Connecticut PURA: Residential Gas Choice Would Increase Distribution Rates

Expanding the unbundling of the natural gas industry to allow for residential choice in Connecticut would increase distribution rates, while any cost savings from competitive supply are "unclear," the Connecticut Public Utilities Regulatory Authority said in comments to the Department of Energy and Environmental Protection.

Currently, only non-residential customers in Connecticut may choose their retail gas supplier. Expanding choice to residential customers had been raised by parties including the Retail Energy Supply Association in DEEP's proceeding regarding the statutory Comprehensive Energy Strategy.

Though PURA offered no outright conclusion with respect to residential gas choice, it cited a number of issues associated with any expansion, and said that distribution rates would increase under residential choice.

"Allowing all residential customers to participate in retail service from marketers would add an extra level of administrative burdens to the LDC," PURA said. "Under this scenario, the LDCs probably would need to employee more staff to accommodate a larger number of customers receiving service from marketers. This would increase the revenue requirements of the company and increase the distribution rates to customers."

"It has always been unclear regarding the costs or cost savings to the residential customer of purchasing service from a marketer rather than the LDC. Historically, marketers were not interested in providing service to the residential market because of the low profit margins associated with the small volumes of gas consumed at the burner-tip," PURA added.

"Nationally there has been an absence of merchants clamoring to provide residential service. In some cases, marketers have attempted to provide residential service and withdrawn after finding it uneconomical to provide. Another question is who will pay for the costs of the transition? The Authority believes that the cost causers and those benefiting should pay the incremental costs (e.g., developing new systems; hardware platforms; excess operational costs; maintenance costs; staff service costs). Any savings should be used to offset those costs," PURA said.

PURA cited "numerous costs" associated with residential service unbundling as including:

• Billing Costs. These include: (1) type of meter required and its reading; (2) cost of changing a customer’s account from one merchant to another; (3) cost of determining each customer’s historical daily and monthly gas requirements; (4) cost of aggregating these requirements by merchant to obtain each merchant’s monthly required deliveries; and (5) uncollectibles.

• Monitoring of Physical-System Integrity. The LDC must ensure that each marketer serving residential customers is in balance between nominations and deliveries on a daily and monthly basis. The LDCs also would need to ensure deliveries of gas were made to the city gate stations for these customers. Penalties would be assessed for costs associated due to imbalances and failures to deliver.

• Asset Utilization. With residential unbundled service, gas supply from the LDCs should decrease. However, the use of the LDCs’ pipeline capacity, storage, and supplemental peaking services may become exposed to higher utilization. Therefore, certain charges may be necessary to recover the higher utilization of the LDC’s assets.

• Stranded Costs. Stranded costs related to residential unbundling include such items as metering systems. The magnitude of these stranded costs may increase as more residential customers switch to marketers. Finally, who should be responsible for incurred stranded cost - the LDC or the ratepayer?

• System Planning Costs: Competition produces additional risk on system planning. Low load-factor costs require more management skill in obtaining cost-effective service for these customers. This would increase administrative burdens on the LDC, which would result in higher staffing requirements and service rates.

PURA further said that consumer service issues would need to be reviewed and adjudicated if residential unbundling happens, including: quality of service; providing energy assistance to low-income customers; service termination and reinstatement of service; payment arrangements; security deposits; billing forms and options; winter hardship shutoff moratorium for residential customers and applications for hardship status; and complaint resolution processes for customers, marketers, and LDCs. "All social programs would need to be reviewed to identify possible cost savings opportunities and appropriate legislative changes. A mechanism for funding social programs would need to be developed. Alternative approaches, such as LDCs sharing these responsibilities and/or costs with other merchants should be developed and tested before full scale implementation. Also, a significant public education program to provide the public with customer and marketer information must be conducted," PURA said.

"Another important issue is the relationship between the LDCs and their marketer affiliates. There is potential for conflict of interest between the LDCs role as a monopoly provider of services to all parties competing for natural gas sales, and its ownership of one of those competitors. It will be necessary for Codes of Conduct to be developed to establish standards governing the relationship between the LDCs and their unregulated marketing affiliates and a statewide code of conduct to educate and protect consumers. The Codes of Conduct should also address such issues as: a marketing affiliate definition; arms-length transactions between buyers and sellers; equal treatment for all users; release of information to all users of LDC services; process of handling requests for transportation services in the same manner to all marketers and in a similar time period; release or transfer of capacity; provision of service issues; complaint procedures; LDC functions and employees; advertising; and a requirement for separate books and records," PURA added.

"If residential unbundling is contemplated, a pilot program and phase-in of service in Connecticut would make the transition easier for customers. The Authority would need to pursue all of the above issues more fully if and when it adjudicates this complex issue," PURA said.