Energy Update Newsletter

On October 22, 2002, the North Carolina Utilities Commission and South Carolina Public Service Commission released the report of the accounting firm Grant Thornton LLP regarding certain accounting practices of Duke Power. The report concluded that in response to a South Carolina Public Service Commission action on December 8, 1998 reducing South Carolina Electric & Gas rates after SCANA reported earning over its allowed rate of return, Duke "undertook a coordinated effort to identify and record adjusting and/or reclassification entries which would lower Duke’s net utility operating income reported to the State Commissions." The audit identified approximately $64.4 million of 1998 year-end entries, $24 million in 1999 and $35.2 million in 2000 which were inconsistent with applicable accounting principles, past practices and lacking justification.

The North Carolina Commission staff also filed a proposed settlement in which Duke agreed to take several actions:

• To file certain state regulatory reports and a reconciliation for the years 1998, 1999, 2000 and 2001to reflect the impact of the entries recommended by Grant Thornton;
• To restore in fiscal year 2002 the nuclear insurance reserve account to a level it would have reached had Duke not changed its accounting practices;
• To correct an erroneous 1998 accounting entry related to its Price Anderson Act nuclear liability reserve;
• To make a one-time $25 million credit in 2002 to its deferred fuel accounts for the benefit of current North and South Carolina customers.

Duke also agreed that the cost of the accounting review be charged to its non-utility operations.

On October 28 Carolina Utility Customers Association (CUCA) filed a motion for additional proceedings. CUCA also spoke at the Commission’s agenda conference, arguing that the violations found by Grant Thornton were of sufficient magnitude to require extensive consideration, and that the $25 million fuel charge offset was an inadequate remedy. Barron Stone, the "whistle blower" who first reported the violations, spoke in opposition to the settlement as well, and stated his belief that the accounting irregularities were a part of a deliberate effort known to management.

On Tuesday, October 29, the Commission reconvened, and in open session voted unanimously to reject CUCA’s motion and accept the settlement. Individual Commissioners expressed concern about Duke’s actions, but felt that corrective measures had been taken and that it was time to "move on."

On July 10, 2002, the NCUC entered an Order asserting its jurisdiction over electric utility contracts with wholesale customers granting native load priority status. On October 3, CP&L, Duke Power and NCEMC gave Notice of Appeal to the North Carolina Court of Appeals from the Commission’s orders.

Primarily, Appellants argue that the Commission may not interfere, either directly or indirectly, with the exclusive jurisdiction over the sale of energy at wholesale in interstate commerce given to the Federal Energy Regulatory Commission (FERC) by Congress. According to Appellants, the Commerce Clause prohibits the states’ from acting to "fence in" the benefits of energy supplied by their utilities for the benefit of their citizens.

On September 10, 2002, the Public Staff filed a Motion requesting that the Commission defer ruling on the GreenPower programs and tariffs filed on May 31 to allow further discussion among the parties exploring the best structure for NC GreenPower so that it can be accredited and attract maximum participation. The Commission granted the motion on October 9.

On October 30, the Commission issued an order requesting comments on a new statute signed into law by the Governor on October 23. That statute directs the Commission to supplement its study of green power issues by including a number of additional items, such as funding mechanisms in addition to voluntary purchases, and possible incentives. The Commission requested that the parties file initial comments by December 13, and reply comments by January 15, 2003.

On June 12, 2002, the Carolina Utility Customers Association, Inc. (CUCA) filed a Petition to Initiate a General Rate Proceeding and Complaint Regarding Unjust and Unreasonable Rates against Duke Power. On July 23, the Commission denied the request, finding that the Clean Smokestacks law provides an exception to its rate freeze for overearning during the rate freeze period.

On August 9, 2002, CUCA filed comments and a motion for reconsideration. On October 17, the Commission denied the request, restating its original conclusion that the plain language of the Clean Smokestacks bill barred such a proceeding.

