Section 50. Natural gas industrial rates and transportation policies

On April 4, 1986, the Commission issued an order establishing a rulemaking proceeding to reassess natural gas industrial rates and transportation policies in Virginia. This hearing resulted from the changes in the natural gas industry most immediately caused by the issuance of Order 436 by the Federal Energy Regulatory Commission (FERC). This Order is altering the traditional roles of the various components of the industry - producer, pipeline, local distribution company and end user. While the impetus and control of much of the change remains at the federal level, the successful operation of the FERC induced programs will be determined by the approach taken by state commissions in the implementation on the state level.

The changes have been fueled by a number of factors: decontrol of wellhead gas prices, the decline in oil prices, the competition given our domestic gas industry by Mexican and Canadian gas, the advent of the spot market and contract carriage provisions. Since 1980 the industry has seen an excess supply of gas. This has resulted in increased risk to producers and pipelines under the traditional marketing functions and increased pressure by industrial users to have available a mechanism to obtain natural gas at lower prices. Devices such as Special Marketing Programs, shifts in the allocation of fixed costs in demand and commodity charge components of the minimum bill, and elimination of variable costs from the minimum bill were precursors of the present FERC attempts to enable the natural gas industry to respond to the very real competitive forces in the marketplace.

The federal government through FERC has determined that users of natural gas in this country will benefit if they are given the option to purchase gas directly from the producers and have it transported by the pipelines to their point of use. This policy dramatically alters the traditional role of the interstate pipeline, the intrastate pipeline and the local distribution company. This policy decision, embodied in FERC Order 436 and now expanded in Order 451, poses substantial practical and philosophical problems. The restructuring of this industry cannot happen quickly and the fruits or disadvantages of this move will take even more time to realize and evaluate.

While this shift began on the federal level and initially involved those entities subject to the jurisdiction of FERC, local distribution companies and intrastate pipelines as an integral part on the industry, must also adjust to the new way of doing business. Failure to do so clearly would frustrate national policy. As in the telecommunications industry, it is now incumbent on the local utilities and state regulators to make federal policies work for the public good.

In our April order, we invited interested parties to participate in this rulemaking proceeding, directed Staff to complete its investigation and file its analysis and report, and further, identified several critical issues which the Commission hoped parties to the proceeding would address and which the Commission believed needed to be addressed to facilitate the transition of the natural gas industry in Virginia to a more competitive environment.

As noted in the order establishing the rulemaking proceeding, the Commission has received numerous formal as well as informal requests for guidance and analysis of specific problems related to industrial rate design and transportation policies. Some of the problems which have been raised in those inquiries and proceedings can and should be most effectively decided on a general basis to facilitate a more orderly development of the regulatory scheme. However, although we intend to address many of the problems, this proceeding and this order are intended to provide only a framework for the development of the natural gas industry in Virginia. Actual rates and company specific considerations should and will be taken into account on a company by company basis within the framework established herein.

Beginning on June 17, 1986, the Commission conducted public hearings to receive testimony and comments from interested parties on the development of an appropriate rate design for industrial rates and transportation policies in general. A number of diverse parties provided input on the issues raised by the Commission and by the Staff report. The Commission would like to thank all parties for their contributions in this proceeding and their efforts to suggest a reasoned and equitable approach to this new and still changing environment.

Appearances were entered by Edward L. Flippen for Anheuser-Busch Companies, Inc. (Anheuser-Busch), BASF Corporation (BASF), James River Corporation (James River), Owens-Illinois, Inc. (Owens-Illinois), Reynolds Metals Company (Reynolds), and Westvaco Corporation (Westvaco); Fielding L. Williams, Jr. for Celanese Smoking Products, a Division of Celanese Corporation (Celanese); Charles F. Midkiff and Louis N. Monacell for Allied Corporation (Allied); Anthony Gambardella for the Division of Consumer Counsel, Office of the Attorney General (Consumer Counsel); Eric M. Page and David B. Kearney for the City of Richmond (Richmond); Guy T. Tripp, III and James F. Bowe, Jr. for Virginia Natural Gas (VNG); Donald R. Hayes for Northern Virginia Natural Gas, a Division of Washington Gas Light Company (NVNG); Wilbur L. Hazlegrove for Roanoke Gas Company (Roanoke); Stephen H. Watts, II for Commonwealth Gas Services, Inc. (Services), Lynchburg Gas Company (Lynchburg), Columbia Gas of Virginia, Inc. (Columbia) and Commonwealth Gas Pipeline Corporation (Pipeline); Allan E. Roth for Columbia; John S. Graham, III for Equitable Resources Energy Company; and Deborah V. Ellenberg for Staff.

