COWMONWEALTH OF PENNSYLVAi PENNSYLVANIA PUBLIC UTILITY COMMISSION P.O. BOX 3265, HARRISBURG, PA ISSUED: October 9, 2001 DOCUMENT FOLDER

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1 COWMONWEALTH OF PENNSYLVAi PENNSYLVANIA PUBLIC UTILITY COMMISSION P.O. BOX 3265, HARRISBURG, PA IN REPLY PLEASE REFER TO OUR FILE MARK C MORROW ESQUIRE UGI UTILITIES INC - GAS DIVISION P O BOX 858 VALLEY FORGE PA ISSUED: October 9, 2001 DOCUMENT FOLDER Pennsylvania Public Utility Commission; Office of Consumer Advocate; Office of Small Business Advocate; Alcoa; Appleton Papers, Inc.; Armstrong World Industries; Bethlehem Steel Corporation; Carpenter Technology Corporation; Mount Joy Wire Corporation; R. R. Donnelley & Sons, Co.; Stroehmann Bakeries, Inc.; v. UGI Utilities, Inc. - Gas Division TO WHOM IT MAY CONCERN: Enclosed is a copy of the Recommended Decision of Administrative Law Judge Ky Van Nguyen. R R C0001 An original and nine (9) copies of signed exceptions to the decision, if any, MUST BE FILED WITH THE SECRETARY OF THE COMMISSION IN ROOM B-20, NORTH OFFICE BUILDING, NORTH STREET AND COMMONWEALTH AVENUE, HARRISBURG, PA OR MAILED TO P.O. BOX 3265, HARRISBURG, PA ; a copy in the hands of the Office of Special Assistants, Room 210; and a copy in the hands of each party of record no later than October 26, 2001 by 4:30 P.M. 52 Pa. Code 1.56(b) cannot be used to extend the prescribed period for the filing of exceptions or reply exceptions. Replies to exceptions, if any, must be served on the Secretary of the Commission, in the manner described above, no later than October 31, 2001 by 4:30 P.M. as well as served upon the parties. A certificate of service shall be attached to the filed exceptions. Exceptions and reply exceptions shall obey 52 Pa. Code and 5.535, particularly the 40-page limit for exceptions and the 25-page limit for replies to exceptions. Exceptions should be clearly labeled as "EXCEPTIONS OF (name of party) - (protestant, complainant, staff, etc.)". Any reference to specific sections of the Administrative Law Judge's Recommended Decision shall include the page number(s) of the cited section of the decision. Parties are also requested, if possible, to provide the Commission's Office of Special Assistants with a copy of exceptions/reply exceptions on a computer disk, 3 1/2" in size, in either Word Perfect (Version 5.0 or 5.1) or ASCII format. Very truly yours, Enclosure Certified Mail Receipt Requested law James J. McNulty Secretary See attached list for additional parties of record.

2 BEFORE THE PENNSYLVANIA PUBLIC UTILITY COMMISSION Pennsylvania Public Utility Commission Office of Consumer Advocate Office of Small Business Advocate R R C0001 Intervenors Alcoa Appleton Papers, Inc. Armstrong World Industries Bethlehem Steel Corporation Carpenter Technology Corporation Mount Joy Wire Corporation DOCUMENT R. R. Donnelley & Sons, Co. F Q L D E R Stroehmann Bakeries, Inc. v. UGI Utilities, Inc. - Gas Division 7 e RECOMMENDED DECISION Before KY VAN NGUYEN Administrative Law Judge

3 I. HISTORY OF THE PROCEEDINGS On May 1, 2001, under Section 1307(f) of the Public Utility Code, 66 Pa. C.S. 1307(1), UGI Utilities, Inc. - Gas Division (UGI or Company) filed the Preliminary Supporting Information required by 52 Pa. Code for the Company's annual Purchased Gas Cost (PGC) filing. On June 1, 2001, the Company filed its PGC tariff together with supporting computations and the written testimony of witnesses. The tariff addendum proposes a decrease of $ 1.10/Mcf in the current cost of purchased gas for PGC(l) rates of $9.2134/Mcf 1 and a decrease of $1.6017/Mcf for PGC(2) rates of SS.SOie/Mcf, 2 to become effective March In this filing, the Company is seeking to recover $1,607,399 of interest on the undercollection of ($21,474,864). On June 21, 2001, a telephonic prehearing conference was held in Philadelphia. In-person hearings were scheduled for August 3, 7 and 8, The Office of Trial Staff (OTS), the Office of Consumer Advocate (OCA), the Office of Small Business Advocate (OSBA), a group of UGI's Industrial (UGII) Customers, and Stroehmann Bakeries, Inc. (Stroehmann) participated in the prehearing conference. At the prehearing conference, UGII's Petition to Intervene was granted and a ruling on Stroehmann's Petition to Intervene was deferred to permit UGI to file an Answer. Also, the Company identified UGI Exhibit 1, which consists of Book 1 and Appendix A and Book 2 containing prefiled testimony and information about filing requirements (Prehearing Conference N.T. 16, 17). The PGC(l) rates consist of Rate R (Residential), Rate GL (Gas Light), and Rate N (Small Commercial & Industrial). 2 The PGC(2) rates consist of Rate BD (Business Development), Rate BD-L (Business Development - Large), Rate CIAC (Commercial and Industrial Air Conditioning), and the Total Space Conditioning (TSC) option of Rates R and N. See UGI Exhibit 1, Book 2, Prefiled Testimony, pp. 3-5.

