eureka Pipeline Company v. Public Service Commission, 148 W.Va. 674, 137 S.E.2d 200 (1964); Wilhite v. Public Service Commission, 150 W.Va. 747, 149 S.E.2d 273 (1966). 2. The Commission's legislative mandate to regulate the rates of public utilities is succinctly set forth in West Vir inia Code $24-1-1(a), which stated that the Public Service CommissEha*uGnd authority to regulate the rates of public utilities to "ensure that rates and charges for utility services are just, reasonable, applied without unjust discrimination or preference,.. and based primarily on the costs of providing these services." (Code l(a) (4)) Pursuant to West Virginia Code $ , c and , this Commission is directed to scrutinize transactions between a utility and its affiliates, and establish rates which limit the total return of the utility to a level which is just and reasonable, considering the level of profit or return earned by the affiliate on transactions with the utility. -19-

20 ~ 2d I 4. West Virginia Code a clearly places the burden of proof /upon the utmty to establish that its proposed rate modifications are just lahd reasonable: (Chesapeake and Pofomac Telephone Company v. Public Service Commission, W.Va., 301 S.E.2d 798 (1983). I 5. In all proceedings to modify rates and charges, the public must e provided adequate notice of the proposed rate change and be provided an kdequate opportunity to review and challenge the proposed rates and have ample opportunity to be heard regarding any protest. (See, Code ;,vEPCO v. Public Service Commission, 162 W.VA. 202, 248 S.E. 2d 322 (1978); State ex. rel. Knight v. Public Service Commission, 161 W.Va. 447, 245 S.E. 144 (1978)). 6. In this case, Megan Oil and Gas Company is effectively requesting a waiver of the Commission's normal ratemaking framework by placing a $5.92 rate into effect for five years. While the utility would be allowed to not seek an increase in its base rates for whatever period it desired, Rule 30-C of the Commission's Tariff Rules would have otherwise required Megan Oil and Gas Company to file annual statements of its projected and prior period purchased gas expenses to be recovered through a PGA increment. Therefore, Megan Oil and Gas Company's proposal also effectively freezes the PGA increment for a period of five years. Further, Megan's proposal effectively prevents the Commission for closely scrutinizing Megan's supply contracts and other interactions with its affiliates. While the affiliated contracts would still be submitted for approval in accordance with West Virginia Code , the prices under the various contracts would apparently have no ratemaking effect under Megan's proposal since rates are not based on costs. 7. Under the unique circumstances of this case, Mega1 Oil and Gas Company shall be permitted to freeze its rates at $5.92 per Mcf for a period of five (5) years to provide rate stability during a dramatic transition period in which significant amounts of capital will be infused into the Newton system to benefit both utility and non-utility operations by Megan. During this same period, by virtue of system improvements, the system's purchased gas expenses should be significantly reduced by elimination of reduction of the unaccounted-for gas levels on the system. Further, since the amount of non-utility gas transportation is undeterminable at this time, it is virtually impossible to establish a cost of service or allocate the capital infusion between utility and non-utility function until the use of the system stabilizes. The $5.92 rate reflects a cost-based rate for the Wagner system and represents the current cost of serving the Wagner customers, less a portion of the surcharge to pay the Hope debt, the ALJ finds it reasonable to assess the $5.92 per Mcf rate during the transitional period. 8. Since the record is inadequate to project the Newton system's revenue requirements and cost of service in five years, the magnitude of the prospective rate change can neither be noticed or stated, and a comparison between any proposed ratemaking by proxy cannot be addressed at this time, the ALJ concludes that Megan's proposed proxy for use after five (5) years cannot be properly established at this time. The establishment of such a proxy for prospective use would violate the statutorily mandated