TESTIMONY

Representatives from Anheuser-Busch, BASF, James River, Owens-Illinois, Reynolds and Westvaco came forward to testify on their own behalf. In addition, those industrial companies jointly supported the testimony of Dr. Roy Shanker, an economic consultant. That group of industrial end-users urged the Commission to recognize that competition and increased transportation are in the public interest. They further urged the Commission to unbundle transportation related services, develop cost of service rates for those services and allow such rates to be downwardly flexible to the variable cost of service. They also stated that the Commission should require Pipeline to make its upstream Columbia Gulf transportation capacity entitlement available to its contract demand customers upon their request. The industrial companies further recommended that, to implement the policies developed in this proceeding, utilities be directed to develop and file cost of service studies and to file embedded cost of service transportation rates pursuant to those studies within twelve months of the date of this order. Dr. Shanker testified that embedded cost rates will eliminate most of the economic incentives for bypass. Mr. Flippen, counsel for the six industrials, stated further that the Commission need not address the question of bypass unless and until an actual case arises. Finally, those parties supported the concept of flexible interruptible retail rates and recommended the ceiling be based on the embedded cost of service and the floor on the utility's marginal cost of service.

Celanese presented one witness who urged the Commission to adopt flexible transportation rates within cost of service parameters. Celanese's witness also stated that standby service for transportation customers should be provided at carefully considered and unbundled rates.

Allied presented one witness, John Brickhill, who urged the Commission to encourage voluntary transportation by taking a company's participation into account in establishing an appropriate return on equity or by not allowing utilities to pass on to remaining customers the fixed costs associated with lost load which could have been averted through transportation. He also testified that the Commission should address the problems associated with the allocation of upstream transportation capacity and urged the Commission to look at the long term impact on end-users, not simply at Pipeline's current cost of gas. He asserted that customers must rely on the long term ability to transport gas, not simply transportation of spot market purchases. Allied argued that transportation rates should be based on an embedded cost of service design and should be downwardly flexible if retail sales rates are downwardly flexible. It said that flexible pricing must be closely scrutinized to prevent anti-competitive abuses. Mr. Brickhill stated that rate design should,promote competition and fairness by application of cost causation principles in a manner which would avoid undue rate shock. He observed that now would be a good time to move to parity as gas costs overall are declining. The impact therefore would be minimized.

The Consumer Counsel presented the testimony of Mr. Steven Ruback. He stated that local distribution companies (LDCs) should lower their system average cost of gas and that the Commission should concentrate on reviewing the utility companies' purchasing practices. With regard to rate design, the Consumer Counsel recommended rates be based on the same non-gas margin contribution as if the customer had purchased gas from the LDC under a non-flexible rate schedule. This, he argued, would make both customers and utility companies indifferent as to whether a customer transports or purchases gas from the utility. Mr. Ruback stated that such a margin approach would avoid price signals which encouraged a customer to switch to transportation and thereby make a lower contribution to a utility's fixed costs. He further urged that interruptible flexible retail rates be addressed on a company specific basis and that the floor should be based on the highest commodity cost of gas. Further, the Consumer Counsel cautioned the Commission against making spot market purchase dedications to particular customers and stated that such inappropriate dedications would result in unjust and preferential rates.

