Natural Gas Distribution

1. Distribution Integrity & Infrastructure: Regulating for Safety & Fair RatesLori Traweek - AGA Workshop Oct. 17, 2013

2. Natural Gas Distribution Safe, Reliable Gas Delivery is our Core Business Pipeline Safety Initiatives are Driving Natural Gas Emissions Down Focus on Data Driven Decisions

3. Pipeline Safety: Many Regulators and Stakeholders

4. Pipeline Safety Regulations • DOT Pipeline Safety & Hazardous Materials Administration (PHMSA) – regulates gas utilities under 49 C.F.R. Part 192 • Significant number of new requirements on the way • More than 80 mandates from Congress and recommendations from NTSB, GAO, and the OIG • PHMSA is also following through on several long standing initiatives-- • Transmission Integrity Management Program (TRIMP) • Distribution Integrity Management Program (DIMP) • Control Room Management • Damage Prevention • Land Use Planning • Public Awareness • Emergency Preparedness

5. PHMSA Rulemaking Source: VanNess Feldman’s Pipeline Safety Update Issue No. 64 – September 27, 2013

6. DOT Pipeline Safety Action Plan • Raises the bar on pipeline safety • Accelerates rehabilitation, repair and replacement programs for high risk pipelines • Focus on cast iron, bare steel, older plastic • Report to the Nation on Pipeline Safety • AGA Supports the Action Plan and “Smart Modernization” of infrastructure that is no longer fit for service

7. Natural Gas Distribution:Focus on Safety Side Benefit →Emissions Shrinking • Emissions from distribution shrank 16 percent since 1990 … • even though we added almost 300,000 (30 percent more) miles of distribution mains… • to serve 17 million (30 percent) more customers • Why? Because we replaced thousands of miles of existing cast iron and bare steel pipe with modern PE plastic pipe • Result: EPA estimates distribution systems emitted 0.3%of produced natural gas in 2011

8. Ratemaking 101

9. State Utility Commissions Balance Costs to Ratepayers • How fast can infrastructure be replaced? • May depend on • miles of pipe, and • how many customers would share the cost • State Utility Commissions must: • Consider cost impacts to consumers, and • Allow utilities to recover costs, and • Allow a just and reasonable return on equity (ROE) to attract capital

10. Cost of Service & Return on Investment • An integral part of a regulated utility’s total cost of service is its return on investment. • Return on investment is determined by applying a rate of return to the utility’s net rate base. • The rate of return is determined by computing a weighted average of the cost of the utility’s sources of external financing.

11. Rate Cases • Significant differences of opinion can exist regarding the utility’s capital structure, debt and preferred stock costs, and return on common equity. • Utility investors want predictable earnings, cash flow, and a low risk profile. • Strategies to reduce risk may impact the utility’s rate of return.

12. Cost of Service Ratemaking • Most regulatory commissions follow cost of service as the basic standard for determining the reasonableness of a regulated utility’s revenue requirement – which is used in setting just and reasonable rates. • Under cost of service ratemaking, the regulated utility is allowed to recover its total cost of providing utility service to customers, including its – • Operating costs, and • Return on investment.

13. Regulatory Lag • The utility’s cost of service is based on historical amounts from a “test year.” • Leads to “regulatory lag” • Like being told by your boss – ‘Go travel on business for 5 to 10 years, save your receipts, and at the end, I’ll let you know whether I’ll reimburse you for any of it…’ • Need more timely and reliable cost recovery for major infrastructure replacement projects – e.g. trackers and surcharges

14. States with Infrastructure Cost Recovery Mechanisms as of June 2013 Overall trend is positive: (4 more States in last 6 months) Different states address issue differently Basis: Just and Reasonable Rates

15. States with Cost Recovery Trackers

16. States that Allow Infrastructure Cost Recovery Surcharges

17. NARUC 2013 Resolution: RESOLVED, That the Board of Directors of the National Association of Regulatory Utility Commissioners… encourages regulators and industry to consider sensible programs aimed at replacing the most vulnerable pipelines as quickly as possible along with the adoption of rate recovery mechanisms that reflect the financial realities of the particular utility in question; and be it further RESOLVED, That State commissions should explore, examine, and consider adopting alternative rate recovery mechanisms as necessary to accelerate the modernization, replacement and expansion of the nation’s natural gas pipeline systems…

18. Conclusion • Safe, Reliable Gas Delivery is our Core Business • Pipeline Safety Initiatives are Driving Natural Gas Emissions Down • State Utility Commissions balance pace of infrastructure replacement with need for just and reasonable rates for consumers • Trend is to allow timely cost recovery for pipe replacements • We Focus on Data Driven Decisions

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