BEFORE THE PUBLIC SERVICE COMMISSION OF WYOMING

 

IN THE MATTER OF THE GENERAL INVESTIGATION BY THE Commission ON ITS OWN MOTION OF Kinder Morgan, Inc.’S Choice Gas Service Program

)

)

)

)

)

 

 

Docket No. 30022-GI-02-3

(Record No. 7731)

 

 

APPEARANCES

 

For the Applicant Kinder Morgan, Inc. (Kinder Morgan):

T. J. CARROLL, General Counsel to Kinder Morgan, Lakewood, Colorado; and PAUL J. HICKEY of Hickey, Mackey, Evans & Walker, Cheyenne, Wyoming.

 

For the Intervenor Consumer Advocate Staff of the Wyoming Public Service Commission (Consumer Advocate Staff):

            IVAN H. WILLIAMS and CHRISTOPHER B. PETRIE, Cheyenne, Wyoming.

 

For the Intervenor Midwest United Energy, LLC (Midwest United):

            ELISABETH Y. PENDLEY, Evergreen, Colorado.

 

For the Intervenor MGTC, Inc. (MGTC):

            DALE W. COTTAM, Hirst & Applegate, P.C., Cheyenne, Wyoming.

 

For the Intervenor City of Gillette, Wyoming (Gillette):

            CHARLES W. ANDERSON, City Attorney, Gillette, Wyoming.

 

For the Intervenor Public Alliance for Community Energy (ACE):

BRENT KUNZ, MICHAEL ROSENTHAL, and KEVIN D. BOHNENBLUST, Hathaway & Kunz, P.C., Cheyenne, Wyoming.

 

For the Intervenor Wyoming Community Gas (WCG):

            BOBBE FITZHUGH, City Administrator, Douglas, Wyoming.

 

For the Intervenor the Wyoming Association of Municipalities (WAM):

            STEPHANIE A. REEVES, Deputy Director, Cheyenne, Wyoming.

 

Members of the public appearing pro se:

 

Joe Salveson, Casper, Wyoming.

Eric C. Taylor, Douglas, Wyoming.

Joanne Tanner, Casper, Wyoming.

James Lawrence, Casper, Wyoming.

Bob Hubbard, Mills, Wyoming.

Ralph Meyers, Casper, Wyoming.

The Honorable Paul Bertoglio, Casper, Wyoming.

Bruce Allen, Casper, Wyoming.

John Brodrecht, Casper, Wyoming.

Leo Chernick, Casper, Wyoming.

Richard L. Innes, Casper, Wyoming.

David Lillywhite of Summit Energy.

Cora Innes, Casper, Wyoming.

C. W. Clark, Casper, Wyoming.

Rhett Shumway, Laramie, Wyoming.

Lance Neiberger, Casper, Wyoming.

Walter Schnorenberg, Casper, Wyoming.

Francis R. Harris, Casper, Wyoming.

 

 

HEARD BEFORE

 

Chairman Steve Ellenbecker

Deputy Chair Steve Furtney

Commissioner Kristin H. Lee

 

Chairman ELLENBECKER presiding

 

ORDER

(Issued March 11, 2003)

 

            This matter is now before the Wyoming Public Service Commission (Commission), upon the investigation by the Commission on its own motion of Kinder Morgan’s Choice Gas Service Program, and the interventions of the Consumer Advocate Staff, MGTC, Gillette, ACE, WCG, and WAM.  The Commission, having heard the testimony in this case, reviewed the record thereof and its files concerning Kinder Morgan and the Choice Gas Service Program, applicable Wyoming utility law, and being otherwise fully advised in the premises, HEREBY FINDS and CONCLUDES:

 

Procedural Matters

 

            1.            In Docket Nos. 30022-GA-01-1, 30004-GA-01-67, 30006-GA-01-47, and 31001-GA-01-32 (the Consolidated Cases), the Commission issued its May 1, 2002, Order Allowing Modification of Choice Gas Service Program which instituted a general investigation of Kinder Morgan’s Choice Gas Service Program on the Commission’s own motion.  In that Order, the Commission confirmed that the scope of the investigation would be comprehensive, stating that:

