A Prime "CHOICE®" Agreement
COH Regulatory Package Breaks New Ground; has Implications Beyond Gas Industry
By Steve Jablonski, director of external affairs for Columbia Gas of Ohio
A regulatory agreement brokered by Columbia Gas of Ohio may well become the bible for residential natural gas unbundling in the United States. Or, at the very least, the most frequently consulted road map.The agreement, approved in January by the Public Utilities Commission of Ohio (PUCO), helps clear the way for statewide expansion of COH's highly successful Customer CHOICEsm residential gas transportation program.
Anatomy of an Agreement
The program was introduced in the Toledo area in April 1997. At its most basic level, the regulatory package puts in place a funding mechanism for recovery of the transition capacity costs, sometimes called stranded costs, that will be created by expansion of Customer CHOICEsm statewide. But the details of the agreement, as well as the process the company used to forge the deal, have implications that go far beyond the natural gas industry.
"Almost everything about this agreement is unique," said Robert C. Skaggs Jr., COH president and CEO. "It positions COH to expand the premier choice program in the nation throughout our market. It was negotiated, rather than litigated. It provides COH with the incentive and opportunity to generate new revenue. And it creates a model for transition cost recovery for both the gas and electric industries. At the same time, it provides COH with a fair opportunity to achieve its long term financial goals."
The agreement actually is a stipulation which amends, for the second time, a COH rate case approved in 1994. It offers some innovative ways to address the prickly transition cost issue, the biggest roadblock to expansion of the Customer Choice program. The transition costs are created as Choice customers leave COH's tariff for other gas suppliers. The utility ends up with upstream pipeline capacity it has contracted for but will no longer need as other gas merchants assume the supply activities.
"The stipulation allows COH to manage the entire process of transition cost recovery," said John W. (Jack) Partridge Jr., COH senior vice president of public affairs and communication. "While the company is assuming some risk, it also gains new opportunities for revenue enhancement. What's even more important, we should be able to address transition costs at no additional cost to our customers."
A pool of funds will be created that COH will use for transition cost mitigation, Partridge said. Funding sources include pipeline refunds, an increased balancing service fee from marketers participating in the Choice program, and revenues generated by off-system sales and capacity release programs. Partridge said the transition costs could range from $100 million to $300 million over the agreement's five-year term. The company will be at risk for a portion of any unrecovered transition costs.
Offsetting the risk is the potential for additional revenue generation through the marketing of COH's upstream pipeline capacity rights and gas supplies. Through sharing mechanisms established by the agreement, both COH and its customers will benefit from this robust mid-stream marketing effort.
"There is a powerful incentive for us to manage our business carefully and focus on operational excellence and customer service," said Partridge. "This agreement provides us an opportunity to leave behind the days of wrestling with our customers in rate case hearing rooms."
Partridge said this method of dealing with transition costs, never before attempted in Ohio or any other state, provides a bridge to the contract re-negotiations with upstream pipeline companies that are expected to be one of the last key steps in the industry restructuring transition. A significant added value for customers is COH's pledge not to increase base rates before 2000 at the earliest, Partridge said.
Collaboration, Not Confrontation
The seeds from which the stipulation grew were sown nearly a decade ago, when COH adopted a collaborative approach to ratemaking. "The old litigated rate cases were costly, time consuming and frequently put the company at odds with the PUCO, the Ohio Consumers' Counsel (OCC) and our key customers and other constituencies," said Gary W. Babin, COH vice president of regulatory and governmental affairs. "We figured there had to be a better way to deal with rate cases and regulatory matters in general."
The company found a solution by forming a collaborative group including the PUCO and OCC staff, the cities of Toledo and Columbus, the Ohio Farm Bureau, Honda of America Manufacturing, various school districts, industrial customers, natural gas marketers and other customer groups. The collaborative has negotiated every COH rate settlement since 1991, avoiding costly litigated cases.
Thomas J. Brown Jr., COH director of regulatory relations, helped guide the collaborative through the discussions which formulated the framework of the stipulation. "This agreement is the product of about 10 months of intense negotiations and might not have happened if not for the trust and mutual respect that has grown from the collaborative process."
Smiles all Around
For the state's consumer watchdog, collaborative ratemaking and the resulting opportunity to expand Customer Choice represent the ultimate "win-win."
"Our position was that we had to provide meaningful benefit for residential customers as opposed to large-volume customers. Otherwise, why are we doing this?" said Ohio Consumers' Counsel Robert S. Tongren. "Through a lot of effort, a huge success was produced in Toledo. There's been good penetration and incredible awareness ³ no other program has been as successful. We had to figure a way to extend these benefits to the rest of Columbia's service territory."
Tongren said a spirit of cooperation among all parties was the key to success. "The collaborative process was what allowed us to put together this kind of agreement. It was a labor, without a doubt. But the process of talking and negotiating, as opposed to public posturing, is preferable by far."