Richmond presented the testimony of one witness, Michael Moore. Mr. Moore agreed with most other parties that increased competition and transportation are in the public interest. Mr. Moore also urged the Commission to address the allocation of upstream capacity and stated that customers must have the assurance that upstream capacity will be available or there will be a resulting disincentive to transportation. Moreover, he stated that such allocation should be available to Pipeline's customers since they pay the contract demand costs to reserve the capacity.

Virginia Natural Gas, through its witness, Ann Rasnic, also urged the Commission to find as a matter of policy that transportation is in the public interest. It also urged the Commission to consider allocation of upstream capacity and argued that the customers of Pipeline need the assurance that transportation will be available through that upstream capacity to facilitate economic and reliable service to the end-user. VNG supported staff's recommendation that transportation rates be designed on an embedded cost of service basis, with some contribution to contract demand costs included in interruptible rates. Ms. Rasnic urged the Commission to retain interruptible flexible retail rates within specific parameters. She recommended the floor be based on a utility's weighted average commodity cost of gas (WACCOG) unless the utility can show that something less than that WACCOG is necessary to compete with alternate fuels and still provides a net benefit to the firm customer. VNG also recommended that the ceiling of the authorized range should be the firm industrial sales rate. Finally, VNG suggested the Commission support the general concept of an incentive proposal which would encourage a utility company to maximize throughput from interruptible sales and transportation volumes. Under the mechanism, any shortcomings or additional revenue generated over a target level would be shared between stockholders and ratepayers according to the risk borne by each. VNG stated that the proposal is in the public interest because it reduces the need for base rate changes by eliminating severe shifts in utility earnings and further, it provides an incentive to increase throughput resulting from interruptible sales and transportation volumes which, of course, is in the public interest of all parties.

Northern Virginia Natural Gas (NVNG) also participated in the rulemaking proceeding and presented two witnesses, Jack Keane and Frank Hollewa. NVNG stated that, as a general matter, the transition from a regulated environment to a market driven environment will impact each local LDC differently according to each company's size and load profile; accordingly, it recommended that this rule-making should only present broad guidelines to provide flexibility for company operations. Moreover, NVNG supported a gradual phasing out of the industrial subsidy of firm rates. In addition, transportation, the company asserted, should be voluntary or with some provision for waiver or exemption and should only be offered on a interruptible basis until more experience is gained with the service. It also recommended the establishment of minimum criteria, by each LDC, relating to size, delivery point, and contract term. Transportation rates, NVNG stated, should be flexible and market driven. NVNG said interruptible flexible retail rates should be established within a floor based on an LDC's WACCOG and each LDC should be allowed to dedicate a specific package of spot market gas to an industrial customer.

Roanoke did not introduce the testimony of any witnesses; however, its attorney, Wilbur Hazlegrove stated the company's position. As a general policy matter, he stated that the LDC was charged with protecting the firm residential customers and that there was no obligation to serve industrial customers. He was doubtful that the Commission would be able to handle a transition to a market driven environment smoothly and cautioned the Commission to proceed slowly, concentrating on more pressing problems, such as the take-or-pay costs issue before FERC. He stated that there was no need to mandate transportation, as the industry was already responding to the competitive market. He called transportation effectively a bypass of the utility system supply and stated that the traditional distributor monopoly of gas supply would soon be replaced by "a proliferation of purchasers chasing an inadequate gas supply with big bucks." Industrial rates and transportation policies, he urged, should be developed on a company specific basis.

Pipeline, Columbia, Services and Lynchburg presented their comments through their counsel, Stephen H. Watts, II. By its statement of position on future allocation of upstream pipeline capacity dated June 24, 1986, Pipeline stated that it has voluntarily allocated its upstream transportation capacity among its five contract demand customers pursuant to mutual agreement. It recognized the customer's need to be able to rely on such an allocation to make longer term gas purchase commitments and stated that it would not revoke the upstream allocation provided to its customers without thirty days notice. Pipeline stated that the issue relative to the allocation of upstream capacity must be decided in terms of a utility company's public service obligation to use its available resources to offer reliable supply at lower cost for all of the customers. However, it requested Commission guidance on the allocation question.