 

      “The evidence before the Commission clearly shows us that an investigation on our own motion of the Choice Gas Service Program is warranted, and we will initiate such an investigation.  We were urged to consider the subjects of competition and the rates offered under the Program.  We cannot narrow our review of the Program in this way.  Our investigation will consider all aspects of the Program, including such subjects as the Regulated Rate option and the one dollar customer charge.  No relevant issue will be outside of the scope of the investigation.  The range of subjects for inquiry will include an examination of the advisability of allowing it to continue beyond this year.  Regarding timing, the investigation should be initiated now.  We expect reports from Kinder Morgan in the fall and have been urged to hold hearings then. However, at this time, the Commission deems it advisable to work toward public hearings in the investigation in January or February of 2003.  By that time, we will have the benefit of important wintertime information about the functioning of the Program, and we will also then have sufficient time to review the results of the investigation, order any changes, or even abolish the Program, before a second Program year starts.  Mindful of the testimony of the AARP, we will include default provisions in the scope of the investigation.

 

      “The general focus of this additional review will be to examine how well the Choice Gas Program is serving the public interest and whether it can reasonably be expected to produce positive results for the retail utility customers of Kinder Morgan in Wyoming.  The necessary minimum number of participants in this investigation will include Kinder Morgan, Inc., and the four competing Suppliers.  The investigation will cover the entire Program territory, including the Torrington Division.

 

      “As we emphasized in our Final Order, we retain jurisdiction in this matter to exercise our public interest oversight role to ensure that the tariffed Choice Gas Service Program operates in the public interest.  Therefore, an investigation on the Commission’s own motion into the degree to which the Program serves the public interest is warranted and justified.  The concerns expressed by the Consumer Advocate Staff at the public hearing will be included in the investigation and review of the Program.  The scope of the inquiry will be general; and parties are reminded of the provisions of W.S. § 37-2-209 regarding the seriousness of the Wyoming utility law concerning the necessity of sharing information with the Commission.”

 

            2.            Although it instituted the investigation in the Consolidated Cases in the May 1, 2002, order quoted above, the Commission, for administrative efficiency, decided to conduct the investigation in this above-captioned, separate docket, in part because the Consolidated Cases included other issues not related to the investigation which were not ongoing.  Therefore, the Commission took judicial notice of its orders, files and all matters of record in the preceding cases for the purpose of the investigation under W.S. § 16-3-108(d) of the Wyoming Administrative Procedure Act.

 

            3.            In our June 22, 2002, Order on Regulated Rate Option in the Consolidated Cases, we allowed the Regulated Rate option to become a permanent part of the Choice Gas Service Program and further clarified our commitment to conducting a comprehensive investigation, stating that:

 

      “Whether this decision should be changed and whether the Regulated Rate option should also be offered to customers in the Torrington Division will be fully considered in the broader context of our investigation of the entire program.  Included in this is the question of how any over or under collections should be dealt with when, and if, the Regulated Rate should come to an end.  Our comprehensive investigation will seek to determine clearly whether or not the Choice Gas program itself actually works to the benefit of the consuming public and is understood by the public as providing sufficient benefit to them.  All of this will be included in the investigation; and all of it will bear on our decision regarding continuation of the program beyond the current [Choice Gas Service Program] year ending May 31, 2003.  [Editorial material added.]

 

            4.            On August 21, 2002, the Commission issued its Notice and Order Setting Public Investigatory Hearing and Procedure, in which it specifically reconfirmed its

 

“. . . May 1, 2002, decision to initiate an investigation of all aspects of the Choice Gas Service Program on our own motion under W.S. § 37-2-117; and we restate here the broad and general scope of the investigation into all aspects of the Choice Gas program and how well it is serving Kinder Morgan’s Wyoming customers.”

