At a session of the PUBLIC SERVICE COMMISSION OF WEST VIRGINIA in the City of Charleston on the 1 lth day of June, 2004.

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1 coma wpd At a session of the PUBLIC SERVICE COMMISSION OF WEST VIRGINIA in the City of Charleston on the 1 lth day of June, CASE NO G-30C WEST VIRGINIA POWER GAS SERVICE, a Division of MONONGAHELA POWER COMPANY, doing business as ALLEGHENY POWER Rule 30-C application for adjustment period commencing November 1,2003. COMMISSION ORDER On August 1,2003, West Virginia Power Gas Service, a Division of Monongahela Power Company, doing business as Allegheny Power (WVPGS) filed its Rule 30C application for 2003 to change rates for gas service. Rule 30C of the Commission's Rules and Regulations for the Government and Filing of Tariffs (Tariff Rules) calls for the calculation of purchased gas costs on an annual or semi-annual basis. On August 6, 2003, the Consumer Advocate Division (CAD) filed a petition to intervene on behalf of WVPGS' residential customers. IRGlNlA

2 A Commission Referral Order was entered on August 15, 2003, referring this proceeding to the Division of Administrative Law Judges (ALJ). On September 11, 2003, WVPGS filed a joint stipulation and agreement for settlement on interim rates, either executed or not opposed by any party, which called for publication of the proposed interim rates, in lieu of WVPGS originally requested rates. The proposed interim rates were lower than the requested rates by approximately $0.55 to $0.60 per Mcf, depending on the rate schedule. WVPGS agreed to defer approximately $800,000 of its existing underrecovery to next year s Rule 30C application. The proposed interim rates were as follows: General Service $7.32 per Mcf Small Sale for Resale $7.006 per Mcf Large Sale for Resale Commodity $6.579 per Mcf Demand $1.229 per Mcf Standby Charges, Winter $0.256 per Mcf Summer $0.027 per Mcf On September 1 1,2003, an Interim Recommended Decision was issued approving the stipulated purchased gas increments, on an interim basis. 2 COMMISSION IRGlNlA

3 The protest hearing set for January 7, 2004, was held as scheduled. The main evidentiary hearing set for January 23, 2004, was also held as scheduled. Thereafter, post-hearing exhibits, initial briefs and reply briefs were filed. Recommended Decision The ALJ entered a Recommended Decision on March 29,2004. As explained by the ALJ, the WVPGS distribution system was formerly owned by Cabot Corporation, performing natural gas distribution operations which were once part of Cabot's integrated operations in West Virginia. In 1989, Cabot's utility operation was purchased by UtiliCorp United, Inc., which originally operated WVPGS. Cabot's gathering, transmission and storage operations are now handled by Cranberry Pipeline Corporation (Cranberry), whereas the old Cabot production and marketing operations are now handled by Cabot Oil & Gas Marketing (COGM). Because of the configuration of the WVPGS distribution system, due in large part to the fact that it once was part of an integrated Cabot Corporation system, WVPGS is highly dependent upon production and transportation services provided by COGM and Cranberry, inhibiting its ability to lower its purchased gas costs. 3 OF W IRGlNlA

4 WVPGS purchases gas from COGM under three contracts or sets of contracts: GS 1107; GS 1164; and two contracts that function as one contract, GS68 1 and GS 1162, known as 681/1162. Under contract GS1107, COGM performs a seasonal balancing function for WVPGS, purchasing excess volumes of gas available from WVPGS, due to a large number of local producer contracts held by WVPGS which produce more gas than WVPGS can use in the summertime. COGM buys the excess gas produced by these local contracts in the summer months and redelivers that gas to WVPGS in the winter months. Under the pricing scheme in effect for the period at issue herein, the price of the gas delivered to WVPGS under that contract was the average price that WVPGS paid for the gas in the summer, plus $0.65 per decatherm. Additionally, WVPGS paid a transportation rate of $0.72 per decatherm for transportation on Cranberry, plus 6% fuel retention. Under contract GS1164, WVPGS purchases gas supplies from COGM in the winter to meet its seasonal peak requirements. The purchases under this contract represent the highest cost supplies purchased by WVPGS. The gas sold by COGM under the contract is priced under a two-part demandcommodity pricing structure. The commodity price for the gas purchased under this contract is set by a formula to calculate a delivered price to the WVPGS city gates. Therefore, the cost of transporting gas on Cranberry to WVPGS is embedded in the price paid by WVPGS to COGM. However, again, in order 4 OF W IRQlNlA