Pipeline was also concerned that any policy decisions rendered in this proceeding should not displace the stipulation filed by several parties in Pipeline's recently concluded rate case.1 In that case Pipeline had proposed cost based transportation rates within and outside of contract demand (CD), provided a methodology for sharing capacity between CD customers and provided equal priority for transportation and sales gas volumes within firm and interruptible classifications. Pipeline expressed concern with the impact of transportation in the long run since the current market instability is due to temporary and extraordinary conditions. Pipeline also urged the Commission to address the bypass question.

On behalf of Columbia, Mr. Watts stated transportation rates ideally should be based on the non-gas sales rate schedule margin, since there is not a significant difference between the non-gas cost of providing transportation service and the cost of delivering gas for sale to its customers. However, under conditions where the price is being set by the market, he stated fixed transportation rates will result in a loss of throughput and accordingly, Columbia recommended flexible transportation rates.

Services agreed that industrial transportation rates should be fully allocated and distributed according to class cost of service studies with class rates of return moving towards parity. Services also urged that industrial rates be downwardly flexible with a floor based on a utility's variable cost of gas sold to the industrial customer. Transportation rates, it urged, should be the non-gas component of the applicable sales rates and should be downwardly flexible to allow competition and prevent bypass.

Lynchburg urged the Commission to consider and maintain flexibility in any policy or framework adopted in this proceeding to allow LDC's to compete with nonregulated markets. Lynchburg also stated that there was not a need for the Commission to mandate transportation. Lynchburg itself offers firm and interruptible transportation but has not had a request for either type of service.

Mr. Cody Walker appeared on behalf of the staff. He indicated that a mandatory carriage policy was not necessary but incentives should be developed to encourage voluntary participation.

Staff recommended value of service rates be retained for retail interruptible sales. Mr. Walker stated that the parameters between which flexible rates could vary on a month to month basis should be based on cost of service considerations. The fluctuation of the rate within the established range could vary as necessary to compete with competitive alternative fuel prices. staff recommended that the floor of the flexible rate range be equal to a utility company's highest commodity cost of gas plus adjustments for taxes and unaccounted for gas, unless the utility shows that a lower floor is necessary to compete with alternate fuels and further, that a lower floor still provides a net benefit to the firm customers. Mr. Walker supported a ceiling based on the same rate of return as provided by the firm industrial rates.

Staff recommended that transportation rates be designed on an embedded cost of service basis. Incorporated into that recommendation, staff included a contribution to compensate firm customers for the interruptible customer's use of excess capacity because it is reasonable to allocate some of the demand costs to interruptible customers as rent or compensation for use of the facilities. Staff did not support flexible transportation rates.

TRANSPORTATION POLICY

The increase in competition in the natural gas industry has clearly been in the public interest. Competition at the wellhead has already served to lower gas costs overall and nondiscriminatory transportation has stimulated that competition. Even nonparticipating customers benefit from transportation due to the increased pressures on utility companies to lower gas costs overall to more effectively compete. Moreover, a company which effectively competes can increase the throughput on its system and again lower costs for all its customers. In addition, transportation provides one more market option which a utility can offer its customers and consequently maximizes the requisite flexibility necessary to compete with a variety of alternatives. We agree with the majority of the parties to this proceeding that transportation of natural gas is in the public interest. However, it is not necessary to mandate that all utility companies file transportation tariffs and provide that carriage. As many parties observed, as a practical matter, most Virginia utility companies who have a demand for transportation on their systems have effective transportation tariffs on file with this Commission. Although we will not mandate transportation, we intend to encourage voluntary participation in transportation programs. This Commission will review individual company practices in future rate cases to assure that each company maximizes utilization of its system. Several means to encourage transportation were suggested by several parties in this proceeding. We will be critical in the event load is lost as a result of a company's failure to transport. Such loss will be taken into account in setting rates. Appropriate measures will necessarily be taken into account in each company's rate case to preclude penalizing a company who has no demand for transportation for its failure to provide transportation.