 

The Notice and Order quoted verbatim the description of the scope of the investigation set forth hereinabove.  It provided that all persons who became parties to the Consolidated Cases were deemed parties to the instant proceeding and set a further intervention deadline of January 6, 2003.  The Notice and Order set this matter for public hearing to commence on Monday, February 3, 2003, in Casper, Wyoming.

 

            5.            The August 21, 2002, Notice and Order also propounded a series of specific questions to Kinder Morgan for which the Commission required answers at the public hearing.  They included:

 

      “6.      Because the continuation of the Choice Gas program is itself in question in this investigation and because of service-related concerns which have arisen, Kinder Morgan should be directed to prepare and present information on the following subjects before the hearing to assist the Commission, the other parties and the public in better understanding the Choice Gas Service Program and related issues:

 

            “a.      any facts and statistics bearing on the question of whether or not the Choice Gas Service Program should be allowed to continue beyond the current program year, including:

 

                  “i.      how the program serves the public interest;

 

                  “ii.      how the program provides improved service to the public beyond that provided by Kinder Morgan functioning as a traditional regulated utility;

 

                  “iii.      a comparison of the pricing of Choice Gas options to comparable regulated rates, including statistics for each Division on the number of customers served by each supplier and on the prices and pricing options under which these customers are served, including the number and type of customers served under each;

 

                  “iv.      a report on the Regulated Rate option, how it functions, how it is perceived, whether it should be continued, and whether it provides a valuable reference for assessing the prices offered by competitive suppliers;

 

                  “v.      the volatility of the wholesale natural gas commodity market and how Choice Gas options may have protected customers from pricing volatility, shown for the current program year in each Division and historically for the Torrington Division for each year since the inception of the Choice Gas program;

 

                  “vi.      whether and to what extent customers have realized tangible benefits from participation in the program;

 

                  “vii.      an explanation of why the pricing options of the various Choice Gas suppliers are similar and whether this is a reflection of a healthy, competitive retail program;

 

                  “viii.     a discussion of any initiatives taken to encourage participation by local Wyoming natural gas producers in the Choice Gas program, the possible impediments to market entry by such persons, and the continuing validity of the requirement that participating suppliers must offer service in all Divisions;

 

                  “ix.      an assessment of the effectiveness of customer education and outreach efforts by the company and the competitive suppliers;

 

                  “x.      statistics showing [A] whether the Choice Gas customer charge can be justified, either generally or at its current level, and [B] the activity in the 191 accounts pertaining to the Regulated Rate option and the Choice Gas program in general;

 

                  “xi.      proposed improvements in the program.

 

            “b.      a discussion of Kinder Morgan’s call centers and the quality and responsiveness of the service they provide to the public in Wyoming as contrasted to the formerly locally accessed service, including standards that should be used to judge the performance of call centers in serving the public in normal and emergency situations, and during regular business hours and at other times.

 

            “c.      information on Kinder Morgan’s current allocation and disposition of service personnel and whether or not it serves the public well and provides adequately for public safety.  This should include discussions of the level and timing of service availability in different seasons and outside of normal working hours, in emergency situations, and in routine repair and service extensions, including a comparison of Kinder Morgan’s capabilities before and after the institution of its call center program.

 

            “d.      the level of customer satisfaction with and understanding of the program with an emphasis on the choices available to customers, the level of competitiveness and competitive benefits shown, the ability of customers to understand the program and use it to their benefit.”

 

            6.            The Notice and Order Setting Public Investigatory Hearing and Procedure was published in the Casper Star-Tribune, the Weston County Gazette in Upton, the Moorcroft Leader, the News Letter Journal in Newcastle, the News-Record in Gillette, the Wind River News in Lander, the Shoshoni Pioneer, the Saratoga Sun, the Riverton Ranger, the Daily Times in Rawlins, the Daily Boomerang in Laramie, and the Lander Journal.  Notice of the public hearing was broadcast on radio on KIML in Gillette, KASL in Newcastle, KQLT in Casper, KVOC in Casper, KYCN in Wheatland, KKTY in Douglas, KOWB in Laramie, KTRZ in Riverton, and KRAL in Rawlins.

