Comments of the

Natural Gas Supply Association

Regarding the Illinois Commerce Commission Inquiry on

The Restructuring of the Illinois Natural Gas Industry

August 15, 1997

In Preparation for the ICC Workshops August 27-29, 1997

A. General Issues

1. Structure of Unbundling

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

The benefits of lower prices and improved selection of services and service providers result from competition and the complete unbundling and transparent pricing of remaining monopoly services. In the Columbia Gas - Toledo pilot program, residential customers realized 10% lower prices. Pilot programs "test the waters" and will likely be remembered as providing valuable experience ­ but not for unlocking the full potential of competition and the resulting benefits to consumers.

The costs are transitional in nature and - in most cases - are either avoidable or mitigateable. The transition costs associated with LDC unbundling efforts are estimated to be significantly lower than those of electricity restructuring. The Commission's approach to and oversight of the LDCs' transition costs and their recovery will be the primary determinant of the ultimate cost impact on residential consumers.

The benefits can and should far outweigh the costs.

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).

All regulated services of the LDCs - that can be unbundled - should be unbundled, discretely priced, and offered to customers and any market participant on a non-discriminatory basis. Each service should be evaluated separately by the Commission to determine whether such services can be offered competitively. The regulated gas utility should only be providing services that unregulated non-affiliated participants cannot offer competitively.

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

The tariffs for remaining LDC monopoly services should be separated and discretely priced ­ eliminating the obfuscation of "black box" fully bundled service pricing. Services where competition is demonstrated should be priced competitively in the marketplace ­ not in tariffs. However, it remains important for there to be price transparency of and non-discriminatory access to all LDC services.

2. Reliability

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

Reliability in all other sectors of the gas industry has improved as competition has been introduced. Note the differences in the performance of the industry in the winters of '95 & '96 (post FERC order 636 and wellhead decontrol) as compared to the problems of the fully regulated industry in the late 1970's ­ especially the shortages in January 1977.

It is the gas industry's experience that: where there is viable competition and discrete/transparent pricing of the remaining regulated services, reliability is enhanced. In a competitive and unbundled service market, customers will get the reliability that they contract for.

'Supplier of last resort' provisions can offer failsafe protection during the transition and thereafter. This service does not have to be provided by the regulated LDC. Note that Vastar and Texaco, unregulated marketers, are providing supplier of last resort services in unbundling pilot programs in Richmond, VA and Mercer County, PA, respectively.

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

No. The requirement would artificially impose unnecessary restrictions on all parties contracting to meet the obligations of their customers. Such a requirement would alter the market for pipeline capacity ­ likely increasing rather than decreasing the cost to bring gas to Illinois customers. Market participants will, by necessity, manage a portfolio of transportation arrangements suited to economically meet the needs of their customers. These portfolios will include firm transportation for customers that require it ­ when customers and market conditions require it.

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

If there is sufficient capacity available before unbundling, it should be available after unbundling at prevailing market or FERC regulated rates ­ whichever applies to the specific pipeline in question. In addition, there are multiple pipeline projects being built specifically to serve the Chicago area, the surrounding Great Lakes, and Mid-western markets ­ significantly increasing the availability of pipeline and gas commodity capacities in the area.

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

Any hospital or critical life supporting public facility that does not have dual fuel capability. Schools may be considered non-essential use ­ based on the Ohio and Pennsylvania experiences. The schools involved with the pilot programs lobbied aggressively to not be included as essential use in the programs in order to save money during peak demand days by closing the school for "snow days". Schools have the flexibility to alter schedules ­ unlike other essential use facilities like hospitals. The schools saved substantial amounts of money in '95 & '96 in peak demand periods.

Premium 'essential use' gas service is available and will be available for those customers that chose to contract for it.

B. Deregulation Issues

1. Obligation to Serve (should read: "Obligation to Deliver")

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.)

All remaining natural monopoly functions of the LDC should individually remain subject to rate and quality regulation. As mentioned earlier, all services of the LDC should be separated, evaluated for potential competition, and priced individually to ensure transparency of pricing in the marketplace. Fully bundled services and the LDC "merchant function" should be eliminated. Otherwise, the full potential of unbundling to increase competition will go unrealized.