4 By Order dated July 6, 2001, Stroehmann was permitted to intervene, as a large volume customer, receiving transportation and related services from UGI. On June 13, 2001, the OCA and Stroehmann filed written direct testimony. On June 19, 2001, UGI filed a Motion to Strike the written testimony of Stroehmann's witness William E. Bennis, which raises the legality of UGI's System Access Fee (SAF). UGI argued that the SAF, originated in a base rate proceeding, should be raised in a base rate proceeding and that a review of rate structure would involve the Commission in a line item ratemaking which is generally prohibited. On July 20, 2001, OTS filed a letter in support of UGFs Motion to Strike. On July 30, 2001, OCA and Stroehmann filed answers to UGI's Motion to Strike. Stroehmann argued that UGI's SAF is a cost of gas under the new definition of Section 1307(h), that, as such, it should be reviewed in a 1307(f) proceeding, and that prohibitions against line item ratemaking are not applicable in Section 1307(f) proceedings. OCA supported the striking of Mr. Bennis' testimony. By Order dated August 1, 2001, UGI's Motion to Strike was denied, the reason being that if UGI's SAF proves to be illegal, UGI should not be allowed to collect an illegal fee, be the fee established in a base rate case or a 1307(f) proceeding. No public input hearings were scheduled because the public interest in the proceedings was not substantial. In anticipation of the parties' reaching a partial settlement, all the hearing scheduled in Philadelphia and Harrisburg on August 3, 7 and 8, 2001 were cancelled. On

5 August 3, 2001, the parties agreed that the record in this matter can be established by the stipulated admission of the following documents: 1. UGI Exhibit 1, which is described above. 2. The written direct and surrebuttal testimonies of William E. Bennis submitted on behalf of Stroehmann. 3. The written rebuttal testimony of OTS witness Michael J. Gruber. 4. The written rebuttal testimony of UGI witness Paul J. Szylcman. These documents, at the parties' request, will be admitted into the record. On August 14, 2001, UGI submitted a Stipulation in Partial Settlement of Section 1307(f) Rate Investigation, which is intended to be, subject to updates and the resolution of the issues raised by Stroehmann, the Parties' Settlement of the case. Attached to this Partial Settlement are: Appendix A, which sets forth the proposed PGC(l) and PGC(2) rates. Appendices B, C, D and E, which are statements in support of the Settlement submitted by UGI, OTS, OCA and OSBA, and Appendix F, which is a letter from the UGI's Industrial Intervenors (UGIII) indicating that they do not oppose this Stipulation.

6 II UGI, Stroehmann, OCA and OTS filed their briefs as scheduled; others reserved their rights to file theirs. On September 14, 2001, UGI filed a Petition for Permission to File a Supplemental Reply Brief. Attached to this Petition is UGI's Supplemental Reply Brief. On September 17, 2001, Stroehmann filed an Answer opposing UGI's Petition. II. TERMS OF THE SETTLEMENT The relevant provisions of the Partial Settlement, as contained in the Proposed Stipulation in Partial Settlement of Section 1307(f) Rate Investigation, may be summarized as follows: A. Effective December 1, 2001, UGFs PGC(l) rate and PGC(2) rate shall be $6.7302/Mcf and $5.3088/Mcf, respectively. The calculations of these rates are set forth in Appendix A. B. In next year's PGC filing, UGI shall propose to add the following reverse migration rider language to its tariff (which will have an effective date of December 1,2002): "Customers who have received transportation service from the Company for at least twelve consecutive months and who transfer to service under Rate R, GL, N, BD or CIAC shall not be charged the associated PGC Gas Cost Adjustment for a period of twelve months." Also, in next year's PGC filing UGI shall address the issue of how it may apply the migration and reverse migration riders for period of less than twelve months under

7 0 appropriate circumstances, and in addressing this issue UGI may consider billing system costs and capabilities. C. For the twelve month PGC year commencing December 1, 2001 (the "PGC 2001 Year"), any PGC quarterly filing shall recover actual experienced over/under collections (actual monthly results compared to monthly projections from annual PGC filing) on an annual basis, while projected over/under collections for the remaining months of the PGC period (due to projected changes in gas costs) may be recovered on either an annual basis or on a remaining life basis over the remaining portion of the PGC 2001 Year. Moreover, UGI shall indicate in any future annual PGC filing if it intends to modify this methodology on a prospective basis. balance of $19,201,408. D. UGI shall use a revised December 2000 undercollection beginning E. UGI shall, in its compliance filing in this case, equalize the weighting factors applied each month to supplier refunds and over/under collections for the purpose of determining interest amounts. F. UGI's compliance filing in this case shall be updated to reflect actual results and updated projections for gas costs, and UGI shall file a complete revised Schedule C in support of its support of its compliance filing at the time this filing is made. G. For the PGC year beginning December 1, 2001 and ending November 30, 2002, UGI will share off-system sales margins derived from PGC assets on a before tax basis in the following manner:

8 fl First $240,000 - credited to PGC $240,001 - $320,000 - retained by UGI above $320,000 - shared 75% (PGC) and 25% (UGI) H. In computing its PGC rates in this proceeding, UGI shall use a projected Interruptible Revenue Credit (IRC) amount of $8.6 million. III. FINDINGS OF FACT- I. Stroehmann is a firm transportation customer on UGI's system receiving service under Rate LFD. It does not purchase natural gas from UGI, but rather purchases it from natural gas suppliers who deliver the gas to UGI's system (Bennis' Testimony, p. 2). 2. In 2000, Stroehmann paid over $57,000 to UGI in SAF payments. As of July 2001, it paid $22,715 to UGI in SAF payments (Bennis' Testimony, p. 3). 3. The SAF is listed in the UGI tariff as a charge which is paid if applicable. Other charges are also listed, such as the Customer Charge, the Capacity Charge if applicable, the Delivery Charge and any Excess Take Charges (Szykman's Rebuttal Testimony, p. 4). 4. The SAF is the difference between the UGI assigned or otherwise assignable pipeline capacity charge and the UGI's weighted average cost of demand. It is calculated by subtracting the cost of assigned or otherwise assignable capacity from the Weighted Average Cost of Demand (WACOD), and is paid in addition to capacity charge billing (Bennis' Testimony, pp. 4, 5; Szykman's Rebuttal Testimony, pp. 3-5).