 

            7.            On October 25, 2002, ACE filed its Petition for Leave to Intervene in this proceeding, stating that it was a supplier of natural gas participating in the Choice Gas program.  The Commission granted this Petition in an order of November 12, 2002.  On that day, Brent Kunz and Michael Rosenthal of Hathaway & Kunz, P.C., Cheyenne, Wyoming, entered their appearances as counsel for ACE.

 

            8.            On November 26, 2002, Kinder Morgan filed with the Commission its Motion for Extension of Time to File Testimony and Exhibits (Motion), asking that the filing deadline be extended to December 6, 2002, because of scheduling conflicts resulting from the Thanksgiving holiday week.  The Commission granted the Motion in its order to that effect of November 26, 2002, without objection of any party and after a duly noticed hearing on the Motion in which Kinder Morgan and the Consumer Advocate Staff participated.

 

            9.            On December 6, 2002, Kinder Morgan filed the prepared direct testimony and exhibits of Daniel E. Watson, President of Kinder Morgan Retail.

 

            10.            By a letter of January 10, 2003, Kinder Morgan advised the Commission that it would “. . . recommend, at the upcoming hearing, that the regulated rate option that is currently in place continue to be offered with the Choice Gas Program, and that it not be eliminated at this time.

 

            11.            On January 13, 2003, Midwest Energy filed the prepared direct testimony and exhibits of James Krebs; ACE filed the prepared testimony of Gary A. Lay; WAM filed the prepared statement of Stephanie Reeves; WCG filed the prepared statement of Bobbe Fitzhugh; and Kinder Morgan filed a correction to the prefiled exhibits A and A-1 accompanying the prepared direct testimony of Daniel Watson.

 

            12.            On January 13, 2003, the Consumer Advocate Staff made an oral motion seeking an extension of time to January 17, 2003, for the filing of its testimony and exhibits in this case.  The Commission granted this motion on January 13, 2003, and reconfirmed this action pursuant to due notice in a regular open meeting on January 14, 2003.  The Commission issued its Order Granting Consumer Advocate Staff Oral Motion for Extension of Time on January 31, 2003.

 

            13.            On January 17, 2003, the CAS filed the prepared testimony and exhibits of Bryce J. Freeman, and the prepared confidential testimony and exhibits of Denise K. Parrish.

 

            14.            On January 23, 2003, Kinder Morgan filed a Notice of Deposition with respect to Consumer Advocate Staff witness Denise K. Parrish.

 

            15.            By a letter of January 28, 2003, Kinder Morgan advised the Commission that it did not object to the release of the confidential version of Parrish’s January 17, 2003, prepared testimony to the parties to this matter.

 

            16.            On January 31, 2003, the Commission issued a Special Order Authorizing One Commissioner or Hearing Examiner to Conduct Public Hearing under W.S. §§ 37-2-102 and 16-3-112 with respect to this case.

 

            17.            Pursuant to public notice, the public hearing in this matter was held in Casper, Wyoming, at the City Council Chambers, from February 3 through February 5, 2003.  At the public hearing, the parties appeared in person and through counsel, and were given the opportunity to participate fully in the hearing.  At the hearing, Kinder Morgan presented the testimony of Daniel E. Watson; the Consumer Advocate Staff presented the testimony of Denise K. Parrish and Bryce J. Freeman; WCG presented the testimony of Bobbe Fitzhugh; WAM presented the testimony of Stephanie Reeves; ACE presented the testimony of Gary A. Lay; and Midwest United presented the testimony of James Krebs.  Other intervenors participated in the hearing to the extent they desired to do so but did not present witnesses.   In addition to the evidence submitted by the parties, numerous members of the public submitted letters in support of and opposition to the continuation of the Choice Gas Program, which were reviewed by the Commission.  Joe Salveson, Eric C. Taylor, Joanne Tanner, James Lawrence, Bob Hubbard, Ralph Meyers, the Honorable Paul Bertoglio, Bruce Allen, John Brodrecht, Leo Chernick, Richard L. Innes, David Lillywhite of Summit Energy, Cora Innes, C. W. Clark, Rhett Shumway, Lance Neiberger, Walter Schnorenberg, and Frances R. Harris appeared as public witnesses pro se.  At the conclusion of the public hearing, the parties were directed to file briefs, by February 21, 2003.

