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Kentucky LDCs Oppose Mandatory Gas Choice Program

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November 3, 2010

The majority of local distribution companies in Kentucky argued that natural gas choice would not provide benefits to customers and opposed any mandate that LDCs offer a choice program, in post-hearing briefs in the Kentucky PSC's investigation of small volume choice (2010-00146).

Duke Energy Kentucky, Louisville Gas and Electric, Atmos Energy Corporation, and Delta Natural Gas Company all said that individual LDCs should be given the discretion to decide whether to implement choice, and expressed skepticism of any benefits from choice -- all positions taken in pre-filed testimony (see 6/24).

Central to the LDCs' arguments is the experience of the Columbia Gas of Kentucky pilot since 2000.

"We therefore have the 'benefit' of a ten (10) year old pilot program to be able to judge whether or not the Participants in that program have actually saved money. On a cumulative basis, the Participants in Columbia's program have collectively paid over $17,000,000.00 more for their natural gas than they would have paid had they purchased their gas through Columbia's traditional sales program," Atmos said.

"[T]he best and most reliable data in this case, the experience of the Columbia Gas Customer Choice Program, clearly indicates that retail customer choice in Kentucky has failed," Duke Energy Kentucky said.

"Not only have customers enrolled in Columbia's program experienced losses over its long-run operation, six out of each of the program's ten years have resulted in losses for these consumers," Louisville Gas and Electric added.

"Evidence in this proceeding establishes that marketers cannot, particularly in the long run, purchase natural gas less expensively than the LDCs. Delta provides natural gas to customers at cost, with no markup. The marketers have indicated that they mark-up the cost of gas to include their costs and their profit margin. Due to timing and the quarterly workings of the gas cost recovery mechanisms, there could be certain times where shopping customers might benefit in the short term, if gas prices move in the direction to make that happen. But Delta believes this cannot happen over the longer term, as indicated by the $17 million in losses in the Columbia CHOICE program," Delta Natural Gas said.

While savings "certainly [have] also occurred from time to time in various [choice] programs," Atmos Energy contended that, "one thing is for sure, there is no guarantee of gas cost savings under any of these programs."

However, Interstate Gas Supply, SouthStar Energy Services and Vectren Source (the retail gas suppliers), countered that the aggregate $17 million figure cited at Columbia has no bearing on an individual consumer's experience with gas choice. "Consumers enter and leave the gas choice market in a fluid manner - not from calendar year to calendar year," retail gas suppliers said.

"With respect to the Columbia Choice Program, one can easily see wide gain and loss fluctuations throughout the life of the program, with the Choice Customers being ahead approximately $14,500,000 as of December 2004," retail gas suppliers added.

Furthermore, retail gas suppliers argued that the current $17 million negative number results from an outlier caused by the financial collapse in late 2008; specifically, from customers locking-in fixed price contracts shortly before the collapse to hedge against then-forecasts as high as $20/Dth.

"With this current 17,000,000 negative number, utilities and consumer groups now flippantly second guess the previous decisions of the consumers that lock-in fixed contracts in 2008 and decry the Choice program a failure based on price alone. However, what would their argument have been if: (i) gas supply cost in 2008 and 2009 rose above $15.00 a Dth and continued to remain high; or (ii) this collaborative docket had occurred in 2005 with the Choice Program showing approximately $14,500,000 in savings compared to Columbia sales customers," retail gas suppliers asked.

Excluding both the negative $17 million and positive $14 million results as outliers, the retail gas suppliers said that results from the Columbia choice program have fluctuated consistently with totals between about $1,500,000 in savings to approximately $4,000,000 in amounts above the Columbia gas cost adjustment.

Additionally, retail gas suppliers noted that except for the most recent period since September 2009, the number of Choice participants' billed gas commodity rates below Columbia's gas cost commodity rate has exceeded the number of customers' billed rates greater than Columbia's gas cost rate in most months, citing Columbia testimony.

Moreover, the Retail Energy Supply Association presented testimony and a Intelometry study, not rebutted at hearings, that showed in Ohio, had customers switched to the lowest offers available between 2001 and 2008, there would have been aggregate savings of $567 million.

Retail gas suppliers also attacked any comparison of the gas cost adjustment (or otherwise named sales service commodity rates) and competitive rates, since the gas cost adjustment does not include any administrative or overhead costs of supplying the commodity, which are recovered from distribution rates.

Atmos argued that, "[t]he likelihood of Participants paying more for their gas under a Customer Choice program is heightened by the lack of sophistication most residential customers possess in natural gas pricing and trends - especially when coupled with the risk of Participants being misled and confused by overly aggressive and/or dishonest marketers."

Columbia Gas, which asked to maintain its current program but did not support a statewide mandate, noted that despite arguments from several consumer groups regarding negative marketing behavior from suppliers, such parties could not provide one single instance of marketer abuse in Kentucky despite 10 years of the pilot program with over 32,000 customers enrolled with competitive suppliers - nearly 25% of eligible customers.

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