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Pennsylvania PUC Proposes Gas Capacity Assets Be Paid Via Nonbypassable Charge Instead Of Assigning Costs To Retail Suppliers

Additional Proposals Meant To Spur Competition Include Virtual Releases Of Reliability Assets, Changes To Imbalance, Penalty Rules

September 1, 2017

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Copyright 2010-17
Reporting by Paul Ring •

The Pennsylvania PUC issued an advanced notice of proposed rulemaking addressing several proposed operational changes in the retail natural gas market aimed at removing barriers to retail choice.

Most notably, the PUC proposes applying the Peoples Natural Gas capacity payment mechanism, under which capacity is released to retail suppliers but all customers pay the average system cost of capacity regardless of their participation within the retail market, on a statewide basis

Such a change would create, "immediate and potentially lasting benefits for competition, including non-shopping customers," the PUC said

"A possible benefit to the market is risk reduction. Both the NGDC [natural gas distribution company] and NGS [natural gas supplier] have risk associated with the payment for capacity. From the NGDC’s perspective, the potential for non-payment by NGSs could place undue burdens on the utility. NGDCs do not earn a return on their efforts for the procurement of gas (see, 66 Pa. C.S. § 1318) and therefore any used assets could be a liability to the utility. Therefore, unpaid NGS capacity payments would fall on customers (in this case non-shopping customers) and in many ways would not be fair or equitable if shopping customers imposed increased costs on non-shopping customers. While the likelihood of this happening is low, having customers pay for their capacity, regardless of shopping status, would eliminate any such threat to NGDCs and its customers," the PUC said

"This proposal could also reduce risk for NGSs. Ultimately, an NGS must pay for capacity and then recover those costs from customers while attempting to outperform default service, provide value added services, and earn profits. By eliminating the need for NGSs to pay for capacity upfront or recover a certain dollar amount to break even, the NGS may be more willing to offer innovative or lower priced services. While the NGS must still compete on price of gas and utilization of assets, it is given a little more freedom from having to beat the NGDCs system weighted average. Not all capacity is created equal and certain capacity bundles for customers could be less lucrative than the system weighted average, while other capacity resources may be more appealing. By eliminating the mismatch of payment for capacity versus its worth, the NGS’s business model may be able to focus more on providing value added or lower priced services with less risk," the PUC said

"This change could reduce the financial barrier for entry into the market. By reducing the upfront capital required to begin service, it may be possible for new participants to enter the market. However, certain other financial requirements will remain in effect such as creditworthy standards imposed by NGDCs and identified in 52 Pa. Code § 62.111," the PUC said

The PUC proposes to add language to its rules providing that, "Capacity or Pennsylvania supply costs shall be charged to all customers as a non-bypassable charge based on the average contract rate for those services."

The PUC's proposal also addresses issues related to capacity that is not physically released to suppliers due to reliability concerns or other restrictions.

"For instance, it is understandable that control of liquefied natural gas (LNG) plants cannot be offered to NGSs as a piece of released capacity. NGSs are also unable to use those storage assets that are designated as “7C” contracts. These assets are legacy bundled services with restrictions that do not enable NGDCs to give control of a portion of the capacity to NGSs (i.e., the asset needs to remain a single bundled service and parceling it out would require the contract to be renegotiated at today’s terms). Finally, another example where an asset may not follow the 'slice of the pie' approach is critical capacity or capacity viewed by the NGDC as vital to the reliability and integrity of the system," the PUC said

The PUC noted that some NGDCs have created programs to address these issues, such as virtual storage or "make-up" gas

"However, these techniques often do not apply to critical assets and across all NGDCs," the PUC noted

"While many NGDCs have created workable programs, some barriers to competition could still exist due to limited access to facilities. While the NGDC is not competing with suppliers, restricted assets like storage do provide a competitive edge that a supplier may not be able to 'beat' without similar access to the facility. The Commission of course holds that reliability is a higher priority than competition and always seeks to preserve reliability and many different NGDC created programs have accomplished this task. The question remains is one method or program better than the other? The Commission invites parties to comment on the benefits of any NGDC’s program compensating for limited access to capacity facilities," the PUC said