 

            18.            On February 20, 2003, the City of Gillette filed a post-hearing brief.

 

            19.            On February 21, 2003, Kinder Morgan, Midwest United, and the Consumer Advocate Staff filed post-hearing briefs.

 

            20.            Pursuant to due notice, the Commission held public deliberations in this case on February 27, 2003, directing the preparation of an order consistent therewith.

 

Party Positions:  Kinder Morgan

 

            21.            Daniel E. Watson, President of Kinder Morgan Retail, testified on behalf of Kinder Morgan.  Watson’s testimony responded to the questions which were propounded in the August 21, 2002, Notice and Order as described above.  (Kinder Morgan Exhibit 1.)  At the hearing he made corrections to various parts of his prefiled testimony and exhibits.  (Transcript of public hearing proceedings, hereinafter, Tr., pp. 47-49.)

 

            22.            Watson testified that the Choice Gas program was established to give Kinder Morgan’s customers choices in determining their natural gas supplier and the rate which they paid for their gas supply.  He explained that the program began in 1996 when Kinder Morgan had an opportunity which allowed multiple suppliers to offer to sell gas to consumers and offer multiple ways in which consumers could purchase their gas.  Watson stated that, due to what he termed the success of that program as well as ongoing interest from other communities, Kinder Morgan’s program in the Torrington Division was continued and the program was recently expanded to include the Gillette Division and the Casper Division.  He stated that the Choice Gas program provides stability by offering select fixed prices as well as the Regulated Rate option.  It provides flexibility in that market price opportunities exist as do new and different products.  Based on the current one year history in the Gillette and Casper Divisions, the six-year history for Torrington, the five-year history in Nebraska, and a review of the program in other states, the Choice Gas program also produces competitive prices.  (Tr., pp. 50-52.)

 

            23.            With regard to how the Choice Gas program provides improved service to the public beyond that of a traditional regulated utility, Watson testified that customers now are given a voice in both from whom they purchase their natural gas supply needs and how they purchase it.  He noted that customers can now choose options such as fixed prices and flexible prices that have various additional features, such as price caps, and they can choose from a variety of programs.  Watson also testified to the benefits to the small and midsize commercial customer in the Choice Gas program, stating that when these commercial customers have the option to access the Choice Gas program, they can drive down their own price, which in turn translates into community strength, jobs, commerce, and economic development.  (Tr., pp. 52-53 and 301-302.)

 

            24.            In response to the Commission’s request for a comparison of the pricing of Choice Gas options to comparable regulated rates, including statistics for each division identifying the number of customers served by each supplier and the prices and pricing options under which these customers are served, including the number and type of customers served under each, Watson referred to his Exhibits A, A-1, B, C, and C-1 to Kinder Morgan Exhibit 1.  With regard to his Exhibit A, he identified it as a complete list of the index-based or blended natural gas prices charged by suppliers to customers that selected those price options in the various divisions in which the program is offered for the period from June 1, 2002, through the latest data compiled on November 30, 2002.  He noted that the revised Exhibit A made changes to the three-month prices, but did not change the fundamental characteristics of the graph related to this data.  (Tr., pp. 54-55.)

