Request For Comments:

Restructuring the

Illinois Natural Gas Industry

Illinois Commerce Commission

July 30, 1997

Request For Comments:

Restructuring the Illinois Natural Gas Industry

I. Introduction

Regulatory policies toward the natural gas and electric utility industries are undergoing fundamental change at both the State and Federal levels. Underlying these changes is the realization that competitive forces, where viable, may lead to greater efficiency in the provision of energy services and lower prices for consumers. The Illinois Commerce Commission has been active in advocating reform at both the State and Federal levels. Whether it is at the State or Federal level, nondiscriminatory gas transportation and electric wheeling services are the keys to linking ultimate consumers with competitive energy markets.

Restructuring of the electric industry was a major issue in the spring session of the Illinois General Assembly. However, over the last fifteen years, the natural gas industry has internally generated many of the structural reforms that are just now being considered in the electric industry. For example, for non-residential customer classes, the delivery of gas has been offered on both a "bundled" and "unbundled" basis. ⁽¹⁾ Such unbundling provides customers with choice over their gas supplier. Using unbundled gas transportation service tariffs, thousands of customers use the utility to deliver gas purchased directly by customers on the open market. In fact, gas purchased in this manner constitutes over one-third of the total gas volumes delivered to Illinois consumers. This unbundled gas service is analogous to the "retail wheeling" concept currently under debate for the electric industry.

At this stage, the Commission is considering further reforms in the gas industry and is focused on expanding the availability of unbundled service to residential customers. Using a public comment/workshop process, the Commission is soliciting views of interested parties on this subject. The main purpose of this process will be to help the Commission develop a framework for pursuing residential gas transportation. The Commission is also interested in distinguishing between reforms that the Commission may pursue without first obtaining explicit legislative authority and reforms that will first require additional legislative authority. The Commission plans to use the input from these comments and workshops in preparing a report to the Governor and the Legislature in October of 1997.

This Request For Comments begins with a brief history and status of the natural gas industry in Illinois. It introduces a number of topics that the Commission believes are important and provides questions for participants to answer with respect to each of these topics. The Commission welcomes discussion of other issues that participants feel are relevant to gas industry restructuring.

II. History of Gas Industry Restructuring

A. ICC Advocacy of Open Access at the Federal Level

The ICC has had an ongoing interest in energy policy developments at the national level. In this regard, most of the ICC's attention has been focused on key proceedings of the Federal Energy Regulatory Commission ("FERC"). The ICC has consistently argued before the FERC that competitive forces, where viable, will best protect the interests of consumers. Nondiscriminatory transportation is the crucial link between the competitive wellhead market and natural gas consumers. Much progress has been made over the years, as described below.

1. Prior to Order 636

Starting from 1983, the Commission has intervened in numerous FERC proceedings to argue pro-competitive positions. For example, the ICC supported the elimination of minimum commodity bills because they acted as a barrier to inter-pipeline competition. The Commission was a critic of "special marketing programs" (SMPs), under which pipelines offered transportation services on a discriminatory basis to highly price-sensitive customers. The ICC supported open access transportation services as a means to bring the benefits of wellhead decontrol to natural gas consumers. The ICC supported the elimination of price ceilings and a reliance instead on competitive markets. The ICC argued for the continued recovery of "take-or-pay" costs through pipeline commodity rates to minimize the anti-competitive effect of take-or-pay cost recovery. The ICC supported the concept of capacity brokering. For transportation and related services that can still be considered natural monopolies, the ICC has generally supported the FERC's movement toward efficient pricing policies.

2. Order 636 and Beyond

In Docket No. RM91-11-000 on Transportation Under Part 284 of the Commission's Regulations, known as the "Mega-NOPR," the ICC applauded the steps being proposed by the FERC to help assure completely non-discriminatory transportation service, which would enable customers to achieve service comparable in quality to the bundled service that pipelines were still providing at that time. The ICC argued that the FERC should require utilities to continue providing a balancing and swing service, which proved to be a crucial aspect of achieving comparable service quality. The resulting Order 636 was a major change in the gas industry, virtually eliminating the concept of bundled service at the interstate pipeline level.

Since Order 636, other FERC developments have attracted the attention of the ICC. For example, in FERC's docket on secondary pipeline markets, the ICC submitted extensive comments urging the FERC to unconditionally remove the price cap on released capacity and to permit direct contracting between releasing and replacement shippers and to minimize the role of pipelines in the capacity release process.

This year in its docket on gas industry issues and priorities, the FERC appeared to be reaching beyond its jurisdiction and into areas reserved by the states in regulating retail services. In particular, the FERC asked whether retail unbundling and/or the lack thereof in certain states could raise issues for the FERC. In its comments, the ICC cited the FERC's lack of proper jurisdiction. The ICC also pointed out that it is already active in the development of unbundled retail services. In fact, these comments to FERC are just the most recent example of the ICC's interest in unbundled retail service in Illinois.

