Download August 6, 2001 - Maryland Public Service Commission

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August 6, 2001
Felecia Greer, Executive Secretary
Maryland Public Service Commission
William Donald Schaefer Tower, 16 Floor
6 St. Paul Street
Baltimore, Maryland 21202
Re: Washington Gas PGC Revision; ML # 78453
August 8, 2001 Administrative Meeting
Dear Ms. Greer:
The purpose of this letter is to respond to the Staff’s Comments in the abovereferenced matter which were received by Washington Gas Light Company
(Washington Gas or Company) on Friday, August 5, 2001. The Company believes
that the analysis underlying Staff’s recommended denial, while well intentioned, is
incorrect and also contains some internal inconsistencies. Washington Gas believes
that approval of the proposed revision to its gas tariff is appropriate and in the public
interest.
Summary of Position
When industry-defining events occur - - like last winter’s dramatic gas price
increases - - a natural question is posed: What has the industry learned and how can
customers benefit from the knowledge? The Company believes that commodity
hedging is an appropriate response to the acute volatility and high prices experienced
in the winter of 2001-2002. Last winter’s dramatic increases in gas costs were driven
by market conditions that have not been fully resolved. The potential continuation of
a notable imbalance between available supply and market demand may well present
another volatile and unusually high level of gas costs this winter.
The Company believes that a non-speculative hedging strategy may offer
modest reduction in the potential volatility seen last winter. Washington Gas
candidly admits that there may be a cost to obtain the protection hedging provides - there are no free lunches. However, the modest cost that may be incurred because of
a hedging transaction may indeed provide additional measures of protection to
Ms. Felecia Greer
August 6, 2001
Page 2 of 5
augment the Company’s other available tools to protect customers from some of the
harsh effects of a commodity market.
Discussion
Before last winter, Washington Gas would have agreed with the Staff that
additional hedging transactions were not necessary. For over a decade, the natural
gas commodity market served as a model for other commodities - - it had trading
mechanisms that provided pricing transparency as well as numerous sellers and
purchasers. For the ten years prior to last winter, gas prices traded in a relatively
narrow range, even during dramatically different winter conditions (i.e., harsh winters
like 1993-1994 as well as mild winters like 1999-2000). The traditional summer
injection/winter withdrawal of approximately one-third of flowing gas provided a
more than adequate “hedge” against winter volatility and price increases. However,
last winter presented an unparalleled combination of factors that created dramatic
imbalances of supply and demand. Washington Gas testified on those factors as last
year’s Public Hearing on Natural Gas Costs.
In view of the acute volatility of natural gas prices experienced during the
winter of 2001-2002, WGL proposes to implement a gas hedging strategy to enhance
the stability of gas costs during the approaching winter. To eliminate any uncertainty
about the recovery of costs incurred in hedging transactions through the Company’s
Purchased Gas Charge (“PGC”) provision, the Company has proposed an amendment
to the PGC to permit the recovery of “costs associated with gas cost hedging
programs” through such provision in the same manner as other gas costs incurred by
the Company.
The balance of this letter provides a response to various points raised by the
Staff’ Comments. The Staff Comments can be summarized into three areas: (1) a
theoretical objection to hedging; (2) an assertion that current hedging practices
provide enough protection; and (3) questioning whether hedging costs are recoverable
through the PGC.
(1) Staff’s Theoretical Objection to Hedging
The Staff correctly notes that hedging, whether it is through financial tools or
fixed price contracts, will mute the monthly price signal that is available for natural
gas. There are several answers to this objection. First, to the extent customers desire
to be at least partially protected from price volatility, hedging can be beneficial. The
vast majority of the Company’s customers have elected to remain with traditional
sales service or have declined level monthly payment plans. The Company believes
Ms. Felecia Greer
August 6, 2001
Page 3 of 5
that these traditional sales customers would be the beneficiaries of any hedging
transaction the Company executes.