 

            25.            Watson testified regarding Exhibit A-1, a graph which compared the 22 supplier index price options to the Regulated Rate.  The graph showed that, most recently, i.e., for November 2002, the Regulated Rate was less than any of the 22 index price options and that it had remained relatively stable.  Watson stated that the Regulated Rate prices as shown on Exhibit A-1 were not indicative of the actual cost of gas to the company because the Regulated Rate reflects “regulatory lag” in that the rate which is filed is an estimate and the under- or over- collecting of the actual gas costs would have to be corrected or collected from customers in rates.  Watson next responded to the Commission’s request for comparisons of prices with Exhibit C to Kinder Morgan Exhibit 1.  He explained that Exhibit C contained a list of available price options from each supplier in the three divisions and the number of customers who selected that price option.  He explained that Exhibit C-1 contained a summary of the numbers of customers who defaulted to each supplier in each of the divisions and showed, by division and in the aggregate, the percentage of customers selecting one of the four suppliers and the number selecting the Regulated Rate option.  Of the persons who had the ability to choose (i.e., those customers in the Gillette and Casper Divisions), 19% of them elected the Regulated Rate option.  (Tr., pp. 55-57.)

 

            26.            Watson next testified regarding the Regulated Rate option, how it functions, how it is perceived, whether it should be continued and whether it provides a valuable reference for assessing the price offered by competitive suppliers.  He explained the gas cost adjustment methodology and how it is used to develop the Regulated Rate.  He said that Kinder Morgan agreed to file adjustments to the Regulated Rate as often as necessary to avoid any under-collections or over-collections.  Watson confirmed that approximately 19% of Kinder Morgan’s customers selected the Regulated Rate option, even though it was not initially meant to be a part of the Choice Gas program.  He explained that Kinder Morgan extended the selection time to give customers an opportunity to pick the Regulated Rate option or change their selection.  (Tr., pp. 57-59.)

 

            27.            Watson testified that while he was recommending the continuation of the Regulated Rate option, he did not recommend the Regulated Rate option for the long term, saying that:

 

      “My fear is that it’s misleading for consumers to select it and to think that they’re getting something that really is not in the cards with the regulated rate. I think that it provides an unfortunate playing field for comparison of various offerings because the regulated rate cannot be predicted, and so it can’t be compared in a rational way with other offerings that are available.” 

 

“ . . . in reviewing the Torrington program for some six to seven years now is that over the long haul, the regulated rate does not provide lower prices; that because of things such as regulatory lag, which I was describing a few minutes ago, it creates continuing confusion, does not allow apples-to-apples comparisons for consumers; that consumers can choose the same net benefit, if it’s a benefit to them or risk to them, of a regulated rate from among several offerings that various suppliers offer, and so the long-term public interest I don’t believe is served by having the regulated rate.”   (Tr., p. 60.)

 

            28.            Watson testified that Kinder Morgan stated, in a letter to the Commission on January 10, 2003, that the Choice Gas Service Program should continue with the Regulated Rate option.  He thought that the Regulated Rate option provided one observable advantage.  He stated that:

 

      “We stand in an environment today where 19 percent felt either uncomfortable enough with the choices offered, confused by the whole program or just wanting to send us a signal that they were [unhappy] about a change that they wanted to select the regulated rate.  I think that’s a significant enough percentage of customers that we should listen to that and respect their decision to remain on that rate for the time being.”  (Tr., p. 310; editorial material added.)

 

He stated that consumer understanding and consumer satisfaction with the program were two key issues to Kinder Morgan and that the company would look at the level of public concern about the continuation of the program, the level of understanding of the program offerings, and the overall comfort with the program when evaluating it.  (Tr., pp. 60-61 and 309.)

 