INTERRUPTIBLE RETAIL RATES

This Commission has historically embraced the flexible rate as a viable mechanism to provide utility companies with the flexibility necessary to compete with unregulated alternate fuels. In January of 1984, the Commission first approved a flexible rate for Washington Gas Light Company.2 In the final order issued in that case we stated that:

We are confident that a flexible rate is required in order for the Company to remain in the competitive market of interruptible customers. If the Company were to lose its entire interruptible load, there would be an automatic shifting of significant non-gas costs to all firm customers. Hence, the economic viability of the Company hinges upon its ability to generate revenues from interruptible customers, and to do so it must have a flexible pricing structure to compete in that market.

That principle has been restated in numerous proceedings addressing flexible rates. As the gas industry moves toward a more competitive market it is even more essential that utility companies retain the flexibility available through measures such as flexible rates to be able to respond to the marketplace.

Although most parties to this proceeding generally supported the basic concept of a flexible rate, the suggested parameters of that mechanism varied. VNG suggested that it was more appropriate to establish the floor based on a company's weighted average commodity cost of gas (WACCOG) plus appropriate adjustments. Further,

VNG suggested that the ceiling be equal to the large volume firm sales rate, rather than simply incorporating the return included in the firm rate as suggested by staff. In addition, several parties recommended establishing a floor based on the utility company's spot market purchases or, in other words, to allow utilities to dedicate their cheapest purchases to the most elastic customers.

Several parties also cautioned that each utility company's situation will be different and will depend in part upon load profiles and purchasing practices. Accordingly, those parties recommended that flexible rates should be reviewed on a company specific basis.

Although we agree that specific provisions may vary based on an individual company's market and operating characteristics, basic guidelines can be established to provide a uniform approach to companies' flexible rates. We conclude that the floor of a flexible rate should be based on the highest commodity cost of gas or if more than one supplier furnishes gas, the floor should be the weighted average commodity cost of gas. If, and we emphasize "if," the utility can demonstrate that a lower cost is necessary to compete with alternate fuels and further, that the firm or core customer still receives a net benefit from retaining the interruptible sale, the lower price will be accepted.

As pointed out by several parties, the point at which the price necessary to retain an interruptible sale no longer provides a benefit to the system will vary significantly from company to company. Accordingly, it is reasonable to establish the starting point for the floor at the highest commodity cost and allow companies to offer proof that something less is necessary and still beneficial on a case by case basis. That test will of course reflect an analysis of several factors, foremost of which will be the incremental cost of gas acquired to serve the interruptible load. To facilitate a direct comparison it may be appropriate to assume the benefits of retaining the interruptible load will coincide with the immediate impact on gas costs.

We will necessarily be cautious about allowing companies to dedicate spot market purchases to the most elastic customers. The Commission must be particularly sensitive to the protection of the inelastic core customers. A rate design which results in inelastic customers subsidizing the elastic customer is clearly improper. Economic purchases should not be made solely for elastic customers to the exclusion of purchases for system supply. The authority to make such a dedication to the most elastic customers would also eliminate one incentive for a company to minimize its general system costs. With a low price necessary to compete with alternate fuels in the current market, a captive customer, or one with no ready alternative, might be assessed the higher cost of gas without close regulatory scrutiny. We caution all utility companies to review their general system purchasing practices and to fulfill the statutory obligation to provide reliable utility service at a just and reasonable cost.

The customer charge component of the rate should reflect the fully distributed costs of providing the interruptible service. We will closely review this in rate filings.

Finally, at this point in the evolving competition in the gas industry, we concur with the recommendations of most parties that it is prudent to move gradually toward parity of return in firm industrial rates. Such movement must be gradual to minimize rate shock to residential customers and carefully evaluated at each step.