9 5. The SAF is a method by which UGI equalizes the upstream pipeline demand charges to the UGI Weighted Average Cost of Demand (WACOD) for its Rate LDF and Rate DS customers. WACOD is determined by totaling all charges for upstream pipeline demand and divided by the amount of throughput associated with that demand (Gruber's Rebuttal Testimony, p. 2). 6. Each month, Stroehmann pays charges or fees associated with delivery service, no notice service, excess requirement option service, pooling service, and balancing service (Bennis' Surrebuttal Testimony, p. 4). 7 UGI has fully and vigorously represented the interest of its ratepayers in proceedings before the Federal Energy Regulation Commission (FERC) (Filing Requirements - UGI Exhibit No. 1, Book 1, Section 3). 8. UGI has taken all prudent steps necessary to negotiate favorable gas supply contracts and to relieve the Company from terms in existing contracts with its gas suppliers which are or may be adverse to the interest of its ratepayers (Filing Requirements - UGI Exhibit No. 1, Book 1, Section 1). 9. UGI has taken all prudent steps necessary to obtain lower cost gas supplies on both short-term and long-term bases from sources within and outside the Commonwealth, including the use of gas transportation arrangements with interstate pipelines (Filing Requirements - UGI Exhibit No. l,book 1, Attachments l-a-1, 1-B-l, l-b-2, l-c-l,and 2-A-l). 10. UGI has not withheld from the market or caused to be withheld from the market any gas supplies which should have been utilized as part of a prudent least

10 ft cost fuel procurement policy (Filing Requirements - UGI Exhibit No. 1, Book 1, Section 2-A). 11. UGI has fully and vigorously attempted to obtain less costly gas supplies on both short-term and long-term bases from nonaffiliated interests (Filing Requirements - UGI Exhibit No. 1, Book 1, Sections 1, 3 and 5). 12. UGI gas purchases from an entity that is or might be considered an affiliated interest are consistent with a prudent least cost procurement policy (Filing Requirements - UGI Exhibit No. l,book 1, Section 13). 13. UGI or any entity that is or might be considered an affiliated interest has not withheld from the market gas supplies which should have been utilized as part of a prudent least cost procurement policy (Filing Requirements - UGI Exhibit No. 1, Book 1, Section 13). IV. DISCUSSION A. Tardy Brief and Burden of Proof When a party fails to file a brief on time, a court's ability to sanction noncompliance is limited to suppressing the tardy brief or barring that party from argument. Department of Transportation, Bureau of Driver Licensing v. Vogat, 112 Pa. Commonwealth Ct. 515, 535 A.2d 750 (1988). Because UGI did not file its Supplemental Reply Brief according to the schedule, I will not consider its arguments.

11 Also in its Main Brief, UGI argued that the burden of proof is on Stroehmann as the challenger of an existing rate. Section 315 of the Code, 66 Pa. C.S. 315, in part, provides: (a) Reasonableness of rates. - In any proceeding upon the motion of the commission, involving any proposed or existing rate of any public utility, or in any proceedings upon complaint involving any proposed increase in rates, the burden of proof to show that the rate involved is just and reasonable shall be upon the public utility... According to Subsection (a) of Section 315 above, the utility has the burden of proof to show that the existing rate is just and reasonable whether the challenger is an intervenor or a complainant. B. Legality of UGFs System Access Fee (SAF) 1. UGI's position In its Main Brief, UGI made some inappropriate remarks that the rationale for permitting Stroehmann to intervene and to file testimony on the SAF issue is correct, but only in the abstract. These remarks should be. UGI argued that the SAF is a Section 1308 rate established as part of a Commission-approved settlement of UGI's 1995 base rate proceeding, and that, as such, the rate should not be reviewed in a 1307 PGC proceeding. In that argument, UGI stated that the SAF plays a dual role in providing credits to both the PGC and UGI's revenue 10

12 0) requirement, that if the SAF does not recover gas costs, then the SAF cannot be considered in a Section 1307(f) proceeding. It concluded that because the SAF does not and cannot recover gas costs from Stroehmann, in view of the fact that Stroehmann purchases no gas, and receives no capacity assignment, from UGI, it is inappropriate for Stroehmann to challenge the SAF in a Section 1307(f) proceeding. Second, UGI argued that Stroehmann seeks to eliminate the SAF which is one component of Rate LDF (Large Firm Delivery) without any examination of other elements of this rate or the overall reasonableness of UGI's rates and rate structure, and that a review of UGI's SAF would constitute an unlawful line item ratemaking. Third, the SAF does not violate the Natural Gas Choice and Competition Act (the Gas Choice Act), the Act of June 22, 1999, P.L. 122, No. 21, 66 Pa. C.S , because Section 2203(14) of this Act specifically authorizes a natural gas distribution company (NGDC), such as UGI, to continue to provide natural gas services to their customers under all existing tariff rate scheduled and riders, and policies or programs, that nothing in Section 2204 would prohibit UGI from charging a SAF to customers, such as Stroehmann. It is unreasonable to require UGI to design, as here, an individual rate for Stroehmann that has chosen not to use any UGI capacity. Stroehmann pays for LDF rate in exchange for UGFs gas distribution service. Fourth, it argued that if it were determined erroneously that the SAF is unlawful or unreasonable, Stroehmann's request for a refund must be rejected. The SAF is a Commission-approved rate and may only be changed prospectively. Cheltenham & Abington Sewerage Co. v. Pa. PUC, 344 Pa. 366, 25 A.2d 334 (1942). (UGI's Main Brief, pp. 8-21). 11