A growing number of jurisdictions are recognizing the potential benefits
provided by gas hedging. A study by the National Regulatory Research Institute
(NRRI) highlighted the benefits and the jurisdictions that have acted favorably on
ratifying local distribution company (LDC) hedging authority. The primary author of
the report, Kenneth Costello, presented testimony in a recent District of Columbia
proceeding on the advisability of using hedging transactions. The NRRI report,
issued in May 2001, cited 11 states that have approved or required hedging by local
distribution companies.
Finally, the value that can be achieved through hedging has been previously
recognized by this Commission. The Company’s use of gas storage is a form of
hedging. Washington Gas’ customers pay nearly $40 Million in demand charges
(system-wide) each year to be able to realize the benefits. In addition, Baltimore
Gas Company and Columbia Gas of MD both operate hedging programs that have
been approved by the Commission.
(2) Modest Addition to Current Hedging Transactions
Staff’s Comments also question whether any additional hedging transactions
beyond the current storage activity is appropriate. Staff has misstated the question.
The issue is whether additional hedging or other activities should be pursued because
of potential benefit to customers. On the basis of last winter’s experience we now
know that volatility and price increases can be more severe that during the 1990’s.
Hence, the question is whether additional steps are appropriate. The Company
believes, at least for this winter, that additional measures may indeed be beneficial.
(3) Is it Appropriate to Include Hedging Costs in the PGC?
Staff has questioned the propriety of including certain hedging costs in
Washington Gas’ fuel clause. Specifically, the Staff has stated that hedging
arrangements other than storage and fixed price contracts that contain an explicit, or
transparent, fee for the hedging may not be recoverable through the PGC.
Washington Gas disagrees.
As an initial matter, it is rather curious to draw a distinction between the
“costs” of hedging based on the transparency of the fee, or even the nature of the fee.
The Staff position improperly exults form over substance. As noted above, the
Company’s customers currently pay nearly $40 Million in storage demand fees.
Functionally, those storage hedging “costs” are in distinguishable from the fees
Ms. Felecia Greer
August 6, 2001
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associated with other viable hedging tools identified in the attachment to this letter.
Similarly, while fixed price contracts may not have a separately stated fee, the cost of
the longer term arrangement is fully captured.
Additionally, the Commission has historically rejected a very restrictive
definition of gas costs. See, e.g., Re PGA Costs, 71 MD PSC xx at 364 (19xx). In
addition, the Commission has previously ruled that costs related to gas acquisition,
such as take-or-pay costs, are properly included in a gas company’s fuel clause.
Jurisdictional and Policy Issues Relevant to the Recovery by Local distribution
companies of Pipeline/Producer Take-or-Pay Costs and Charges, 79 MD PSC 436,
451-54 (1988). Finally, the Commission has authorized both Baltimore Gas and
Electric Company and Columbia Gas of Maryland to recover the costs of hedging
transactions through their respective fuel clauses. There is no distinguishing features
of those programs that Washington Gas is aware of that could justify disparate
treatment of the hedging costs.
(4) Other Issues
The primary concerns cited by the Staff Comments have been addressed
above. There are additional matters raised that are largely addressed in a recent
Washington Gas submittal to the District of Columbia PSC. The comments are
attached for the Commission’s reference.
Ms. Felecia Greer
August 6, 2001
Page 5 of 5
Conclusion
The Company’s proposed amendment to its tariff will clarify that “costs
associated with gas price hedging transactions” are recoverable through the PGC
charge. The Company believes that the addition of a gas hedging program to its gas
acquisition strategy can benefit customers by stabilizing gas costs which are passed
on to customers. A gas hedging program will not necessarily reduce gas costs in
total, but will reduce volatility of gas costs and limit exposure to potentially high gas
prices during the upcoming winter of 2001-2002. The Company will provide a report
to the PSC on the activities. Accordingly, WGL respectfully urges the Commission
to approve the proposed amendment to the PGC provision of its tariff.
Very truly yours,
Paul S. Buckley
Attorney
CC:
Lloyd J. Spivak, Assistant Staff Counsel
Calvin Timmerman, PSC Staff-Director of R,R & E
Luanne McKenna, Assistant People’s Counsel
Mr. Ralph E. Miller, OPC Consultant
Timothy Sherwood, WG Director of Gas Acquisition