5 to receive the supplies under this contract, WVPGS is also paying the $0.72 per decatherm transportation rate to Cranberry. Under GS681/1162, a buyhell agreement is developed between WVPGS and COGM. Under these contracts, WVPGS purchases gas on the Tennessee Gas interstate pipeline system during the summer and causes those volumes to be delivered to Cranberry, for Cranberry s benefit. Upon their delivery, WVPGS sells those volumes to COGM. During the winter, COGM sells an equivalent volume of gas back to WVPGS at the same price as WVPGS sold the summer volumes to COGM, plus the same $0.65 per decatherm charge to COGM and the separate $0.72 per decatherm transportation rate to be paid to Cranberry. It was the CAD S contention that the payment of the $0.65 per decatherm charge to COGM for services which, by any reasonable measure, include storage, plus the payment of the separate $0.72 per decatherm charge to Cranberry for services which also include storage for the same volumes of gas, results in WVPGS making double payments to store and transport the volumes of gas under GS1107 and GS681/1162. The ALJ wrote that she has been convinced for some time that Cranberry is providing storage services, whether it wants to call those services storage or not. The ALJ 5 OF W

6 was also convinced by testimony in the 2002 and 2003 Rule 30C proceedings that WVPGS is being required to make double payments for that storage service through the $0.65 per decatherm charge to COGM under the stated contracts and the $0.72 per decatherm transportation rate paid to Cranberry. However, the ALJ explained the actual issue is not whether WVPGS is being required to make double payments for the same service - the issue is whether there is a viable alternative to the double payments. Based on the testimony provided in both the 2002 and the 2003 Rule 30C proceedings, that question could not be answered affirmatively. The ALJ said there simply did not appear to be a readily available supply of gas in the volumes and at a price which is competitive with or lower than the COGM contracts, and which would enable WVPGS to eliminate the COGM supplies and, thus, the double payment. The only real remedy lies in being able to force Cranberry to offer reasonable unbundled storage and transportation rates. Such issues will not be resolved in this WVPGS Rule 30C process. Those issues will be resolved, if they can be resolved, either before the Commission in Case No GT- GI' and/or GT- 42A2, or before the Federal Energy Regulatory Commission in Docket No. PR 'Case No GT-GI is an investigation into Cranberry's gas transportation policies. The hearing in that proceeding included much of the same testimony regarding double payments. 2Case No GT-42A was established to litigate the firm and interruptible transportation and service rates and terms and conditions of service. 6 OF W IRGlNlA

7 In any event, given the unrebutted testimony of a WVPGS witness that there are no other reasonably priced readily available supplies of gas to supplant the COGM supplies under the contracts at issue and given the inability to use any other transportation services at this time, the ALJ concluded that WVPGS met its burden of proof that the double payments were, if not reasonable, at least justified and unavoidable at this point. Therefore, the CAD S recommendation that $446,069 be removed from the WVPGS over/underrecovery balance for the July 2002-June 2003 ACA3 period was rejected. Among other things, the ALJ approved the following purchased gas increments for use by WVPGS: General Service Small Sale for Resale Large Sale for Resale Commodity Demand Standby Charges Winter Summer $7.92 per Mcf $7.606 per Mcf $7.179 per Mcf $1.229 per Mcf $0.256 per Mcf $0.027 per Mcf 3Actual cost adjustment. 7 IRGlNlA CWARLESTON