13 In its Reply Brief, UGI rejected that the SAF is discriminatory under Section 1304 of the Code. It argued that Stroehmann's argument was never developed on the record, and that to show unlawful rate discrimination, a customer must show both an unreasonable burden on one rate class and an unreasonable preference to another rate class. Pennsylvania Retailers' Associations v. Pa. PUC, 440 A.2d 1267 (Pa. Commonwealth Ct. 1982). Stroehmann has made no such showing in this proceeding (UGI's Reply Brief, pp. 7, 8). 2. Stroehmann's position Stroehmann argued that UGI's SAF is a mechanism used by UGI to allocate and recover demand costs equally among its customers by ensuring that all customers pay the weighted average cost of demand to UGI. Under the Gas Choice Act, UGI can recoup such costs when it actually assigns capacity at the contractual rate. Therefore, UGI's SAF, which sought to recover these costs at a level in excess of the contracted-for rate, 66 Pa. C.S. 2204(d)(l), must be eliminated, considering the fact that UGI incurs absolutely no upstream demand costs on behalf of Stroehmann. UGI is not the supplier of last resort for Stroehmann under Section 2207(a)(1) of the Gas Choice Act. This section requires a natural gas distribution company to serve as a supplier of last resort for "residential, small commercial, small industrial, and essential human needs customers." However, Stroehmann, as an LFD customer, is neither a small commercial nor a small industrial customer. In UGI's restructuring proceeding, the Commission approved UGI's proposed definition of obligation of a supplier of last resort to extend service to customers who consume 4,000 Mcf per year or less. Stroehmann does not fall within this definition either. Stroehmann already pays UGI a separate fee in exchange for Excess Requirement Option service. The SAF would constitute Stroehmann's double payment for service it receives. 12

14 In addition to being an illegal gas cost recovery mechanism under the Gas Choice Act, the SAF, as it applies to only two of several transportation delivery customer classes, results in unreasonably discriminatory rates in violation of Section 1304 of the Code. UGI only charges the SAF to two classes: rate class LFD and DS (Delivery Service). Finally, it argued that the SAF is a wholly inequitable and anti-competitive fee. An examination of other related tariff charges reveals that Stroehmann, in fact, receives absolutely no service or anything of value in exchange for its SAF payments. Ultimately, using the SAF to require customers to pay the weighted average cost of demand ~ even though they do not purchase any capacity - greatly reduces any benefit of a competitive market (Stroehmann's Main Brief, pp. 5-16). In its Reply Brief, Stroehmann emphasized that the language of Section 2204(d)(]) of the Gas Choice Act identifies only one method by which UGI may assign or transfer responsibility for upstream pipeline capacity costs by assigning those contracts to its suppliers or customers, and that UGI and OTS failed to identify a single benefit which Stroehmann receives in return for paying UGI the SAF each month (Stroehmann's Reply Brief, pp. 4-10). 3. OCA's position In Pa. PUC v. UGI Utilities, Inc. - Gas Division, Docket No. R (Pa. PUC November 30, 1994), having realized that the allocation of low cost capacity to transportation customers and higher cost capacity to PGC (1) customers violated the least cost gas procurement requirements of the Code, OCA proposed a "weighted average cost" proposal for allocating interstate pipeline capacity among all customers. But, the 13

15 0) Commission rejected OCA's proposal at that time and held that this issue should be examined in a base rate proceeding. As a result of that ruling, the parties took up the issue the next year in UGI's 1995 base rate case. And the SAF then became a key component of a compromise for the allocation of interstate pipeline capacity costs. Further, in UGI's most recent restructuring proceeding, no parties, which included transportation customers and marketers, opposed the SAF. Therefore, eliminating the SAF in this proceeding would upset the balance struck by the parties in the settlement of UGI's last base rate proceeding (OCA's Main Brief, pp. 3-6). In its Reply Brief, OCA argued that Section 2204(d) only pertains to customers who take an assignment of capacity for a natural gas distribution company (NGDC), that Stroehmann, by its own admission, does not take an assignment from UGI, and that, therefore, Stroehmann's reliance on this Section is misplaced. OCA also concurred with OTS that the elimination of the SAF for all LFD and DS customers would result in LFD and DS customers not paying their fair share of demand costs and in those costs being shifted to PGC customers (OCA's Reply Brief, pp. 1-4). 4. OTS position UGI's SAF is a tariff charge which equalizes demand costs of the entire system with the UGI Weighted Average Cost of Gas demand for Rate LFD, such as Stroehmann, and Delivery Service customers so that no customer is disadvantaged by another customer not paying its appropriate share. OTS argued that Stroehmann viewed the SAF as an attempt by UGI to allocate capacity costs to Stroehmann when it does not receive any assignment of, or use any, capacity by UGI, either directly or through a supplier. Stroehmann believes that this 14

16 capacity cost allocation through the SAF is not permitted under the Gas Choice Act. 66 Pa. C.S. 2204(d)(l). But this Section of the Gas Choice Act only addresses those circumstances in which UGI does assign capacity costs to its customers. It does not address the Stroehmann situation where a large transportation customer contracts with a party other than UGI for capacity. Nothing in Section 2204(d)(1) would preclude the application of UGFs SAF to Stroehmann. Later, in UGFs restructuring filing, which postdated the passage of the Gas Choice Act, no party objected to the retention of the SAF. See UGI's Restructuring Filing, at Docket No. R (Pa. PUC June 29, 2000). Further, rate design issues, such as the SAF, are properly addressed in the context of a base rate proceeding, rather than a 1307(f) proceeding. Pa. PUC v. UGI Corporation, 68 Pa. PUC 204, 206 (1988). Finally, Stroehmann has failed to provide any concrete evidence indicating that the SAF has acted to defeat competition. Rather, the SAF, which has been in effect for six years, should properly be viewed as a cost of doing business and has in no way been shown to have impeded Stroehmann's ability to search out and purchase other sources of gas supply (OTS' Main Brief, pp. 6-13). In its Reply Brief, OTS argued that Stroehmann's opposition to the Partial Settlement should be disregarded because it has no standing to object to it, that the record does not support Stroehmann's claim of unreasonable rate discrimination under Section 1304 of the Code, and that the request for the elimination of the SAF is overbroad (OTS' Reply Brief, pp. 6-14). 15