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

Any service where competition can and will exist, including but not limited to; metering, billing, commodity sales, upstream capacity and storage, 'supplier of last resort', etc. The Commission should monitor all services periodically to determine whether competition exists. If it does, let the market set prices. If competition does not exist, Commission regulatory oversight is necessary to protect consumers from the exercise of monopoly power. With the challenges before it in a dynamic market, the Commission's role will need to evolve more towards proactive oversight and enforcement rather than arbiter in the economic regulatory sense. As economic regulation properly recedes, safety and reliability regulation remain crucial.

The LDC 'obligation to serve' should be transformed into an 'obligation to deliver'.

2. Low Income Issues

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

Unbundling will create no new need for such programs.

How should such a low income assistance program be designed?

Any such program should be evaluated in terms of meeting the social goals, the need for such a program in Illinois, and equity amongst all participants in the Illinois economy.

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

General benefits programs, such as low income assistance, may be more appropriately funded through the general tax revenues of the state ­ disassociated with energy commerce. The continuation of such a program, funded by natural gas rate-payers, places gas at a competitive disadvantage against other competing forms of energy ­ some of which the ICC does not regulate.

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?

If it works now for the industrial and commercial customers, don't fix it. If the ICC defines a unique purpose or need for oversight of marketers serving residential customers, the Commission should limit the requirements to those that are meaningful to the purpose identified ­ such that the Commission does not erect barriers to entry for market participants. Additionally, those requirements should be limited to a marketer's activities with residential consumers in the state.

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

No. If some standards are relevant to the residential customers, the ICC ­ not the LDC ­ must administer the oversight. To afford this responsibility to the LDC would only serve to create the potential for conflict and/or abuse ­ where there need be none.

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

Yes. However, its cost should be minimized. Additionally, the ICC should be the spokesman not the LDC. The messages contained therein should only include competitive-neutral information. Otherwise, the "public education" program may serve to supplement or advantage the marketing efforts of a particular company, marketer or LDC affiliate.

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?

The same information should be made available to all marketers and service providers on a non-discriminatory basis. Unequal access to customer information could provide a competitive advantage to an incumbent utilities' unregulated marketing affiliate. Information obtained through a customer funded rate requirement should be either be made public ­ or ­ be restricted from the LDCs' affiliates that compete with other marketers. Legal issues regarding customer consent should be reviewed by the ICC with respect to Illinois and federal law.

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

To the degree that any provider switch or "slamming" is unauthorized by the customer, the action should be considered illegal (fraud). Some complaint mechanism to protect consumers financially from such fraudulent activity should be considered.

Should rate information be standardized to facilitate comparison shopping?

LDC rate and tariff information for all unbundled services should be standardized to avoid potential confusion in the marketplace and the erection of barriers to entry by increasing costs to non-affiliates by forcing duplicative systems and personnel. A "GISB-esque" standard may be appropriate for LDC information systems and rate/tariff reporting.

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?

At the ICC or in the Illinois courts.

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?

The ICC should require complete physical and operational separation between an LDC and its marketing affiliate. Furthermore, the ICC should establish strict and enforceable codes of conduct governing the LDC's relationship with its affiliates. The ICC will have to monitor and enforce non-discriminatory access to and pricing of all LDC facilities and services under the ICC's jurisdiction.

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?

Yes. Full separation and strict and enforceable codes of conduct should be implemented to govern affiliate and LDC relationships and transactions. See attached paper "LDC Affiliate Codes of Conduct" for more detail.

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

The penalties should fit the offense. Severe and/or conscious infractions of the affiliate separation rules and codes of conduct should be penalized by suspending the LDC's marketing affiliate from marketing and providing other unregulated services in the LDC's franchise territory and should include appropriate fines and other remedies. The Commission should routinely monitor these LDC / affiliate relationships and their transactions through regular management and financial audits. The ICC should be empowered to initiate a disciplinary action on behalf of the state and its consumers ­ without the requirement that another company or customer file suit or request ICC intervention.

