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New York PSC Rules On Petition To Change Natural Gas Default Service Pricing Mechanism (Reconciliations)

March 20, 2018

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Copyright 2010-17 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

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The New York PSC has denied a petition from the Small Customer Marketer Coalition that had sought changes in the gas cost reconciliation mechanism, to ensure monthly default service rates are more market-reflective, as the PSC determined that, "the current gas recovery mechanism remains the most appropriate mechanism that best balances timely recovery of gas costs and bill volatility."

On February 24, 2015, the Small Customer Marketer Coalition (SCMC) had filed a petition requesting that the Commission institute an investigation to examine the Annual Reconciliation of Gas Expenses and Gas Cost Recoveries governed by NYCRR §720.6.5 and examine an alternative cost recovery mechanism that would ensure that the monthly gas adjustment clauses (GAC) are truly reflective of current market costs (the Petition).

The SCMC petitioned the Commission to institute an investigation to examine the annual reconciliation of gas expenses and gas cost recoveries and examine an alternative cost recovery mechanism that would ensure that the monthly GAC, which sometimes are referred to as the Gas Supply Charge (GSC) or Gas Cost Factor (GCF), is truly reflective of current market costs. The SCMC stated that the current methodology allows refunding or surcharging the result of the annual reconciliations in the following billing cycle. The result, according to the SCMC, is that the monthly gas commodity rates do not represent the most current and accurate costs associated with supply for the applicable billing period since current costs are modified by incorporating the refund or surcharge. Additionally, the SCMC said that the inclusion of material out of period cost adjustments in rates undermines the transparency and relevance of the current utility commodity pricing.

The SCMC had said that a refund rate of $1.03 per dekatherm (Dth) instituted by Consolidated Edison Company of New York, Inc. (ConEdison) in the 2015 calendar year created a dramatic and whole sale revision of the market price. At an estimated monthly cost of $4.00 per Dth, the application of the credit reduced the market price by 26%.

In its order, he PSC stated, "Due to the nature of forecasting, there will always be a discrepancy between the actual cost of gas incurred and the forecasted cost that is recovered from customers. This difference must be reconciled per the Rules and Regulations and also to eliminate any incentives for the LDCs to under or overestimate the monthly cost of gas. This difference is magnified during the winter months, where as much as 60% of total gas sales occur over this four-month period. Additionally, as much as 80% of total residential sales are dependent on the weather; this dependence on weather increases the difficulty in accurately forecasting revenue collections."

"[U]ltimately, the Commission has determined that the current annual GAC reconciliation remains the most appropriate available mechanism for the reasons discussed below. Alternative mechanisms, which alter the frequency of the reconciliation, can impact the volatility of the rates charged to customers. Shorter reconciliation periods can introduce more volatility, especially in the winter months where the majority of customer’s annual usage occurs. Reconciliation periods longer than one year can reduce bill volatility but can create inequities as customers move on and off the system, or migrate to and from ESCOs. The annual GAC reconciliation strikes the balance between minimizing these inequalities and mitigating rate volatility. Moreover, LDCs closely monitor the GAC imbalance and often file for interim GAC rates allowing for timelier cost recovery, and minimize the total GAC imbalance that would have to be recovered in another period," the PSC said in its order

"Although the Commission agrees that there have been significant changes to the energy markets, the underlying issue and need for the annual reconciliation remains the same, which is the utility’s lack of ability to control the capacity and commodity cost of gas," the PSC said in its order

"The Commission also explored the possibility of excluding the annual reconciliation rate in the monthly GAC; however, we believe the annual reconciliation should continue to be included in the cost of gas for several reasons. First, although the reconciliation rate reflects adjustments from a prior period, this is no different than the current hedging practices or the utilization of storage gas where costs do not necessarily reflect current market costs. Moreover, in certain cases, storage gas contains commodity costs that were procured from a prior period which may date back further than the prior period included in the GAC reconciliation. Second, it is important to note that one of the main purposes of the GAC mechanism is to allow recovery of the utility’s commodity cost. Reconciliations of the prior period are an actual cost and should be appropriately included in the gas cost. Third, as previously discussed, the annual reconciliation eliminates the potential incentive to overestimate gas costs and recognizes that the commodity and capacity costs are beyond the control of the gas LDCs. Finally, the current mechanisms allow LDCs the flexibility to implement interim reconciliation rates to minimize the GAC imbalance. Many LDCs also have taken other measures, discussed below, to reduce the potential GAC imbalance and its affect to the commodity cost since this petition was filed," the PSC said in its order

The PSC noted that several reconciliation factors cited by SCMC that exceed $1 per Dth reconciled the costs and revenues from the 12-month period ended August 31, 2014.