17 0> 5. UGII's position UGII did not file a Main Brief, but chose to file a Reply Brief. They argued that they agreed with many of the arguments raised by Stroehmann about the absence of a factual or policy basis for the SAF, but that several of the UGII members in this proceeding were signatories to the 1995 settlement in Pa. PUC v. UGI Utilities, Inc. - Gas Division. Docket No. R , and that they should honor their settlement commitment. It also argued that the existence of the 1995 settlement in and of itself does not constitute a bar to Stroehmann's challenge in this proceeding and that UGI is not the Supplier of Last Resort because it does not have obligation to act for customers using over 4,000 Mcf a year (UGII's Reply Brief, pp. 1-4). Recommended position provides as follows: Section 1307(h) of the Code, 66 Pa. C.S. 1307(h), in pertinent part, (h) Definition. - As used in this section, the terms "natural gas costs" and "gas costs" include the direct costs paid by a natural gas distribution company for the purchase and the delivery of natural gas to its system in order to supply its customers. Such costs may include... all charges, fees, taxes and rates paid in connection with such purchases, pipeline gathering, storage and transportation... "Natural gas" and "gas" include natural gas, liquefied natural gas, synthetic natural gas and any natural gas substitutes. The SAF is a fee that is paid in connection with pipeline gathering storage and transportation. As such, it falls squarely within the definition of Section 1307(h) as a cost of gas. Unlike take-or-pay costs and customer assistance program expenses, which 16

18 it were adjudicated non-gas costs, UGI Utilities v. Pa. PUC, 673 A.2d 43 (Pa. Commonwealth Ct. 1996), the SAF is a cost relating to the acquisition of gas. The fact that Stroehmann purchases no gas, and receives no capacity assignment, from UGI, is not relevant to the determination of whether the SAF is a gas cost within the ambit of a 1307(f) proceeding. UGFs line-item-ratemaking argument is based on the proposition that the SAF is a base-rate revenue reflected in a Section 1308 base rate proceeding, rather than a purchased gas cost, which may be reviewed in a Section 1307(f) proceeding. But I have determined that the SAF is a purchased gas cost and, therefore, the prohibitions against line item and retroactive ratemaking are inapplicable here. UGI Utilities v. Pa. PUC, supra. UGI cited Cheltenham & Abington S. Co. v. Pa. PUC, 344 Pa. 366, 25 A.2d 334 (1942) for the proposition that the SAF is a Commission-approved rate, that it may only be charged prospectively, and that, as such, retroactive refunds of the SAF are not permitted. This proposition is all the more reason for reviewing the SAF in this proceeding. If the SAF is found to be illegal, why is UGI allowed to collect that fee when no retroactive refunds are permitted? The legality or lawfulness of a fee is paramount and overrides all concerns. Section 2204 of the Gas Choice Act, in pertinent part, provides as follows: (d) Release, assignment or transfer of capacity. - (1) A natural gas distribution company holding contracts for firm storage or transportation capacity,... on the effective date of this chapter,... may at its option release, assign or otherwise transfer such capacity or Pennsylvania supply, in whole or part, associated with those contracts on a 17

19 0) nondiscriminatory basis to licensed natural gas suppliers or large commercial or industrial customers on its system. (3) Such release, assignment or transfer shall be at the applicable contract rate, for such capacity or Pennsylvania supply and shall be subject to applicable contractual arrangements and tariffs. The amount so released, assigned or transferred shall be sufficient to serve the level of the customers' requirements for which the natural gas distribution company has procured such capacity determined in accordance with the natural gas distribution company's tariff or procedures approved in its restructuring proceedings. Subsection (d)(1) of this Section gives a natural gas distribution company (NGDC) an option to release, assign or transfer its firm storage or transportation capacity; but Subsection (d)(3) requires the cost of release, assignment or transfer of such capacity to be determined by applicable contractual arrangements and tariffs. While the right to release, assign or transfer is discretionary with an NGDC, the cost of release, assignment or transfer of capacity must be based on contractual arrangements and tariffs. The language of this capacity cost is mandatory. If UGI's SAF is intended to be the capacity cost, the SAF would be inconsistent with this mandate and in violation of these subsections. A careful reading of UGI's tariff indicates that the SAF is only one of the many charges required to be paid by UGI's customers. Appearing on the monthly rate table, alongside the disputed SAF, are the Customer Charge, the Capacity Charge if applicable, the Delivery Charge and any Excess Take Charges. The SAF is separate and distinct from the capacity cost. Here, neither Stroehmann nor Stroehmann's marketers, receive any assignment of UGI upstream capacity. But the fact that Stroehmann is a firm 18