Columbia's Customer CHOICEsm program has put the natural gas industry on the cutting edge of regulatory innovation in Ohio, said Tongren. "It's uncanny. We're approaching the second anniversary of the Federal Telecommunications Act of 1996, and in that arena we're nowhere near Customer CHOICEsm in terms of penetration and meaningful competition for residential customers. Who'd have thought we'd end up with competition in natural gas before the telephone industry?"
That the agreement breaks new ground in the natural gas industry is being acknowledged almost unanimously. PUCO Chairman Craig A. Glazer, in a concurring opinion to the stipulation agreement, wrote: "The proposal accomplishes several purposes: it allows vibrant competition in natural gas to occur at the outset without making stranded cost recovery a barrier to entry. Secondly, it uses creative means for recovery of authorized stranded costs without either raising rates to customers or requiring long transition periods that hurt competition."
Glazer acknowledged the value of the collaborative process in handling the hot potato of stranded costs: "The stranded cost recovery proposal voluntarily agreed to in this stipulated agreement illustrates that with a lot of dedication and compromise, a 'win/win' proposal that balances the needs of all stakeholders can be crafted. I believe the proposal provides an excellent model for addressing this difficult issue."
Finally, Glazer urged those involved in the contentious debate over electric industry deregulation and stranded cost concerns to study the Columbia agreement: "As Ohio debates this issue in electricity, it is noteworthy that many of these same parties were able to work up a 'win/win' solution in the natural gas arena. Although there are certain differences between the two industries, there are also many similarities which would suggest that all policymakers note what has occurred by voluntary agreement of the parties in this important case."
The way stranded costs are handled is significant for Tongren, as well. "The recognition that everybody deals with stranded costs is a fundamental principle. That is where we have to go with respect to electric industry stranded costs."
Going Forward
With the tools to tackle stranded costs in hand, COH is turning its attention to the next phase of the Customer CHOICEsm program. "This spring, the PUCO will review what's happened in Toledo and then decide about expanding the program," said Genevieve W. Tuchow, COH vice president of external affairs. Tuchow heads the company's Customer CHOICEsm implementation task force.
"It's not certain yet exactly when or where the program will be expanded," said Tuchow. "All the parties seem to agree that it's going to happen this year, though." Tuchow said the company is already working on the logistics of expansion, which will require significant administrative and customer education resources.
In mid-January, COH met with marketers participating in the Customer CHOICEsm program to solicit feedback and suggestions. The meeting yielded positive, valuable input, Tuchow said. "We were able to identify and discuss high-priority marketer issues, like customer sign-up procedures, capacity options and use of the electronic bulletin board. They appreciated having a chance to help shape the process." The company will hold more meetings with marketers and other stakeholders, and will work with the PUCO, the OCC and its other collaborative partners to refine the program and lay the groundwork for its expansion.
The Bottom Line
The value of the stipulation, and what will flow from the agreement, go beyond dollars and cents for COH, said Skaggs. "A big sense of satisfaction for me is the confirmation that the direction we're taking as a company is on target, and that the risks we're taking are worth it. Think about it. Collaborative ratemaking works. Innovative problem solving works. Sharing risks and rewards works. When you get strong reinforcement that your corporate policy is working because you can see it creating value for both your customers and your shareholders, that's about as good as it gets."
Off-System Sales and Capacity Release – Good Business! Off-system sales and capacity release are important but relatively new terms for many Columbia employees. Columbia Energy Group's distribution companies first began experimenting with off-system sales in 1995. Revenues generated through off-system sales are allocated to the utilities and their customers as determined by individual state public utility commissions. What's an Off-system Sale? Off-system sales involve gas and gas exchange agreements on interstate pipeline systems, as opposed to the distribution companies' own pipeline facilities, often between Columbia and other parties which are not traditional customers. Supply and capacity are marketed whenever opportunities for revenue enhancement becaome available in the marketplace, as long as service and price to sales customers is not compromised. Give Me an Example! Off-system sales transactions are very complex and take various forms. One example would involve requests from marketers for Columbia to loan them some gas during a period when prices are high. Because of the large amount of storage Columbia has available, it many times has the flexibility to meet such requests without jeopardizing its core market service. The marketers would then return the gas to Columbia on a predetermined date when prices are projected to be lower. The price differential is determined using New York Mercantile Exchange (Nymex) futures prices, adjusted according to the specific circumstances of the transaction. Columbia receives a fee for the exchange service, negotiated with the marketers based on the Nymex price difference between the loan date and return date. Capacity Release Columbia contracts for large amounts of frim interstate pipeline capacity to transport gas from the suply sources to its customers. Some days Columbia uses its full pipeline capacity, but many days it does not. When Columbia doesn't us its full contracted capacity, it offers the unneeded capacity to others on a bid basis. the excess capacity is most often purchase by large industrial customers and gas marketing companies. |
CHOICE® is a registered service mark of Columbia Gas of Ohio, Inc.