The PUC proposed to address this issue as follows: "The Commission recognizes that physical access to certain facilities may raise reliability and/or operational problems for NGDCs and their customers. Therefore, virtual access to the asset may be the best option to provide NGSs with the ability to utilize and benefit from the asset but still provides overall control to the NGDC for reliability assurance. This type of access also should not violate FERC rules or other operational or reliability constraints. The NGS receives a portion of the restricted asset in accordance with the “slice of the pie” approach to capacity release. However, any use of this restricted asset must be first communicated to and approved by the NGDC before the NGDC acts upon the NGS’s request. Ideally, the determining factors for approval or denial of a request would be provided in pre-established rules. For instance, critical capacity could be used as the NGS saw fit during non-peak times but must be utilized to serve NGDC system customers during operational flow orders or during periods below a certain degree day. Similarly, storage assets could be used provided the NGS maintains a certain storage level consistent with the NGDCs normal withdrawal plan. Also, if any NGS action would cause an imbalance on the distribution system because of use outside the system, it could be denied unless a partner NGS can correct the imbalance. Increased communication is likely needed."

The PUC specifically proposes to add language to its rules stating, "When release must be restricted due to reliability or other constraints, an NGDC shall develop a mechanism that provides proxy or virtual access to the assets."

The PUC's proposal also addresses imbalances and penalties.

The Commission proposes that imbalance trading between market participants (both Choice and Transportation customers) should be a market feature. "For some systems, this change may require information technology upgrades as well as increased real-time communication. It is also possible that other provisions within an NGDC’s program may need to change to accommodate imbalance trading between Choice and Transportation programs, such as mismatches in tolerance bands or penalty structures. While these changes and concerns should be highlighted, emphasis should also be placed on provisions that would customize imbalance trading for each participant. It’s important to note that all NGDCs already allow for some imbalance trading with the NGDC. For example, some NGDCs have mechanisms where NGSs provide extra gas during the summer months to make-up when LNG is used during the winter. Expanding options for market participants, coupled with real-time information could further optimize the market for all market participants," the PUC said

"For imbalance trading to work, real-time information between all market participants becomes more important. The current communication mechanisms NGDCs have already established might be sufficient; however, the Commission is interested in parties providing examples or conditions where additional communication could improve the market, particularly, communications practices that facilitate or complicate imbalance trading at the NGDC level. As imbalance trading will need certain real-time information, the NGDC’s electronic bulletin board could possibly serve as a general trading hub for each distribution system, with enhancements to fulfill this role," the PUC said

"For purposes of this proposal, the Commission is focused on daily imbalances and not month-end cash-ins/outs. However, commenters are invited to mention any impact this daily imbalance trading and communications proposal can have on the month-end mechanism," the PUC said

To implement this daily imbalance trading, the Commission proposes the following additions to the regulation at 52 PA Code 62.225: An NGDC shall provide the opportunity for imbalance trading on the day the imbalance occurred. Capacity may be traded between market participants provided that either:

(i) The trade improves the position of both parties.

(ii) The trade improves the position of one party and is agreed to by the second party but does not negatively impact the second party’s imbalance.

The PUC also proposes that all NGDCs establish penalties during system off-peak periods based upon their local gas costs.

"For this, the NGDC could propose a local hub or utilize a system average cost as its base market price for natural gas. From there, a straight multiplier could be used to generate the penalty. During system off-peak periods, a value of 15% was generally considered as reasonable by some of the stakeholders. While the multiplier could be a standardized set percentage, the Commission recognizes that a market based formula may offer a more fair and dynamic mechanism to respond to NGDC concerns about inadequate penalty structure and provide for a fairer penalty," the PUC said

For this purpose, UGI’s formula approach could provide a template for a market based approach, the PUC said. UGI’s penalty formula approach is described in its tariff as: "The difference in price between the highest published index price for Texas Eastern M-3 and the lowest published index price for Texas Eastern M-2, as published in Platts’ Gas Daily on the table 'Daily Price Survey', but shall not be lower than $0.25/per Dth, applied to the difference between the DDR and the delivered volumes, plus all incremental costs incurred by Company as a result of the failure to deliver the DDR."

The PUC would propose to add language to its rules stating, "Penalties during system off-peak periods must correspond to market conditions."

Furthermore, the PUC proposes, "An NGDC shall use the system average cost of gas as the reference point for market based penalties. If an NGDC takes service from a local hub, it may use the local hub as a reference point for market based penalties," and that, "The lowest penalty must be set at the market price."

Docket L-2017-2619223

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