20 it transportation customer on UGI's system to have natural gas delivered from UGI's city gate to Stroehmann's burner tip, 3 justifies the imposition of UGI's SAF on Stroehmann. Nothing in the Gas Choice Act prohibits this imposition. As indicated by OTS, UGI's SAF's purpose is to equalize demand costs of the entire system with the UGI Weighted Average Cost of Gas demand, so that no customer is disadvantaged by another customer not paying that customer's appropriate share. OCA, in its Main Brief, mentioned a brief history of the relationship between the SAF and the Weighted Average Cost. The weighted average cost proposal stemmed from OCA's challenge of UGI's allocation of low cost interstate pipeline capacity to transportation customers. Pa. PUC v. UGI Utilities, Inc. - Gas Division, DocketNo. R (Pa. PUC November 30, 1994). The Commission rejected OCA's proposal at that time and the issue was examined in UGI's 1995 base rate case. And the allocation of interstate pipeline costs among customers was specifically addressed through the implementation of the SAF, which results in a weighted average cost allocation for interstate pipeline capacity costs. The resolution seems reasonable and in the public interest. 3 It is appropriate to provide an overview of the components of the gas industry. Traditionally, producers extracted the gas and sold it at the wellhead to a pipeline company. Pipelines then transported the gas where it was produced to areas of demand. And local gas distribution companies (LDCs) accepted the gas at the City gate and distributed it through its local mains to residential and industrial users. In many respects, local distribution companies have been the most stable of these components. In Order No. 636 (1992) the Federal Energy Regulatory Commission (FERC) took steps in restructuring the natural gas industry, moving to open-access transportation. It is now functionally separated into production, transportation, and distribution. Industrial and large commercial customers, such as Stroehmann, can purchase gas directly from producers or independent brokers or marketers (marketers generally act as agents for end users and arrange for supply or transportation or both for them) and arrange for the LDC to transport their gas from the city gate to their burner tip. Re Gas Transportation Tariffs, 169 PUR4 lh 212(Pa. PUC May 13, 1996). 19

21 9 i It is noted that in Re Gas Transportation Tariffs. 169 PUR 4 th 212 (Pa. PUC May 13, 1996), the Commission reiterated one of severalftmdamentalprinciples that retail customers should not bear demand-related costs which are properly allocable to transportation customers. UGI's SAF is an existing Commission-approved rate and, as such, UGI is authorized to continue charging that rate under 66 Pa. C.S. 2203(14). C. Partial Settlement provides as follows: In part, Section 1318 of the Public Utility Code, 66 Pa. C.S. 1318, Determination of just and reasonable natural gas rates (a) General rule. - In establishing just and reasonable rates for those natural gas distribution utilities with gross intrastate operating revenues in excess of $40,000,000 under section 1307(f)... No rates for a natural gas distribution utility shall be deemed just and reasonable unless the commission finds that the utility is pursuing a least cost fuel procurement policy, consistent with the utility's obligation to provide safe, adequate and reliable service to its customers. In making such a determination, the commission shall be required to make specific findings which shall include, but need not be limited to, findings that: (1) The utility has fully and vigorously represented the interest of its ratepayers in proceedings before the Federal Energy Regulatory Commission. (2) The utility has taken all prudent steps necessary to negotiate favorable gas supply contracts and to relieve the utility from terms in existing contracts with its gas suppliers 20

22 which are or may be adverse to the interests of the utility's ratepayers. (3) The utility has taken all prudent steps necessary to obtain lower gas supplies on both short-term and long-term bases both within and outside the Commonwealth, including the use of gas transportation arrangements with pipelines and other distribution companies. (4) The utility has not withheld from the market or caused to be withheld from the market any gas supplies which should have been utilized as part of a least cost fuel procurement policy. It is uncontradicted that the Findings of Fact Nos indicate that UGI has pursued a least cost procurement policy which has served to minimize its customers' costs without sacrificing its ability to provide safe, adequate and reliable service. Such a policy, of necessity, requires it to pursue the lowest practical level of gas prices consistent with adequate supply, availability, reliability and flexibility, and thereby construct a supply line of product that will not only insure security for UGI's core markets, but also do so at lowest gas cost. About the issues raised in this case, I find that the parties' resolution of them is also in the public interest. The parties have agreed that the Company agreed to propose in next year's PGC filing certain tariff language to implement a reverse migration rider. This tariff revision is needed to insure that former transportation customers, who have not contributed to over/undercollections of purchased gas costs in the preceding 12-month period, do not share in the purchased gas cost adjustment related to that period. It also agreed to address the issue of how it will apply the migration and reverse migration riders 21

23 for periods less than 12 months. In doing this, it may consider billing system costs and capabilities (OTS Statement in Support, pp. 2, 3). The Company also agreed to amortize over/undercollections on an annual basis instead of compressing them into the remaining months of the PGC period. This methodology will minimize price volatility created by such compression and eliminate any cost shifting from heating to non-heating customers (OCA Statement in Support, p. 4). The Company agreed to use a revised December 2000 undercollection balance from $24,881,899, as shown in Schedule C, p. 4, of its filing to $19,201,408, an error of about $5.68 million. This adjustment benefits PGC customers in that their undercollection is reduced by $5.68 million. It also agreed to equalize the weighing factors applied each month to supplier refunds and over/undercollections for the purpose of determining interest amounts, which equalization also benefits PGC customers (OTS Statement in Support, p. 3). For the PGC period beginning December 1, 2001, UGI will share offsystem sales margins (sales to end-users outside the service territory) derived from PGC assets on a before tax basis. It would credit the first $240,000 off system sales margins through its PGC mechanism, retain them when the margins are between $240,001 and $320,000, and share them when margins are above $320,000 on a 75% (PGC)/25% (UGI) basis. This sharing mechanism should result in a larger credit to the PGC from offsystem sales margins and provide the company with sufficient incentive to increase the level of margins derived from off-system sales (OCA Statement in Support, pp. 4, 5). This incentive program is both reasonable and consistent with least cost planning. 22

24 Finally, the Company has agreed to increase the projected IRC credit from $7.1 million in its filing to $8.6 million. It is noted that the Commission's approval of a voluntary automatic rate adjustment mechanism might be revoked at any time following notice and hearing, if the Commission determined that the rates produced by the adjustment mechanism were unjust or unreasonable. Natural Fuel Gas Distribution Corp. v. Pennsylvania Public Utility Commission. 81 Pa. Commonwealth Ct. 148, 473 A.2d 1109(1984). V. CONCLUSIONS QF LAW 1. UGI is pursuing a least cost fuel procurement policy, consistent with its obligation to provide safe, adequate and reliable service to its customers. VI. ORDER THEREFORE, IT IS RECOMMENDED: 1. That the Petition to File a Supplemental Reply Brief by UGI Utilities, Inc. - Gas Division is denied because it is not timely filed. 2. That the System Access Fee of UGI Utilities, Inc. - Gas Division has not violated the National Gas Choice and Competition Act. 66 Pa. C.S