On October 2, 2001, Piedmont Natural Gas, Inc. filed an application seeking approval to implement an experimental natural gas hedging program. At the time, the Commission was engaged in a generic investigation into the hedging of natural gas commodity costs in a separate docket and took no action on Piedmont’s application until a decision had been reached there.

On February 26, 2002, the Commission issued its order in the generic docket concluding, among other things, that hedging costs should be treated as gas costs and considered in an LDC’s annual prudence review. The Commission also concluded in that docket that pre-approval of a hedging program would be inconsistent with its statutes.

On April 10, 2002, Piedmont made a new filing in the present Sub 454 docket and again asked the Commission to approve a hedging program on an experimental basis for a period of two years. Piedmont also asked the Commission to reconsider its prior decision not to preapprove the parameters of the program. The hearing was held on June 19^th.

At the hearing, Piedmont presented testimony regarding its proposed program. The plan yields hedging decisions based on two parameters, price and time. Most of the key decisions are determined by the provisions of the plan; there is very little discretion to be exercised by the company. Depending on the circumstances, between 30% and 60% of Piedmont’s annual weather-normalized sales volumes will be hedged. Hedging will be initiated if a comparison of the current New York Mercantile Exchange (NYMEX) natural gas future’s prices and historic average NYMEX gas future prices is favorable. The comparison will also help determine how much hedging is undertaken. Even if price comparisons do not prompt hedging, a time variable will cause some hedging to occur. The plan involves the use of three financial hedging tools: caps, collars, and fixed price contracts. Plan parameters will help define the choice of tools, although Piedmont retains some discretion in the selection.

There was general agreement among the parties as to the treatment of certain costs associated with hedging. The parties generally agreed that transaction costs such as brokerage fees, margin requirements and the actual costs of the hedge itself should be recoverable as gas costs. The parties also generally agreed that further costs such as wages and employee benefits, consultant fees, software costs, external credit checks of counter-parties, and the costs of subscriptions to publications should not be recovered as gas costs in the annual prudence review but may be recoverable in a general rate case proceeding.

On October 18^th, the Commission issued an order again concluding that pre-approval of the hedging program would be inconsistent with the provisions of its statutes and unwise as a matter of policy.

Based on the language of North Carolina General Statutes Section 62-133.4, the Commission concluded that the provision clearly contemplates a once a year review proceeding at which a determination of the prudence of gas costs will be made. The Commission stated that if hedging costs are to be treated as gas costs and passed through to ratepayers between rate cases they must be scrutinized as provided by the language of that provision.

The Commission also concluded that the preapproval of the hedging plan parameters would be inappropriate as a policy matter. The Commission agreed with comments by the Attorney General and CUCA that preapproval would inappropriately shift the obligation to monitor markets and plan responses to ratepayers and that it would also provide a strong disincentive for an LDC to take any action outside the parameters of the plan even if such action were in the best interest of ratepayers.

Most of the state’s local gas distribution companies charge residential and commercial customers a Weather Normalization Adjustment (WNA) based on the difference between normal degree days and actual degree days, that lets the utilities recoup certain costs even when the weather is warmer than usual during the heating season. The factor, based on long-term averages of weather derived from 30-year data from the National Weather Service, is also used to lower the bills when the weather is colder than usual.

The Public Staff asked the Commission to discontinue the practice of showing the WNA as a line item on customers’ bills, saying that it caused confusion and that a bill insert would be more informative. The gas companies supported the request but the Commission rejected it and required the companies to include both the line time information and a bill insert. The Commission instructed the parties to develop the insert.

On October 9, the gas companies and Public Staff submitted a joint proposed notice modeled after the explanation on the Commission’s website. The Attorney General filed a separate one-page notice. On October 15, the Commission approved a slightly altered version of the joint proposed notice.

On October 16, 2002 Progress Energy announced an agreement to sell the stock of North Carolina Natural Gas Corporation (NCNG), its natural gas distribution subsidiary, to Piedmont Natural Gas for approximately $425 million in cash. Progress Energy plans to use the net proceeds from the sale to pay down debt. The sale includes Progress Energy’s ownership interest in EasternNC, a joint venture with the Albemarle Pamlico Economic Development Corporation (APEC) to bring natural gas service to fourteen counties in Northeastern North Carolina. The companies say they expect the acquisition to close by mid-2003.