            29.            Watson addressed the Commission’s question with regard to the volatility of the wholesale natural gas commodity market and how Choice Gas options may have protected customers from pricing volatility, shown for the current program in each division and historically for the program in the Torrington Division for each year since the inception of Choice Gas.  (Exhibit B and revised Exhibit D to Kinder Morgan Exhibit 1.)  He noted that Exhibit B contained a comparison of the Casper and Gillette regulated rate to the average fixed price available in the Torrington Division for the periods of July 1996 through the year 2001, stating that the prices reflected on Exhibit B excluded upstream pipeline costs.  He testified that Exhibit B showed that for the first three years of the program (1996 through 1999), the Torrington Division fixed rate offerings were either equal to or below those regulated rates for the Casper and Gillette Divisions.  During the winter of 2000-2001, he testified that the rates in Casper and Gillette went up while the rates for Torrington remained stable.  Watson noted that, during the first three years of the Choice Gas program, Kinder Morgan had not unbundled the upstream costs in the Torrington Division, stating that once the upstream assets were spun down to the suppliers and they were incorporated into their commodity price offerings, suppliers could then use the storage assets that were allocated to them.  He further noted that there was a competitive market component to those assets, and consumers began to see the benefits of those beginning when Kinder Morgan spun down the upstream costs after July 1999.  (Tr., pp. 62- 64; and Exhibit B to Kinder Morgan Exhibit 1.)  Exhibit B shows that, as of July 2001, the Torrington Division fixed rate was at its highest level since the inception of the Choice Gas program in Wyoming, while the regulated rates in the Gillette and Casper Divisions dropped back to levels comparable to those prior to the extremely volatile energy market of 2000-2001.  (Exhibit B to Kinder Morgan Exhibit 1.)

 

            30.            Watson testified with regard to a revised version of his Exhibit D to Kinder Morgan Exhibit 1, a graph comparing the average fixed price over the life of the Choice Gas program in the Torrington Division to the monthly average market price of gas for the period from June 1996 to September 2002.  He explained the revisions to Exhibit D:

 

      “With the changes to the first three, as I discussed, to reflect the adjustment of the fixed price to properly put the gas on an apples-to-apples comparison at the city gate, you can see that fixed and market prices are much closer together, and it’s really now in four of six years that the fixed price option would have been cheaper on a total all-end [sic] basis compared to the market rate.

 

      “But the amount of difference is not really significant.  What’s most significant to us about this graph is that consumers were shielded from price spikes as were seen in the winter of 2000-2001 when gas prices were between ten and eleven dollars per MMBtu.”

 

(Tr., pp. 65-66; and Kinder Morgan Exhibit D, revised.)

 

            31.            In response to the Commission’s question with regard to the tangible benefits for customers participating in the program, Watson said that customers can choose from various offerings and “aren’t forced to take a one-size-fits-all-pass-on tariff rate . . .” noting that customers would have the benefit of price stability by taking advantage of fixed price offerings.  Watson stated that, over time, choice leads to customer satisfaction.  He further testified that, under the Choice Gas program, communities are given the ability to participate with regard to pricing.  He stated that while data suggests that fixed prices have been somewhat lower, he believes that the fixed and market prices are superior to the [Regulated Rate].  (Tr., pp. 66-67 and 293.)

 

            32.            In response to the Commission’s request for an explanation of why pricing options of the various Choice Gas suppliers were similar, Watson argued that customers are given more options, stating that suppliers offer at least five different Choice Gas options, including a fixed rate, fixed-blended rate, and a product called WinterGuard.  He stated that:

 

      “The fact that all of the gasoline prices here in Casper today are within a few pennies of each other does not mean that it’s not a competitive market.  The fact that, you know, the price of milk in one store seems to move with the price of milk in another store does not indicate it’s not a competitive market, but only that competitive forces are actually at work and customers have to be and suppliers have to be in tune with one another, not through collusion, but there competing with each other.  They have to respond instantaneously to competitive pressures if they want to remain in the game. So fractions of a penny or a few pennies difference do exist.”

 

      “I think that’s representative and reflective of a healthy competitive environment.  Certainly no surprise to me or to others who are involved in the natural gas business, but it really doesn’t require that you be in the natural gas business to understand that concept certainly.”  (Tr., p. 68.)