25 3. That the Stipulation in Settlement of Section 1307(f) Rate Investigation be and is hereby approved. 4. That the Commission authorize UGI Utilities, Inc. - Gas Division to file a tariff or tariff supplement as set forth in Appendix A to the Stipulation in Settlement of Section 1307(f) Rate Investigation, with a decreased PGC1 rate of $6.7302/Mcf and a decreased PGC2 rate of $5.3082/Mcf for service rendered on and after December 1 } That, in next year's PGC filing, UGI Utilities, Inc. - Gas Division shall add to its tariff the following reverse migration rider language, which become effective on December 1, 2002: "Customers who have received transportation service from the Company for at least twelve consecutive months and who transfer to service under Rate R, GL, N, BD or CIAC shall not be charged the associated PGC Gas Cost Adjustment for a period of twelve months." 6. That, in next year's PGC filing, UGI Utilities, Inc. - Gas Division shall address the issue of how it may apply the migration and reverse migration rides for periods of less than 12 months. 7. That, for the 12-month PGC year commencing on December 1, 2001, UGI Utilities, Inc. - Gas Division shall amortize over/undercollections over a 12- month period. 24

26 8. That UGI Utilities, Inc. - Gas Division shall use a revised December 2000 undercollection beginning balance of $19,201, That UGI Utilities, Inc. - Gas Division shall use a revised December 2000 undercollection beginning balance of $19,201, That UGI Utilities, Inc. - Gas Division shall, in its compliance filing, equalize the weighting factors applied each month to supplier refunds and over/undercollections for the purpose of determining interest amounts. 11. That for the PGC year beginning on December 1, 2001 and ending on November 30, 2002, UGI Utilities, Inc. - Gas Division shall share off-system sales margins derived from PGC assets and before-tax basis in the following manner: First $240,000 $240,001 -$320,000 above $320,000 credited to PGC retained by UGI shared 75% (PGC) and 25% (UGI) 11. That UGI Utilities, Inc. - Gas Division shall use a projected interruptible revenue credit amount of $8.6 million to compute its PGC rates. 12. That the Commission terminate and mark closed the records at Docket Nos. R and R C0001. Date KY VAN NGUYEN [/ Administrative Law Judge 25

27 BEFORE THE PENNSYLVANIA PUBLIC UTILITY COMMISSION PENNSYLVANIA PUBLIC UTILITY COMMISSION UGI UTILITIES, INC. GAS DIVISION DocketNo. R STIPULATION IN PARTIAL SETTLEMENT OF SECTION 1307(f) RATE INVESTIGATION TO THE HONORABLE KY VAN NGUYEN, ADMINISTRATIVE LAW JUDGE: I. INTRODUCTION UGI Utilities, Inc. - Gas Division ("UGI"), the Office of Trial Staff ("OTS"), the Office of Consumer Advocate ("OCA"), and the Office of Small Business Advocate ("OSBA"), parties in the above-captioned proceeding (hereinafter collectively referred to as the "Parties"), hereby join in this Stipulation In Partial Settlement Of Section 1307(f) Rate Investigation ("Stipulation"), and hereby request that the Administrative Law Judge (the "ALJ") and the Pennsylvania Public Utility Commission ("Commission"): (1) approve this Stipulation; (2) authorize UGI to file a tariff supplement for service rendered on or after December 1, 2001, that implements, subject to updates and tariff modifications traditionally performed on December 1, the rates set forth in Appendix A hereto, adjusted to the extent necessary to reflect the resolution of the issue raised by Stroehmann Bakeries, Inc. ("Stroehmann"); and (3) make all associated findings required by Sections 1307(f) and 1318 of the Public Utility Code, 66 Pa. C.S. 1307(f) 1

28 and As fully set forth and explained below, this Stipulation resolves all issues among the Parties in this proceeding. UGI has two PGC rates. The PGC(l) class is comprised primarily of the residential and small commercial customers of UGI. The PGC(2) customer class is comprised primarily of firm high load factor contractual commercial and industrial customers. The rates set forth in Appendix A hereto provide for a decrease of $ /mcf from the PGC(l) Rates of UGI currently in effect, thereby reducing UGI's PGC(l) rate from $ /mcf to $ /mcf. Appendix A also provides for a S /mcf average decrease in UGI's PGC(2) rate 1, thereby decreasing UGI's PGC (2) rate from $ /mcf to $ /mcf. These calculations incorporate data for experienced over/under collections and supplier refunds through March 31, 2001, and projected under collections through November 30, Attached as Appendices B, C, D and E hereto are statements in support of the Stipulation submitted by UGI, OTS, OCA and OSBA. Attached as Appendix F hereto is a letter from the UGI Industrial Intervenors ("UGIII") indicating that they do not oppose this Stipulation. II. BACKGROUND In support of this Stipulation, the Parties state as follows: 1. UGI, being a natural gas distribution company with gross intrastate annual operating revenues in excess of $40 million, is authorized by the provisions of Section 1307(f) of the Public Utility Code, and the Commission's gas cost recovery regulations at 52 Pa. Code An average increase is stated because Rate BD PGC(2) will include a demand charge of $ 15.34/DCR and a commodity charge of $ /mcf for the recovery of purchased gas costs. The stated average rate reflects the effective volumetric rate based upon PGC(2) usage. See Schedule B, p 2.

