Natural Gas Deregulation Transition Costs
and the Impact Such Costs
Could Have on
State Utility Rates
By David J. Kreher
Part Three: Purchase Gas Adjustments
Purchase Gas Readjustment Clauses. The purchase gas readjustment clause [PGA] is a balancing agreement between the producer and the pipeline. The PGA allows the annual balancing of the gas contract between the supplier and pipeline and insures total payment for deliverables. "A positive balance in a pipeline's [a]ccount … is a reflection of unrecovered costs of purchasing gas for a prior period. … If it is negative, the sales customers are entitled to a refund of the pipeline's overrecovery of its purchased gas costs in prior periods."1 At the federal level the PGA mechanism is to be terminated between the producer and pipeline upon unbundling. The same balancing method can then be adopted by agreement between the producer and other contracting agents. The PGA accounts for past gas deliverables and therefore, interstate "[c]ustomers that purchase gas from a pipeline with a PGA mechanism in its tariff are on notice that they are potentially liable in future periods for payment of unrecovered gas costs that are attributable to current service."2 The same mechanism should be adopted by the State in its unbundling procedure.
As a payment mechanism the FERC has held "[t]he pipelines must permit customers to pay the direct bill in either a lump sum, over twelve months or over some other reasonable period of time, at the customers option. Of course, a pipeline must refund any overrecoveries … and flow through to its customers any refunds it receives that are attributable to the relevant past period."3 In addition, the FERC has decided to accept and the State should consider any other method agreed upon by concerned parties for the recovery of PGA costs.4
The FERC has also found, as with the traditional annual review of PGA mechanisms, that "[c]ustomers of a pipeline terminating its PGA mechanism and proposing to direct bill the unrecovered gas costs … will have the same rights to challenge the makeup of contents of the account, including costs attributable to the pipeline's transportation service, as they would have in a review of any annual PGA filing.5 Interestingly, the FERC has also found PGA costs should not be balanced against other transition costs, but should be calculated separately. This seems to indicate that customers could receive a rebate for PGA costs but pay for stranded costs which otherwise might be offset by PGA.
Implications for the State. In the process of restructuring purchase contracts during the State unbundling, PGA accounts will need to be settled and the costs or benefit must be passed on to the consumer. These cost mechanisms will also need to be rectified upon the natural termination of existing contracts. As with the federal level customers should be allowed to review and challenge the accounting practices, payment method and amount to be paid by the consumer. Moreover, PGA costs should be a one-time item in the transition costs but has the potential to be distributed over a select period.
157 Fed. Reg. 36,202 (1992).
2Id. at 36,202-3.
357 Fed. Reg. 13,267, 13,307 fn. 28 (1992) (to be codified at 18 C.F.R. pt. 284).
457 Fed. Reg. 13,267, 13,307 fn. 28 (1992) (to be codified at 18 C.F.R. pt. 284).
5Id. at 36,203.
Coming Next: Stranded Costs
For more information, contact
David J. Kreher
4455 East 31st Street, #261
Tulsa, Oklahoma 74135
918.747.9849
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