8 The CAD s Exceptions and WPGS Responses Thereto The CAD filed exceptions on April 14,2004, to the portion of the Recommended Decision in which the ALJ rejected the CAD s proposed adjustment for the double payments made by WVPGS to COGM for storage services. The CAD focuses on the ALJ s findings and conclusions that WVPGS is clearly being required to pay twice for storage and her dissatisfaction regarding WVPGS bid solicitation efforts. WVPGS responded to the CAD s exceptions on April 27,2004. Staff filed no response, in support or opposition, to the exception^.^ The CAD quotes W. Va. Code tj c5 which establishes the burden incumbent on any natural gas public utility seeking an increase in its rate. The CAD believes WVPGS did not meet its statutory burden for two reasons: 1) the company did not show that it took meaningful steps during the relevant period to achieve storage in Cranberry s facilities in exchange for its payment of the pipeline s bundled $.72 dth rate; and 2) the 4During the time this matter was before the ALJ, Staff did not propose a disallowance. 5W. Va. Code c: Before granting any rate increase to a natural gas public utility the commission must determine that dependable lower-priced supplies of natural gas are not readily available to the applicant from other sources. At any hearing involving a rate increase for a natural gas public utility, the burden of proof to demonstrate that dependable lower-priced supplies of natural gas are not readily available from other sources and that contracts between the public utility and its suppliers for purchase of natural gas are negotiated at arm s length and are not detrimental to the customers of the utility s services shall be upon the public utility making application for such change. Should the applying public utility not satisfactorily meet this burden, then the commission may not authorize an increase greater than that which reflects the reasonable cost of natural gas which is determined to be readily available. 8 COMMISSION IRGlNlA -

9 company refused to file a complaint over Cranberry s practices and otherwise failed to seek the Commission s assistance in breaking the CabOKranberry monopoly, offering only tepid involvement in the GI case that appeared to offer the best opportunities to upset that monopoly. The CAD argues that unless the CAD s recommended adjustment to the ACA balance is adopted, the Company s customers will bear the financial burden of the imprudent decision of not pursuing other options that would result in not having to pay twice for storage. CAD s First Basis of Exception: The company did not make a showing that it took meaningful steps during the relevant period to achieve storage in Cranberry s facilities in exchange for its payment of the pipeline s bundled $.72 dth rate. The CAD says that according to witness testimony, it was not until May 2003 that WVPGS ever made a formal request for storage service from Cranberry. Although a witness asserted there were informal discussions about storage service, the CAD argues that testimony from last year s 30C proceeding indicates that no such requests had been made as of the date of that proceeding on January 9,2003. WVPGS responds: a) it currently achieves a storage service from Cabot under an arrangement previously approved by the Commission for many years; b) it has no legal right to inject, store andor withdraw gas into/out of Cranberry s storage facilities, 9 OF W IRGlNlA -

10 inasmuch as the 72-cent rate it pays Cranberry is for transportation service only; c) its position in the Commission investigation of Cranberry was that Cranberry should offer a storage service; d) Cranberry filed a tariff at FERC but if it is adopted, it could result in costs to the ratepayers as much as $4 million more than what they are currently paying; e) there is no regulatory order from FERC or the PSC finding that WVPGS has the legal right to achieve storage in Cranberry s facilities in exchange for the pipeline s bundled 72 centddth rate, nor is Cranberry required to offer such a service; f) the disallowance theory has no nexus with the legal standard of what is necessary to recover purchased gas costs in WV; and g) WVPGS investigated representative alternatives to its current arrangement and found all to be significantly higher in cost. WVPGS argues that it met the requirements of W. Va. Code c to show dependable, lower priced gas supplies are not readily available from other sources. It says that short-term price is not the only factor to be considered and other factors are the reasonableness of prices under existing market conditions, price stability, long-term supply reliability and flexibility to take advantage of downward trends in natural gas prices. WVPGS further argues the evidence showed it conducted a bid solicitation for supplies specifically targeted for the Cranberry system. While this process resulted in two new local producers willing to sell their gas to the Company on a baseload basis, there were no suppliers ready, willing or able to step up and assume the obligations contained 10 OF W IRGlNlA