"It is important to note that the magnitude of the imbalance for that year was the result of one of the coldest twelve-month periods New York State has faced in the past 30 years, New York City reported 4,376 Heating Degree Days - approximately 9.1% colder than normal weather. This 12-month period also contained the prolonged period of extreme weather which broke low temperature records in many areas including a 116-year old record in New York City, which experienced a low temperature of 4 degrees Fahrenheit. The impact of weather should be carefully considered when determining if the current GAC reconciliation mechanism should be replaced. The basis of any modification to the mechanism should not be solely dependent on a record cold winter which created a major gas cost recovery imbalance in one particular year," the PSC said in its order

"The SCMC was particularly concerned with Con Edison’s GCF which reduced the utility’s commodity price by 26%. We note that although the cold weather was a major factor in the large refund rate, a significant portion of the reconciliation rate was also attributed to refunding customers pursuant to Case 10-G-0643. Due to an error associated with the calculation of lost and unaccounted for gas in the historic period of September 2004 to August 2010, Con Edison was ordered to reallocate the associated cost from the annual reconciliation to the monthly rate adjustment. This refund to customers through the GCF has since sunset and no longer affects the GCF rate which should better align the utility gas price with the market prices and help alleviate one of the SCMC’s concerns. Although this charge no longer exists, similar charges may arise that could affect the monthly GCF. The future inclusion of extraordinary charges or refunds in the GCF will be determined on a case by case basis," the PSC said in its order

The PSC noted that, although weather, which is beyond the LDC’s control, is a major driver of the annual gas cost imbalance, certain LDCs have under gone changes or currently have procedures to try to minimize the annual gas cost imbalance. "All of the gas LDCs have the ability to monitor the gas cost imbalance and implement an interim gas cost rate, as necessary, to ensure current rates are reflective of current costs and minimize the end of period imbalances. As discussed in the comments filed by NYSEG and RG&E, interim adjustments are a tool the LDCs utilize to help mitigate large out-of-period costs," the PSC said in its order

Furthermore, the PSC noted that National Grid petitioned the Commission for a limited waiver of §720-6.5(b) that requires the Company to file statements not less than three days prior to the effective date. The waiver allows National Grid to file GAC statements on less than 2 business days’ notice. "This waiver allows National Grid to utilize the latest available NYMEX futures closing prices which assists in providing a more accurate forecast of monthly gas costs and can result in a lower annual GAC imbalance," the PSC said in its order

"Additionally, Central Hudson has modified its estimation of winter unbundled sales to enhance its forecasting methodology after it experienced a season with significant gas cost imbalance. Since the SCMC Petition was filed, Con Edison, O&R and the National Grid Downstate Companies, have recently modified their retail access programs to allow ESCOs to have more control of the amount of gas being nominated which would result in lower monthly cash outs and subsequently would lower the annual GAC imbalance. These LDCs no longer use a single pricing point of Transco Zone 6, as this pricing point was extremely volatile during the 2014 winter. These LDCs have transitioned to the use of average prices from multiple price points which would reduce price volatility and the magnitude of the monthly cash outs," the PSC said in its order

"The retail access programs of the National Grid Downstate Companies, Con Edison, and O&R were also modified to give ESCOs more control over the capacity assets utilized to bring gas into the service territories. These new programs were designed to allow ESCOs the ability to modify daily delivery quantities on a day-to-day basis rather than month-to-month basis. This gives ESCOs better access to the LDC gas control operation which will protect reliability and also minimize the potential cash outs because it allows the ESCO to accurately determine the amount and which assets to be utilized to serve its customers," the PSC said in its order

"Our examination of the Annual Reconciliation of Gas Expenses and Gas Cost Recoveries governed by NYCRR §720.6.5, as described above, has determined that an alternative cost recovery mechanism is unnecessary. The SCMC’s concerns have been addressed through various utility operational changes and can be addressed with the current tools available to the LDCs which would reduce the potential imbalance to minimize the future out of period adjustments. The Petition is therefore denied," the PSC said in its order

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