TRANSPORTATION RATE DESIGN

A number of parties recommended the embedded cost of service rate proposed by staff to be established as a maximum transportation rate and that the utility companies be afforded the flexibility to adjust the transportation rate downward from that embedded cost of service level to the marginal cost of providing transportation service. There are problems, however, associated with flexible transportation rates. The value of transportation to individual customers will vary on the basis of a number of different factors. Unlike the flexible retail rates, there is not a readily identifiable alternate source of competition to transportation. Transportation may occur due to any one of a number of factors ranging from wellhead cost of gas to alternate fuel prices. To respond to these variables, the utility would need to apply a different rate for each customer and would consequently engage in discriminatory ratemaking between similarly situated transportation customers. Such a framework would also result in problems with effective regulatory review problems.

The Consumer Counsel recommended a different approach to the design of transportation rates. Its witness, Mr. Ruback, recommended basing transportation rates on the non-gas margin of the applicable retail sales rate which would otherwise be available to that customer. He stated the benefit of this rate design approach would be the utility's revenue neutrality relative to a customer's election to transport its own gas or purchase from the utility. At the public hearing, the Consumer Counsel further clarified that its margin approach should be limited to nonflexible rate schedule margins.

Other parties observed that such a margin approach could be a goal if industrial retail rates were already based on cost-causation principles, however, based on current rate designs, the nonflexible margin approach results in unworkable and uncompetitive rates. Such an approach would effectively eliminate transportation as a service option in Virginia, thereby compounding the current problems with competitive fuel prices. In addition, the Consumer Counsel's limitation on the margin approach to nonflexible rates would not result in the company's operations being revenue neutral. An alternate fuel user who could purchase gas under an interruptible flexible rate schedule would not be purchasing gas under the firm large volume rate schedule as its alternative to transportation service and accordingly, its choice between a flexible sales or transportation service would not result in a revenue neutral situation. If the limitation to nonflexible rate schedules were removed and transportation rates were based on the appropriate margin, a wide range of rate levels would be charged to transportation customers despite the fact that the customers were all receiving the same type of service.

We will direct that an embedded cost of service approach to transportation rate design be applied on a company by company basis for both firm and interruptible transportation service. Over time, the non-gas margin of the industrial sales rates will be more closely aligned with the transportation rates, however at the present time we must provide viable competitive options for utilities to offer their customers. Moreover, since the growth in transportation service is a recent phenomenon, development of embedded cost of service transportation rates at the present time will not result in rate shock to the captive customers. An immediate elimination of the subsidy currently being provided by industrial customers in the retail rates would, however, result in rate shock. We would note, however, that, with the recent drop in oil prices, the impetus to shift much of the fixed costs of the utility to firm customers is already in place.

An interruptible customer does not contribute to the fixed cost of capacity associated with peak demand and such service is inferior to firm service, since it is interrupted during periods of peak load; however, the interruptible service is provided through the same facilities as firm service. Therefore there should be some compensation by the interruptible customer to the firm customer for the use of that excess capacity. The contribution will vary from company to company, again depending on the customer mix and load profile, and therefore should be specifically addressed on a company by company basis. The demand allocation applied in each case should reflect the operating characteristics of the company.

To facilitate and expedite implementation of the framework established herein, all gas utility companies should conduct class cost of service studies and file them with the Commission within the next 12 months. Exemptions from this filing requirement, upon proper petition, may be considered for small gas utilities with limited industrial loads and who have not received requests for transportation service. Any tariffs filed should be based on cost of service studies. Those companies who do not intend to file rate cases in the next 12 months, should file limited applications to revise their transportation rates where transportation is being offered in accordance with the findings herein within that same 12 month time period.

UNBUNDLED SERVICES

There was overwhelming support for an approach to rate design which identifies the several services which a utility provides and separately determines the fully allocated costs of providing each service. Unbundling services in this way provides a menu from which a customer can tailor the type of service and degree of reliability appropriate for that customer. The extent to which unbundling occurs will again vary from company to company and accordingly should be evaluated on that basis, however, it provides a reasonable approach to rate design at a time when the industry is becoming more competitive in the services offered. Transportation and standby retail service are two examples of services which can be easily unbundled from the traditional retail sale and provided on an individual basis.