B. Development of End User Transportation Service at the State Level

For over a decade, the Commission has been approving unbundled gas transportation tariffs for local distribution companies ("LDCs") in Illinois. These LDC tariffs, in combination with interstate pipeline tariffs approved by the FERC, have enabled medium and large usage customers to directly access competitive gas wellhead markets. In addition, a significant industry of gas marketers has developed. These marketers generally bundle competitive wellhead gas with interstate pipeline transportation services to provide gas delivered to the LDCs' citygates for both utilities as well as retail consumers.

The Commission's approach toward unbundled gas transportation service has evolved over the years to better reflect existing conditions in the industry. In the early stages of transportation service in Illinois, unbundled rate "design" was simply deducting the purchased gas adjustment (PGA) on all transported volumes. When transportation customers consumed LDC-supplied gas, they also paid the regular PGA rate. The problem with this simple approach is that it may not adequately recover from transportation customers the costs incurred by the utility for reserving the gas supply and pipeline capacity needed just in case the transportation customer uses LDC-provided gas. The ultimate effect tended to be a shift in the cost burden for reserved capacity from transportation customers to sales customers.⁽²⁾

Currently, Illinois LDCs utilize various standby and balancing charges, which have the effect of recouping the cost of providing the level of firm LDC gas service requested by the customer. In addition, for customers that exceed their contracted level of firm gas service, there are various penalty charges that may apply. These charges are not necessarily cost based, at least not in the usual sense of the term. The intention of these penalty charges is to prevent large-scale imbalances beyond those imbalances that the LDC is prepared to accommodate, pursuant to the terms and conditions and rates specified in the tariff. Furthermore, such penalties may often be much more practical than the alternative of actually curtailing service to transportation customers whose gas supply does not reach the citygate--a clear advantage if customers number in the tens of thousands as they might under a residential unbundled service scenario.

New ways of approaching transportation service continue to arise. As the Commission deals with smaller usage customers, such as those in the single-family residential class, it is clear that tariffs must be simple for the customer and that expensive metering must be avoided. This is possible through the use of aggregation-style transportation service and by relying on forecasted usage rather than metered usage for daily balancing purposes. The Commission has already approved a residential unbundling experiment and a small commercial unbundling experiment, both of which utilize this type of tariff framework.

With this Request for Comments, the Commission seeks input on how to proceed even further.

III. Workshop Topics

In this section, the Commission sets forth the questions to be addressed in the workshop process. Participants are asked to provide written comments, within the framework below. Participants are asked to indicate the type of reforms that should be pursued by the Commission and the type of legislative changes, if any, that would be required before the Commission could pursue the recommended reforms. At this stage, the Commission is interested primarily in receiving comments on broad issues rather than technical details.

A. General Issues

1. Structure of Unbundling

What are the costs and benefits to ratepayers of residential unbundling?

Describe the various services that gas utilities should be providing on an unbundled basis for residential customers and/or for marketer/aggregators serving residential customers (for example, storage, standby gas, balancing, transportation).

Describe the main tariff features that should be adopted to facilitate residential unbundling.

2. Reliability⁽³⁾

Explain how reliability can be maintained in a fully unbundled environment.

Should marketers be required to utilize "firm" interstate pipeline and gas supply resources?

How can the availability of adequate pipeline capacity be assured as unbundling progresses in Illinois?⁽⁴⁾

Define "essential use" customers and any additional requirements that should be placed on such customers or their gas suppliers in an unbundled environment.⁽⁵⁾

B. Deregulation Issues

1. Obligation to Serve

Which services should utilities be required to provide subject to rate and quality regulation? (Examples: Fully bundled sales service, transportation service, standby service, daily balancing service, storage service, unbundled merchant service, etc.)

Which services, if any, should be deregulated and to what extent?

2. Low Income Issues

Under unbundling, is there a need for a low income assistance program to make energy more affordable?

How should such a low income assistance program be designed?

What should be the funding source for a low income assistance program?

3. Consumer Protection Issues and Marketer Responsibilities

Currently non-utility gas suppliers are not regulated by the ICC. Under expanded unbundling, should the ICC impose any regulations or licensing requirements on these non-utility gas suppliers? For example, should there be any standards for termination of service or disclosure of policies and billing practices?

Should LDCs be allowed or even required to impose fitness tests on non-utility gas suppliers?

Should a public education program be implemented to prepare customers to participate in a competitive gas market?

Should an LDC be required to release customer information to potential suppliers or marketers? When should customer consent be required for the release of such information?

What, if any, safeguards are necessary to protect against unauthorized provider switching ("slamming")?

Should rate information be standardized to facilitate comparison shopping?

How should disputes and complaints be resolved, including not only those disputes and complaints between customers and LDCs, but also those disputes and complaints between customers and non-utility suppliers and between non-utility suppliers and LDCs?

C. Competitive Issues

1. Utility Affiliate Relationships

Under unbundling, LDCs continue to control bottleneck facilities. How can the Commission prevent LDCs from using their control of these facilities to discriminate against competitors in unregulated gas supply markets?

Should the Commission adopt rules of conduct for utilities and utility affiliates that market gas at unregulated rates within their service territories? If so, what rules of conduct should be adopted to help prevent unfair anti-competitive practices?

What penalties should the Commission impose on utilities that use unfair anti-competitive practices?