11 in not only the subject Cabot contracts, but the peaking contract as well. In a separate solicitation, five entities (three interstate pipelines and two marketing companies) responded with offers which were more expensive and not as flexible or encompassing as the present Cabot contracts. WVPGS asserts the contracts were negotiated at arm s length, and are beneficial to the ratepayers and that the record contains no evidence from CAD that would refute any of the foregoing. No lower cost options were presented because they do not exist presently. WVPGS also indicates that it has continued to explore storage that might be made available on the Columbia system, via Mountaineer s storage contracts with the pipeline, and then brought into the WVPGS system through the new interconnects built by Allegheny between the two systems. According to WVPGS, there are severe limitations on the amount that can be displaced with this strategy, and for each such dth, the company must back off spot purchases from Columbia, since there is a limited amount of gas the company can take from Mountaineer/Columbia in total. CAD S Second Basis of Exception: The company refused to file a complaint over Cranberry s practices and otherwise failed to seek the Commission s assistance in breaking the CabotKranberry monopoly, offering only tepid involvement in the GI case that appeared to offer of the best opportunities to upset that monopoly. WVPGS response is summarized as follows: a) there is no legalhegulatory requirement that a utility is required to join in filing a complaint with CAD and Staff in a legal/regulatory proceeding to try to break an alleged monopoly as a condition 11 OF W IRGlNlA

12 precedent to recovering all or any part of its costs of its gas supply; and b) the PSC approved the current structure of CaboUCranberryWPGS during its breakup in 1989 and WVPGS has a right to rely on such precedent rather than filing a complaint. With regard to its role in the general investigation of Cranberry, WVPGS states it was clear it thought Cranberry should 1) unbundle its rates, 2) offer a storage service to provide a possible option, and 3) should be subject to PSC oversight. WVPGS further states, in response to CAD S argument, that CAD is not a party that must maintain a workable business relationship with Cabot and accomplish day-to-day business and deliverances of gas to customers. The CAD S Recommended Disallowance The CAD recommends disallowance of the 65-cenUdth charge by COGM for storage which totals $446,000 for the past year (this is the total amount under the contracts less 5 cents for administration). WVPGS admits it is essentially receiving psuedo storage, which is valuable to its customers whose winter demands are some ten times the summer demand. 12 IRGlNlA

13 WVPGS says it has been paying 72 centddth for transportation to Cranberry since the splitlspin off of Cabot to WVPGS in That rate was approved at that time and has never changedincreased. WVPGS says the legal issue is - does it have the legal right to inject, store, and withdraw gas for payment of the 72-centldth transportation rate and is the payment of the 65 cents to Cabot unreasonable under the circumstances? WVPGS says it cannot unilaterally force gas to be stored by Cranberry for winter use absent legal right. The gas sales contracts with Cabot do not provide a right to store in Cranberry s facilities now. Cranberry s contract for firm transportation, approved in 1989, does not provide for storage. In the PSC order, the Commission found the subject storage facilities not to be necessary for the operation of WVPGS distribution facilities. The final order also stated that Cranberry was obligated to provide transportation services to WVPGS under the Gas Transportation Agreement and any change in or modification to the terms or conditions of that Agreement shall require prior Commission approval. WVPGS explains that if the Commission adopts the CAD S argument and disallows recovery of the 65-centldth cost for the pseudo storage, then WVPGS would obviously not continue to pay the 65 cents. As a result, and inasmuch as COGM is under no legal obligation currently to supply such storage service at all, the company would lose its ability to have gas redelivered in the winter at the least cost, when it needs the gas for its customers. Moreover, there would be excess gas in the summer, that WVPGS would 13 IRGlNlA

14 need to dispose of, most probably at a loss after taking into consideration the cost of transport on Cranberry to a viable sales point. In other words, these summer volumes would need to be transported on Cranberry to market (presumably Columbia Gas Transmission), thereby paying the 72 centddth. Then, when gas is needed by WVPGS customers in the winter, the utility would again have to pay a transportation cost to Cranberry of 72 cents to have gas delivered to its customers, not to mention transportation charges on upstream pipelines as well and probably firm demand charges also. Not only would WVPGS end up paying for Cranberry transportation twice instead of once, but would also incur additional upstream charges as well, all in exchange for one sixty-five cent payment. As a result, the ratepayers of WVPGS would be saddled with more, not less, costs for the same gas supplies. The contractual arrangement WVPGS has with Cabot eliminates not only one of those Cranberry transportation charges, but the additional upstream charges as well, and, as a result, lowers the overall cost to its customers. Another option, which likewise is unattractive, would be to shut in wells in the summer. WVPGS also says that concerning the 65-cenddth storage/winter premium cost, a renegotiation resulted in modification so that there is a ceiling of 65 cents and a floor of 50 cents to provide potential benefits to customers. This was done for both the summedwinter buyback contract and the Tennessee replacement contract. Additionally, 14 IRGlNlA