ALLOCATION OF UPSTREAM TRANSPORTATION CAPACITY

One of the foremost concerns raised in this proceeding relates to the proper allocation of upstream transportation capacity. At the present time few interstate pipeline companies have agreed to become open access transporters. Columbia Gas Transmission Corporation, a primary interstate supplier for Virginia, and Columbia Gulf are, however, open access transporters. Because they represent a major supplier for the east coast, tremendous demand has been placed on them for transportation. This has resulted in demand exceeding capacity available and raised serious questions concerning the allocation of transportation capacity on their pipeline facilities.

The FERC recently addressed the problems with allocation of Columbia Gulf's main line capacity. The FERC defined the "first-come/first-served" methodology which was first described in FERC Order No. 436. The FERC has generally outlined the allocation of transportation capacity to Columbia Gulf's wholesale customers, both for its customers' system supply and for the wholesale customers' end-users through March 31, 1987. The FERC directed that in making monthly nominations, the wholesale customers should include any requests for service by their customers. While addressing the Gulf capacity allocation generally, the FERC by Order Approving a Settlement Offer with modifications in FERC Docket No. RP86-14-004 dated March 28, 1986, stated at page 19 that "the relationships between Columbia Gas' wholesale customers and the end-users they serve is properly a matter of local concern, to be determined by each customer with its end-users and is subject to state regulatory agency oversight and/or regulation."3 Commonwealth Gas Pipeline as a direct customer of Columbia has received an allocation of Gulf capacity pursuant to this settlement. Initially, Pipeline used its allocated capacity to purchase spot gas for its system supply, thereby lowering the per unit cost of gas to all customers equally. Pipeline was informed that this arrangement did not comply with the terms of the PGA settlement with FERC. As result Pipeline released its capacity to its direct customers who in turn agreed to an allocation formula. Pipeline has five direct customers - Virginia Natural Gas, Suffolk Gas, the City of Richmond, Allied and Commonwealth Gas Services. Presently, Pipeline is operating on a shared allocation basis; however, the stated policy of the company continues the ability to revoke the shared allocation on thirty days notice.

Pipeline and its customers have asked for Commission guidance on the proper allocation of Pipeline's entitlement to upstream transportation capacity. Although the problem will be somewhat relieved in the event that other interstate pipelines serving Virginia become open access transporters, the problem clearly must be addressed now at least for the short term period.

Many parties urged the Commission to provide some assurance on the availability of upstream capacity. They are interested in acquiring supply for the longer term, not solely from short term spot market purchases. To do this they need more than thirty days assurance of transportation. Moreover, they argue that Pipeline's customers pay the contract demand associated with reserving capacity upstream and, accordingly, should be able to elect to use that capacity or to ask Pipeline to use the capacity to minimize its commodity cost of gas. In making that decision, those customers of course would weigh their own ability to purchase gas at economic prices relative to the price of their supplier.

The Commission recognizes that if gas transportation is to work effectively and efficiently, those who wish to transport gas must have some assurance that the capacity to transport will be available. Without that assurance, these users are forced to purchase system supply or leave the system for alternate fuels. All of Pipeline's LDC customers have indicated that obligation can be best fulfilled by passing the upstream allocation on to them. Accordingly, the choice should be Pipeline's customers. We will monitor this situation as other interstate pipelines become open access transporters and understand that the time may come when such allocation may be unnecessary, impracticable or impossible. Although not bound by the FERC settlement, we encourage local distribution companies to utilize policies which afford a degree of reliability for transportation capacity usable by their transportation customers.

BYPASS

The issue of bypass was also identified in this proceeding. We define bypass to mean direct connection by an end user to an interstate or intrastate pipeline, thereby bypassing the certificated local distribution company. This issue involves the economic incentives for bypass as well as its legality under present law. The Commission believes that appropriately designed embedded cost of service rates should eliminate the economic incentives for bypass. This will of course require the good faith efforts of both the customer and the utility. In any event, the Commission does not believe the record before us is adequate to resolve the legal issue at this time.