Should utilities be permitted to compete on an unregulated basis directly against non-affiliated marketers of gas?

Currently, the Commission gives utilities wide discretion to protect system reliability through declaration of a critical day which results in the imposition of higher imbalance and unauthorized use penalties. Also, utilities are given discretion to limit deliveries of customer-owned gas, which could increase the customers' exposure to imbalance and unauthorized use penalties. There are other areas where LDCs are given discretion to impose rules or limits on transportation customers. How can the Commission prevent utilities from abusing this discretion to benefit the utility or its marketing affiliates rather than for the preservation of system reliability?

Describe changes to utilities' operational processes that are necessary to promote open entry by marketers into the residential gas transportation market, e.g., would nomination and billing options such as consolidated billing, encourage entry into the market.⁽⁶⁾

2. Taxation

Is it true that fully bundled sales service is subject to higher effective Illinois gas taxes than unbundled service?

Is this an unfair advantage for unregulated gas merchants?

What are the consequences of the differential tax burden.

Should there be an end use tax and how should it be implemented?⁽⁷⁾

3. Impact of Electric Restructuring

What impact do you expect that electric restructuring will have on the gas industry in Illinois?

What aspects of electric restructuring should be taken into account as natural gas restructuring is contemplated?

D. Transition Issues

1. Pace of Restructuring

How quickly, if at all, should residential unbundling be developed?

Should a timetable be developed to which utilities must conform?⁽⁸⁾

Should all utilities be required to pursue residential unbundling or just the larger utilities?

Should small scale pilot programs precede full scale residential unbundling programs?

2. Capacity Assignment⁽⁹⁾

Should marketers be required to accept assignment of upstream pipeline capacity (including both storage and transportation service capacity)?

Should utilities be required to release capacity to marketers serving load within the utilities' Illinois service territories?

If marketers should be required to accept and/or utilities required to release capacity held by the utilities, how should the rates, terms and conditions of this released or assigned capacity be developed?

3. Stranded Costs

Do any significant stranded cost issues arise from the expansion of unbundling to the residential sector?

If there are significant stranded cost issues arising from the expansion of unbundling to the residential sector, how should they be handled?

4. Performance Based Regulation

Is performance based regulation a preferable alternative to unbundling?

Assume that residential unbundling is instituted. Would performance based regulation that is applied to PGA costs provide the utility with an incentive to discriminate against unbundled service customers?

E. Other Issues

Please provide comments on other issues that are important to the Commission in its consideration of residential gas transportation.

IV. Schedule

Written comments are due on August 15, 1997. Please send a printed copy of your comments to Richard J. Zuraski, Senior Economist, Office of Policy and Planning, Illinois Commerce Commission, 527 East Capitol Avenue, Springfield, Illinois 62794-9280 (Phone: 217-785-4150; Fax: 217-782-1042).

Also, please attach to an e-mail or send on a 3.5" computer diskette an electronic file containing your written comments in ASCII (.txt) format. Unless otherwise requested by the commenting party, files received will be uploaded to the Commission's Internet site. If you choose to attach your comments to an e-mail, please send your e-mail to cspear@pop.state.il.us and indicate that the package should be forwarded to Richard J. Zuraski.

Workshops will be held in the auditorium at the Illinois Department of Transportation (IDOT), Harry R. Hanley Building, located at 2300 S. Dirksen Parkway, Springfield, IL 62701. Free parking is available in the IDOT lot.⁽¹⁰⁾ The workshops will be held on the following days:

August 27, 1997 1:00 PM - 5:00 PM

August 28, 1997 9:00 AM - 5:00 PM

August 29, 1997 9:00 AM - 5:00 PM

When sending your initial comments, please indicate how many people from your organization you expect to attend the workshops.

On October 6, 1997, the Commission will discuss the workshop issues in an open meeting in the Commission's Main Hearing Room in Chicago, Illinois, 160 North LaSalle, Suite C-800.

V. Internet Address

Documents pertaining to this public comment/workshop process that are submitted to the Commission through e-mail or on computer diskette will be posted on the Commission's Internet site: http://www.state.il.us/icc.

¹ Unbundled service is provided when the delivery or transporting of gas from the supply region to the consuming region is separated from the commodity itself.

    ²The above cost-shifting problem would not necessarily exist where standby gas was provided on a strictly "interruptible" basis (that is, where the LDC deducted the customer's projected potential LDC-provided standby load from total projected requirements and took steps to physically curtail such use under severe conditions).

³ Also see the potentially related topic, "Capacity Assignment," under the "Transition Issues" section, below.

⁴ This issue added at the request of Enron.

⁵ This issue added at the request of Illinois Power Company.

⁶ This issue, in part, added at the request of mc2.

⁷ This issue added at the request of the Cook County State's Attorney's Office.

⁸ This issue added at the request of El Paso Energy.

⁹ This issue added at the request of El Paso Energy.

¹⁰ IDOT requests that visitors do not park in the areas designated Assigned Parking - Tag Required (see the enclosed map of the IDOT facility). Unauthorized vehicles in these spaces will be towed at the owners' expense.

This page was last updated August 31, 1997.