NARUC Energy Regulatory Partnership Program The Georgian National Energy Regulatory Commission

1. Natural Gas NARUC Energy Regulatory Partnership Program The Georgian National Energy Regulatory Commission and The Vermont Public Service Board by June E. Tierney Staff Attorney Vermont Public Service Board July 1, 2008

2. Background: Vermont Gas, Inc. • Vermont imports all natural gas from Canada • The TransCanada pipeline is regulated by the National Energy Board in Canada

3. Background: Vermont Gas, Inc. • Vermont Gas serves over 40,000 residential and business customers in Northwest Vermont. • Vermont Gas is Vermont’s only distributor of natural gas • Franchise covers the state • Regulatory policy encourages Vermont Gas to expand beyond current footprint

4. Background: Vermont Gas, Inc. • Vermont Gas delivered first CCF of natural gas in Vermont in 1966 • Vermont Gas converted a 100-year old manufactured gas system to a state-of-the-art natural gas transmission and distribution system

5. Background: Vermont Gas, Inc. • Transmission System • 113 Kilometers of HP Pipeline • 28 kilometers of 41 cm pipe (1440 psi) • 72 Kilometers of 25 cm pipe (600 psi) • 14.5 kilometers other

6. Background: Vermont Gas, Inc. • Vermont Gas has an international corporate ownership structure • Its parent, Gas Metro, LP, is regulated by Canadian authorities

7. Background: Vermont Gas, Inc. • VGS’s business is very seasonal…residential customers use 80% of gas in winter.

8. Background: Vermont Gas, Inc. VGS Gas Supply – Portfolio Overview: • VGS uses combination of pipeline base load, storage, and peaking supplies to meet customer demand • Base load supply is 365 day service • Storage is winter-season storage and contract is with Gaz Metro • Peaking supplies are most expensive and limited to 30-45 days during the winter season • On-system propane air plant provides some peaking price protection and operational flexibility

9. Background: Vermont Gas, Inc. VGS’s gas supply objective is to have the least-cost approach to: • Meeting peak day needs • Peak day is defined as an 86 degree day or a day where the average temperature is -21 Fahrenheit • Current peak day is about 65,463 Mcf • Meeting annual firm requirements • Annual firm load requirements are about 5,800,000 Mcf • Minimizing curtailments to interruptible customers • Customer satisfaction issue for interruptible customers • Margin maximization issue for firm customers

10. Legal Aspects of Natural Gas Regulation Regional: • Limited regulatory interface between Vermont and U.S. federal authorities • Significant international regulatory interface with Canada • Heavy reliance on contract law and arbitration to resolve conflicts • Role of industry trade groups in developing model contracts

11. Legal Aspects of Natural Gas Regulation Vermont: • Intrastate regulation only • State statutory requirements • Vermont Supreme Court case law precedent • Board case law precedent • Board administrative rules

12. Legal Aspects of Natural Gas Regulation • Issues in regulating gas local distribution companies • Promoting fairness, transparency, and non-discriminatory conduct • Rules and procedures for conducting a tender/award • Procedures for public notification of requests for a bid • Procedures for submitting a bid • Qualifications and disqualifications from participation • Fiscal incentives for attracting LDCs

13. Tools For Regulating Gas Utilities in Vermont • Certificate of Public Good (CPG) • Rate Design • Tariffs • Special Contracts • Service Quality Plan

14. Tools For Regulating Gas Utilities in Vermont • The Certificate of Public Good • CPGs are issued for different purposes: • To own or operate a gas utility • To construct or expand facilities • Land use considerations • Application process is public and transparent • No fees for applying

15. Tools For Regulating Gas Utilities in Vermont • Evaluation of CPG applications by the Vermont Public Service Board • Statutory guidelines • Standard: Promote the public good in Vermont • Use of Board precedent • Board has significant discretion • Use of Board’s power to specify conditions for approval

16. Tools For Regulating Gas Utilities in Vermont • Enforcement procedures and mechanisms to ensure compliance with CPG conditions • Case specific mechanisms • Formal and informal mechanisms

17. Tools For Regulating Gas Utilities in Vermont • Rate Design • Regulatory objectives mostly the same as with electric utilities • Exception: Encouraging system expansion • Economic and environmental benefits of expanding natural gas use in Vermont

18. Tools For Regulating Gas Utilities in Vermont • Tariffs • “traditional” cost of service regulation • Historic costs adjusted for known and measurable changes • Establish appropriate rate of return • If fully litigated may take 8 ½ months to change rates • Special Contracts • VGS has a capacity constrained distribution system; therefore relies on interruptible service terms to smooth peaks in demand

19. Tools For Regulating Gas Utilities in Vermont • Alternative Regulation • VGS has an alternative regulation plan • Approved and implemented in 2006 • Three year duration • Strategy for dealing with volatile gas supply costs • Automatic gas cost adjustment mechanism

20. Tools For Regulating Gas Utilities in Vermont • Wholesale natural gas prices in U.S. have been very volatile in recent years

21. Tools For Regulating Gas Utilities in Vermont • Gas costs are largest share of VGS’s costs

22. Tools For Regulating Gas Utilities in Vermont VGS’s Gas costs have two components: • Demand or Capacity Costs: • Costs associated with moving gas from point A to point B • Generally incurred year round regardless of whether or not gas is moved • Represent about 15% of total gas costs • Commodity Cost: • Cost associated with the actual molecule of gas • Generally incurred only as consumed • Market-based and very volatile • Represent remaining 85% of gas costs

23. Tools For Regulating Gas Utilities in Vermont VGS Gas Supply Hedging Strategy: • VGS uses financial instruments (“hedging”) to address volatility • VGs aligns hedging strategy with gas cost recovery • Systematic hedging • Hedge Every Other Month • 12 months at a time • 3 months in advance • Primary objective is to reduce volatility, not necessarily to obtain “best” price

24. Tools For Regulating Gas Utilities in Vermont Alternative Regulation Plan changes how VGS recovers its costs: • Gas cost recovery is treated separately from recovery of non-gas operating (distribution) costs • Quarterly gas cost recovery • Annual operating cost recovery • Includes provisions for on-going regulatory review, service quality requirements, and energy efficiency investments

25. Tools For Regulating Gas Utilities in Vermont • Automatic Gas Cost Adjustment Mechanism: • Natural gas costs are separately identified on customers’ bills • Natural gas costs include commodity costs and costs associated with transporting gas across Canada • Natural gas costs change quarterly based on wholesale markets • VGS continues to hedge to stabilize gas costs • Deferral account captures 90% of variances in gas costs for future rate recovery/reduction

26. Tools For Regulating Gas Utilities in Vermont • Operating Cost Recovery – Base Rates and Earning Sharing Mechanism • All non-gas operating costs are recovered via: • Daily Access Charge • Distribution Charge • Annual filing • Operating cost per customer capped at inflation less a productivity gain • Provision for sharing cost savings • Provision for sharing over/under earnings