29 , to make armual purchase gas cost ("PGC") filings proposing gas rate modifications to reflect increases or decreases in its natural gas costs. 2. On May 1, 2001, UGI provided the Commission with the profiling information required by 52 Pa. Code 53.64(c) and On June 1, 2001, in accordance with the schedule for Section 1307(f) filings established by the Commission, UGI submitted its 2001 PGC filing to the Commission, with proposed modifications to UGI's Gas Tariff Pa. P.U.C. No. 5, to become effective December 1, This filing proposed a $l.l'0/mcf decrease in the Company's PGC(l) rate of $9.2134/mcf and a decrease of $1.6017/mcf in its PGC(2) rate of $8.3016/mcf. 4. UGI also filed the direct written testimony of its supporting witnesses with its PGC filing. 5. On May 11, 2001, the OCA filed a formal complaint. On May 16, 2001, UGI filed an answer to the OCA's formal complaint. 6. On May 22, 2001, a notice of appearance was filed by counsel for the OTS. 7. On May 30, 2001, the OSBA filed a notice of intervention in UGI's PGC proceeding. 8. On June 11, 2001, the UGIII filed a Petition to Intervene that was not opposed by any party. 9. On June 20, 2001 Stroehmann filed a petition to intervene. 10. On June 21, 2001, a prehearing conference was conducted. At this prehearing conference, the Petition to Intervene of UGIII was granted, but a ruling on the petition to intervene of Stroehmann was deferred to permit UGI to file an answer to it.

30 0 11. In a Prehearing Order dated June 22, 2001, a procedural schedule was established that required the opposing parties to file their direct testimony on July 13, 2001, the submission of written rebuttal testimony on July 27, 2001 and the submission of written surrebuttal testimony by August 1, Hearings were scheduled for August 3, 7 and 8, On June 29, 2001 UGI filed its answer to the petition to intervene of Stroehmann. 13. In an Order Granting Petition For Leave To Intervene dated July 6, 2001, Stroehmann was permitted to intervene. 14. On July 13, 2001, written direct testimony was submitted by the OCA and Stroehmann. OTS provided notice that they would not be filing written direct testimony since they had reached a tentative settlement with UGI. 15. On July 19, 2001, UGI filed a motion to strike the written direct testimony of Stroehmann witness William E. Bennis. 16. On July 20, 2001, OTS filed a letter in support of UGI's motion to strike. 17. On July 25, 2001, UGI submitted a letter to the presiding Administrative Law Judge indicating that a tentative settlement had been reached between all parties to the proceeding other than Stroehmann. 18. On July 27, 2001, UGI and OTS submitted written rebuttal testimony to the written direct testimony of Stroehmann witness Bennis. 19. On July 30, 2001, OCA and Stroehmann filed answers to UGI's motion to strike the testimony of Stroehmann witness Bennis. OCA's answer supported the striking of Mr. Bennis' testimony. 20. In an order dated August 1, 2001, UGI's motion to strike was denied.

31 21. Throughout this proceeding all parties, including Stroehmann, explored the possibility of settlement in accordance with the Commission's Rules of Practice at 52 Pa. Code As a result of such settlement discussions, the Parties have reached agreement on the stipulated terms set forth in Sections III, IV and V, below. III. GENERAL PROVISIONS OF SETTLEMENT 22. The Parties agree that, subject to updates and the resolution of the issues raised by Stroehmann, the rates for recovery of purchased gas costs of UGI should be revised, effective December 1, 2001, to reflect the rates set forth in Appendix A hereto. Specifically, the PGC(l) rate shall be $ /mcf. The average PGC(2) rate shall be $ /mcf. 23. The Parties have also agreed to the following: a. Reverse Migration Rider - In next year's PGC filing UGI shall propose to add the following reverse migration rider language to its tariff (which will have an effective date of December 1, 2002): "Customers who have received transportation service from the Company for at least twelve consecutive months and who transfer to service under Rate R, GL, N, BD or CIA C shall not be charged the associated PGC Gas Cost Adjustment for a period of twelve months. " b. Application of Migration or Reverse Migration Riders to periods of less than Twelve Months - In next year's PGC filing UGI shall address the issue of how it may apply the migration and reverse migration riders for periods of less than twelve months under appropriate circumstances, and in addressing this issue UGI may consider billing system costs and capabilities. c. Quarterly Filings - For the twelve month PGC year commencing December 1, 2001 (the "PGC 2001 Year"), any PGC quarterly filing shall recover actual

32 experienced over/under collections (actual monthly results compared to monthly projections from annual PGC filing) on an annual basis, while projected over/under collections for the remaining months of the PGC period (due to projected changes in gas costs) may be recovered on either an annual basis or on a remaining life basis over the remaining portion of the PGC 2001 Year. Moreover, UGI shall indicate in any future annual PGC filing if it intends to modify this methodology on a prospective basis. d. " Adjustment of Prior Undercollection Balance - UGI shall use a revised December 2000 undercollection beginning balance of $ 19,201,408. e. Supplier Refunds - UGI shall, in its compliance filing in this case, equalize the weighting factors applied each month to supplier refunds and over/under collections for the purpose of detennining interest amounts. f. Update of Compliance Filing - UGI's compliance filing in this case shall be updated to reflect actual results and updated projections for gas costs, and UGI shall file a complete revised Schedule C in support of its compliance filing at the time this filing is made. g. Sharing of Off System Sales Margins derived from PGC Assets - For the PGC year beginning December 1, 2001 and ending November 30, 2002, UGI will share off-system sales margins derived from PGC assets on a before tax basis in the following manner: First $240,000 - credited to PGC $240,001 - $320,000 - retained by UGI above $320,000 - shared 75%(PGC) and 25%(UGI) h. IRC Credit Projection - In computing its PGC rates in this proceeding, UGI shall use a projected IRC credit amount of $8.6 million.