STANDBY SERVICE

The industrial companies represented in this proceeding generally agreed that they should bear the risk of their election to transport gas for themselves rather than rely upon their traditional local distribution company. Clearly, if a customer elects transportation and should not also elect a standby service, the utility company does not have a continuing public service obligation to sell gas to that customer. By placing the responsibility where it belongs, on the customer to elect what type of service it wants to take, the gas company can retain some predictability in its requirements, a predictability which is necessary for it to make its own system plans. Standby service should be offered at compensatory rates.

OTHER TERMS AND CONDITIONS

Any investments made to specifically serve a new transportation customer should be recovered from that customer; accordingly each utility company should provide some type of guarantee through customer charges, minimal purchase requirements, minimal monthly payments, contract terms or some other means to assure recovery of the investment from the specific customer.

We recognize that there are some circumstances in which penalties may be necessary to prevent gross abuses of system availability and to prevent large or disparate operating practices. Penalties should not be designed to be onerous and a disincentive to transportation, but rather should be compensatory for any additional cost which may result from the operating problems. Application of penalties should be addressed by each company on a company specific basis.

Adjustments for unaccounted for gas should be made to account for any difference in deliveries where such differences can be practically identified, for example deliveries through temperature compensated meters vs. non-temperature compensated meters.

We have concern over tariff conditions imposing minimum terms or volumes and other conditions which may be contrary to the market. We will closely review the reasonableness of terms and conditions which may be included in company tariffs.

In conclusion, we want to commend all participants in this proceeding. This is an uncharted course for the industry, consumers and regulators. Proposals other than those adopted herein have been offered. We are confident the changing nature of this industry will give rise to even more approaches to these issues generally and as they relate to a specific company. It is essential that dialogue continue examining the broader policy questions as well as specific rate designs and the performance of the market and industry. We must be aware of all reasonable options to maintain our ability to provide effective and innovative regulation which will allow us to meet the goal of reliable gas service at a reasonable price for the public good.

NOW, THE COMMISSION, having considered the record and the recommendations of the parties is of the opinion and finds:

1. That increased competition and transportation are in the public interest and the voluntary participation in transportation programs should be encouraged;

2. That interruptible flexible rate mechanisms are reasonable and should be retained. The parameters should reflect a floor and ceiling consistent with the discussion above;

3. That interruptible rates should include a customer charge which recovers the fully distributed cost associated with that service;

4. That firm industrial rates should be developed to move gradually towards the fully distributed costs of service;

5 That transportation rates should be based on the fully distributed costs as recommended by staff;

6. That all gas utility companies should conduct cost of service studies to facilitate implementation of the policies established herein and file them within the next 12 months;

7. That the rate design goals and terms and conditions of transportation service discussed herein shall be applied to gas companies in future rate cases;

8. That services should be unbundled to the extent practicable. Standby service at compensatory rates should be made available to all customers. However, those customers not electing such standby service bear the risk associated with the decision to rely on transportation gas; and

9. That the terms and conditions of transportation service should be developed consistent with the discussion herein. Accordingly,

IT IS ORDERED:

1. The findings and policies discussed and established herein shall be applied in rate cases or limited issue applications filed by gas companies subsequent to the date of this order; and

2. There appearing nothing further to be done in this proceeding, this docket shall be closed and the papers placed in the file for ended causes.

1By Final Order dated July 11, 1986, the Commission did not adopt the Stipulation in its entirety. Case No. PUE850052, Application of Commonwealth Gas Pipeline Corporation, to revise its tariffs - Appeal to the Supreme Court pending.

2Application of Washington Gas Light Company for a change in its gas interruptible rate and other tariff provisions, 1984 SCC Report 395.

3We note that the FERC allocation order is effective only through March of 1987, at which time it will likely be reevaluated.

Historical Notes

Derived from Case No. PUE860024, eff. September 9, 1986.

Statutory Authority

§§ 56-234, 56-235.1, 56-235.2 and 56-247 of the Code of Virginia.