21 standards of notice, review, hearing and the associated burdens of proof set forth in Code (a)4, , (g) and (c). Therefore, the proposed proxy methodology shall neither be accepted nor rejected at this time. Rather, it shall not be preapproved by the ALJ as a condition of the transfer. Megan shall be free to submit this proposed proxy methodology or any other proxy or ratemaking methodology for the Commission's consideration and approval at the conclusion of its proposed ratemaking moratorium. 9. The Commission's authority to grant its consent to the proposed sale of the Newton system to Megan Oil and Gas Company is governed by West Virginia Code As provided by that section, the Commission shall, if the public will be convenienced thereby, enter such orders as it may deem proper and as the circumstances may require, attaching thereto such conditions as it may deem proper, consenting to the entering into or the doing of the things herein provided, without approving the terms and conditions thereof, and thereupon it shall be lawful to do the things provided for in that order. 10. After a review of the affected public interest, the Administrative Law Judge shall approve the proposed sale of the entire Newton system to Megan Oil and Gas Company, conditioned upon Megan Oil and Gas Company's proposed investment in the system, and the proposed retirement of the Newton portion of the outstanding Hope debt. This approving order shall grant Megan Oil and Gas Company the authority to impose rates and charges at $5.92 per Mcf for a period of five years, if it so desires. If it does not wish to impose the rates and charges for the five-year period as described at the hearing, Megan Oil and Gas Company may choose to adopt the existing rates and charges of Wagner Gas Company for providing service to its customers, in accordance with Rule 31 of the Commission's Tariff Rules. ORDER IT IS, THEREFORE, ORDERED that Megan Oil and Gas Company is hereby granted the authority to acquire the entire portions of the Wagner Gas Company facilities, customers and leaseholds identified herein as the Newton system, consisting of approximately 25 miles of pipeline, 50 customers, nine wells and four leaseholds, subject to the conditions contained below. IT IS FURTHER ORDERED that the outstanding debt of Wagner Gas Company owed to Hope Gas, Incorporated at the time of closing shall be apportioned between the Newton section and the remaining Wagner sections according to their respective 1987 customer usage levels, and the Newton portion of the Hope debt shall be satisfied at closing by a $10,000 payment by Megan, with the balance of the Newton portion of the debt satisfied personally by John Habjan, as described by the parties. IT IS FURTHER ORDERED that Megan Oil and Gas Company is hereby directed to undertake an upgrade of the Newton system according to the methods, magnitude and schedule described at the hearing. Accordingly, between $50,000 and $100,000 shall be infused into the upgrade of the Newton system in the next year, and a total of approximately $200,000 to -21-

22 $250,000 shall be applied to upgrade the system over the next four to five years. IT IS FURTHER ORDERED that, as a condition of the transfer, Megan Oil and Gas Company shall be permitted to charge a rate of $5.92 per Mcf for five years after the transfer is accomplished, and it shall be relieved from the Commission's filing requirements under Rule 30-C of the Comission's Rules and Regulaticks f6r the Government of the Construction and of Taritfs of Public Utilities and Common Carriers bv Motor Vehicle. _I for that same period if it chooses to implement such a rate moratorium. IT IS FURTHER ORDERED that if Megan Oil and Gas Company does not wish to implement a five-year rate moratorium in accordance with the provisions stated above, Megan may adopt Wagner Gas Company's existing tariff for providing service to the Newton customers in accordance with Rule 31 of the kommissi&' s Rules and Regulations for the Government of the Construction and Filing of Tariffs of Public Utilities and Common Carriers by Motor Vehicle. If these rates are adopted, Megan Oil and Gas Company shall be subject to the Commission's full regulatory authority, without exemption. IT IS FURTHER ORDERED that within fifteen (15) days after its acquisition of the Newton system, Megan Oil and Gas Company shall duly file copies of its effective tariff with the Public Service Commission. The Executive Secretary is hereby ordered to serve a copy of this order upon the Commission by hand delivery, and upon all parties of record by United States Certified Mail, return receipt requested. Leave is hereby granted to the parties to file written exceptions supported by a brief with the Executive Secretary of the Commission within fifteen (15) days of the date this order is mailed. If exceptions are filed, the parties filing exceptions shall certify to the Executive Secretary that all parties of record have been served said exceptions. If no exceptions are so filed this order shall become the order of the Commission, without further action or order, five (5) days following the expiration of the aforesaid fifteen (15) day time period, unless it is ordered stayed or postponed by the Commission. Any party may request waiver of the right to file exceptions to an Administrative Law Judge's Order by filing an appropriate petition in writing with the Secretary. No such waiver will be effective until approved by order of the Commission, nor shall any such waiver operate to make any Administrative Law Judge's Order or Decision the order of the Commission sooner than five (5) days after approval of such waiver by the Commission. Robert F. Williams Administrative Law Judge a E O N -22-