15 on the peaking contract, the 25-cent premium was lowered to 12.5 cents, although some of that reduced amount was placed over on the demand charge. DISCUSSION The CAD filed exceptions to the ALJ s rejection of its proposed adjustment for the double payments made by WVPGS to COGM for storage services. Specifically, the CAD recommends that $446,069 be removed from the WVPGS overhnder recovery balance for the July 2002-June 2003 ACA period. The Commission agrees with the ALJ s reasoning and conclusion that WVPGS met its burden of proof that the payments at issue were justified and unavoidable, as lower priced supplies were not readily available from other sources. Such WVPGS evidence was unrebutted. The Commission also agrees with the ALJ that the remedy to this issue appears to lie in Cranberry s offering a reasonable unbundled storage and transportation rate. As the ALJ said, this is not to be resolved here, but rather in the other above-referenced Cranberry proceedings and/or the FERC proceeding. Therefore, the Commission will deny the CAD S exceptions and adopt the Recommended Decision. 15 IRGlNlA

16 FINDINGS OF FACT 1. On August 1, 2003, WVPGS filed its Rule 30C application for 2003 to change rates for gas service. 2. On August 6,2003, the CAD filed a petition to intervene on behalf of the residential customers of WVPSC. 3. A Commission Referral Order was entered on August 15,2003, referring this proceeding to the ALJ Division. 4. The protest hearing set for January 7, 2004, was held as scheduled. The main evidentiary hearing set for January 23,2004, was also held as scheduled. 5. The ALJ entered a Recommended Decision on March 29,2004, in which she concluded that WVPGS met its burden of proof that the double payments were, if not reasonable, at least justified and unavoidable at this point. Therefore, the ALJ rejected the CAD recommendation that $446,069 be removed from the WVPGS overhnderrecovery balance for the July 2002-June 2003 ACA period. Among other things, the ALJ also approved specified purchased gas increments for use by WVPGS. 16 IRGlNlA

17 6. The CAD filed exceptions on April 14, 2004, to the portion of the Recommended Decision in which the ALJ rejected the CAD s proposed adjustment for the double payments made by WVPGS to COGM for storage services. 7. WVPGS responded to the CAD s exceptions on April 27, Staff filed no response, in support or opposition, to the exceptions. However, before the ALJ, Staff did not propose a disallowance. CONCLUSIONS OF LAW 1. Prior to granting a rate increase to WVPGS, W. Va. Code c requires that the commission must determine that dependable lower-priced supplies of natural gas are not readily available to the applicant from other sources. At any hearing involving a rate increase for a natural gas public utility, the burden of proof to demonstrate that dependable lower-priced supplies of natural gas are not readily available from other sources and that contracts between the public utility and its suppliers for purchase of natural gas are negotiated at arm s length and are not detrimental to the customers of the utility s services shall be upon the public utility making application for such change. 17 OF W

18 ~~ ~~ ~~ ~ ~~ 2. WVPGS met its burden of proof to demonstrate that dependable lowerpriced supplies of natural gas are not readily available from other sources and that contracts between the public utility and its suppliers for purchase of natural gas are negotiated at arm s length and are not detrimental to the customers of the utility s services. ORDER IT IS, THEREFORE, ORDERED that the Consumer Advocate Division s exceptions to the Recommended Decision of March 29, 2004, are hereby denied. Therefore, the Recommended Decision is adopted as the final order of this Commission. IT IS FURTHER ORDERED that the West Virginia Power Gas Service shall file a revised tariff with the Public Service Commission setting forth the revised rates and charges, as set forth in the Recommended Decision, within thirty (30) days of the date that this Order becomes final. The revised tariff sheets shall contain the following statement: The above rates include a purchased gas increment of!$ 18 OF W

19 I IT IS FURTHER ORDERED that, upon entry hereof, this proceeding shall be removed from the Commission's active docket of cases. IT IS FURTHER ORDERED that the Commission's Executive Secretary serve a copy of this order upon all parties of record by United States First Class Mail and upon Commission Staff by hand delivery. E. H. STAATS, CHAIRMAN TBS/ljm ca.wpd N, COMMISSIONER 19 COMMISSION OF w I R 0 I N I A