On May 31, 2002, Piedmont Natural Gas Company, Inc. and NUI Utilities, Inc., doing business in North Carolina as NUI North Carolina Gas (NC Gas), ask the Commission to approve an acquisition pursuant to which Piedmont would assume the certificate to serve Stokes County. The Applicants filed testimony and exhibits including a market power study and cost benefit analysis.

On October 8, the NCUC issued an Order finding that the proposed transaction was justified by the public convenience and necessity, and that Piedmont’s larger operational and service presence in North Carolina will benefit NUI customers.

The Public Staff witnesses recommended that Piedmont be required to "file a specific plan for switching NC Gas customers to the Piedmont rate schedules" based on "a series of rate changes phased in over a period of more than one year." The Commission agreed with the proposal, and directed Piedmont to work with interested parties to develop a rate transition plan.

The Commission majority also adopted the Public Staff recommendation that it preclude Piedmont from ever seeking to recover its acquisition adjustment in a subsequent ratemaking proceeding. This issue formed the basis of the dissent. Commissioners Conder and Owens argued that consumers would not be harmed and the Commission would have more information regarding cost savings if the acquisition premium issue were deferred to a subsequent proceeding.

On July 1, 2002, NUI NC Gas filed the testimony and exhibits relating to the annual review of its gas costs. The Public Staff agreed with the company witnesses that its gas purchasing policies were prudent and its gas costs during the review period were, after the agreed upon adjustments, prudently incurred and properly accounted for.

The only issue of note was NC Gas’ request for a waiver of the Commission’s affiliate contract filing requirement. In NC Gas’ last annual review, the Commission required the company to file a contract setting forth the broad terms and conditions for gas procurement activities filed by NUI affiliates and operating divisions on behalf of its North Carolina operations. NC Gas sought a waiver because of its pending sale to Piedmont. The testimony of the Public Staff supported the waiver request unless the acquisition is not completed by the end of the company’s next annual prudence review ending April 30, 2003. The Commission adopted the recommendation.

On August 1, 2002, Piedmont Natural Gas Company, Inc. filed testimony and exhibits relating to the annual review of its gas costs for the year ending May 31, 2002. The hearing was held on October 16, 2002. At the hearing, Piedmont requested expedited consideration and the Public Staff concurred. The Commission issued its order approving Piedmont’s gas costs as prudent on October 28, 2002.

At its October 28, 2002, Monday morning staff conference, the Commission approved a number of increases in benchmark gas costs, as follows:

1. Frontier Energy increased its sales rate by $1.60/dt, reflecting a change in its benchmark commodity gas cost from $4.65 to $6.25/dt.
2. Piedmont Natural Gas Company increased NUI NC Gas’ sales rates by $.58/dt and decreased NUI NC Gas’ transportation rates by $.02/dt effective November 1. The changes reflect the change in NUI NC Gas’ benchmark commodity gas cost from $3.40 to $4.00/dt which is currently Piedmont’s benchmark commodity gas cost, and more reflective of the current market price for natural gas.
3. North Carolina Natural Gas Corporation reflected several adjustments, including an increase of $1.25/dt for all sales customers to track a change in the benchmark commodity gas cost from $3.50 to $4.75/dt and an increase of $.0297/dt for all customers to track the change in the Lost and Unaccounted for and Company Use Gas.
4. Eastern North Carolina Natural Gas Company (EasternNC) increased its sales rates by $1.55/dt and its transportation rates by $.0464/dt effective November 1. The rate change is the result of an increase in EasternNC’s Benchmark Commodity Gas Cost from $3.00 to $4.50/dt.
5. Public Service Company of North Carolina, Inc. increased its sales rates by $.611/dt and its transportation rate schedules by $.0111/dt effective November 1, 2002. The increase is the result of a change in PSNC’s benchmark commodity gas cost from $3.50 to $4.10/dt.