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

No. LDCs should not be permitted to provide any unregulated services. An LDC's separate affiliate should be allowed to compete for unregulated portions of the market.

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?

The ICC should consider this potential problem while drafting the "codes of conduct" and the non-discriminatory pricing and access portions of the unbundling rules. Again, ICC oversight of affiliate transactions should be regular and thorough ­ similar to SEC oversight of securities transactions by insiders ­ e.g. "insider trading".

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.

Unbundle them and make all existing non-natural monopoly functions competitive or open to bid.

2. Taxation

The tax issues raised in this section are the only issues in the ICC's inquiry that appear to require legislative action to change.

3. Impact of Electric Restructuring

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

Electric restructuring will lower the cost of electricity for end-users - heightening competition between gas and electric energy sources for end use applications within all customer classes. The natural gas industry would be at a competitive disadvantage in these markets if competition in the natural gas retail markets does not precede or happen simultaneously with that of electric markets.

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

Timing.

D. Transition Issues

1. Pace of Restructuring

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

As fast as practicable. The transition to a competitive market and unbundled services should be manageable, but certain.

Should a timetable be developed to which utilities must conform?

Yes. A date certain for implementation provides clarity and motivation for all parties involved in the process. It will deter market entrants and confuse customers to do otherwise. The lack of certainty essentially protects incumbents' ability to exercise monopoly powers during an undefined period of change.

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

All.

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

There have been many pilot programs nation wide ­ all with distinct variations on the implementation. Each has provided the industry and the regulators with meaningful lessons. However, there is sufficient experience from which to draw. The ICC should seriously consider proceeding without further experimentation. Additionally, pilot programs are, by nature, limited in size and scope. Therefore, pilots cannot replicate fully the effects of competition and unbundling statewide.

2. Capacity Assignment

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

No. Marketers should be left to purchase their own capacity. (see below).

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

Not just to marketers. The issue of the upstream capacity holdings of the LDC are transitional not permanent ­ and are related to valuing, mitigating, and recovering stranded costs (see below). The release of such upstream capacity by an LDC should be required as part of the LDCs' exit from the merchant function. However, the "divestiture" of the assets ­ or ­ liabilities should be handled by "auction" or sold in a non-discriminatory proceeding - pursuant to FERC policies and procedures - involving all interested buyers ­ including the LDC's unregulated affiliate.

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?

By FERC.

3. Stranded Costs

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

Some possible. The primary source of the stranded cost projections in gas unbundling is upstream capacity and storage contracts, and fixed price long term gas supply contracts (if any still exist). Most are either wholly or partially mitigateable through divestiture.

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

All potential stranded contract costs should be closely evaluated by the ICC and verified. Each potential stranded cost should meet the ICC's prudent and used & useful criteria. Additionally, each cost must be verified to have been caused by the unbundling proceeding ­ not otherwise. Next, the LDC should be required to take all reasonable steps to mitigate those costs. Third, the remaining contracts and/or assets/liabilities should be sold at auction or by another non-discriminatory sale mechanism to establish their true market value. Any negative balance left could then be considered stranded.

4. Performance Based Regulation

Is performance based regulation a preferable alternative to unbundling?

No. The popular notion of PBR permits the LDC to more aggressively manage its own commodity supply portfolio, taking some risk with commensurate reward for performance. In this sense, PBR does nothing to introduce competition behind the city-gate or to provide incentives for the LDC to reduce all of its costs. Unbundling has the potential to bring market forces and discrete pricing scrutiny to provide such incentives ­ and benefits to consumers.

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?

Yes, but only if the LDC retains the ability to offer "fully bundled" commodity and transportation service. If full residential unbundling is instituted, removing the LDC from the merchant function, the PGA becomes a relic of regulatory history ­ and PBR also becomes unnecessary. The merchant function is essentially deregulated. The opportunity for abuse of these concepts goes away.

This page was last updated August 31, 1997.