 

            33.            Watson testified that Kinder Morgan advertises in trade publications to inform potential suppliers about the Choice Gas program and that it extends interviews and discussions to encourage suppliers to participate in the Choice Gas program.  He noted that a new supplier has indicated an interest in the Choice Gas program and stated that Kinder Morgan designed the program to minimize the impediments to participation by simplifying the sign-up process, reducing the number of customers required to be a participating supplier, and minimizing administrative fees.  Watson testified that, due to the size of Kinder Morgan’s Wyoming market, 66,000 customers, national suppliers are not interested in participating in the program.  Watson testified that, by requiring participating suppliers to offer service in all divisions, this ensures the presence of competing providers in all service territories offering choices to consumers regardless of where they live.  (Tr., pp. 69-71.)

 

            34.            Watson acknowledged that the Choice Gas program adds complexity to the decision-making process for customers, and he stated that Kinder Morgan has taken steps to educate their customers about the Choice Gas program.  Watson testified that Kinder Morgan intends to simplify its Choice Gas customer education and outreach efforts, stating that the customers have indicated they want to be educated through direct mail rather than in meetings and other forms of direct contact.  He also testified that feedback from customers indicated that education needed to be simple and more direct.  He further testified that Kinder Morgan would also better educate its customers about market, market realities, and what the differences are between regulated rate/pass-on tariff rates, market rates, and  fixed rates.  (Tr., pp. 72, 84, 276, 278 and 331-332.)

 

            35.            Watson stated that Kinder Morgan’s Choice Gas customer charge was established to recover the actual cost of administering the Choice Gas program.  The initial review of this cost showed it to be about $1 per month per customer.  He testified to the components of the customer charge, commenting that public education amounted to only about 5% of the total expenditures.  Watson explained that the “lion’s share” of the customer charge covered such expenses as:

 

      “ . . . sending out selection forms, processing the receipt of those selection forms and inputting into the customer information system the consumer selection and tracking the prices as well as on the implementation side of the program, collecting the revenues under the various choices that consumers have selected and disbursing those revenues to the suppliers appropriately based on the prices that are in place with each customer.”

 

Watson testified that Kinder Morgan tracks these costs and that, although it has found the costs to be “somewhat higher” than the $1 per month, it is committed to keeping that cost down by implementing changes which they hope will reduce the costs closer to the $1 per month charge.  Watson stated that his Exhibit G to Kinder Morgan Exhibit contained data justifying the customer charge.  (Tr., pp. 73-75; and Exhibit G.)  Thus, the greater portion of the costs included in the customer charge pertain to providing service with respect to customers (and competitive suppliers) after the customers have become participants in the Choice Gas program.

 

            36.            In response to a customer question with regard to the minimum charge, customer charge, and distribution charge, Watson testified that the percent of the total rate which is equal to the distribution charge, is established by the Commission in the company’s rate cases and is associated with the distribution charge based upon the total for all customers’ expected average annual throughput.  With regard to the minimum charge which is only applicable in the Casper Division, Watson testified that this charge allows the company to recover its fixed costs.  (Tr., pp. 250-251.)

 

            37.            Watson’s Exhibit H to Kinder Morgan Exhibit 1 contains data on the current balance of under- and over-collections of actual gas costs in Kinder Morgan’s 191 account -- its balancing account.  It also compares gas costs in current rates with the average cost of wholesale purchases.  (Tr., p. 75; and Kinder Morgan Exhibit 1, Exhibit H.)

 

            38.            Watson testified on program improvements which Kinder Morgan has implemented or is considering.  He stated that the company has developed an Internet web page to give customers the option of making their supplier and price option selections on line.  Kinder Morgan is also considering an e-mail option whereby customers can get answers to specific questions, and a one-call system.  He further testified that, due to supplier concerns about allowing a third party, such as Orcom Call Center, to handle calls and communicate price information to customers, Kinder Morgan is considering implementing a single 1-800 number to simplify the quantity of telephone numbers which customers would need to dial.  In addition, Kinder Morgan is working to improve education, storage utilization, and its call centers.  (Tr., pp. 75-77.)

 

            39.            Watson testified on the quality and responsiveness of the service provided to the public by Kinder Morgan’s call centers, stating that the call centers were implemented for Kinder Morgan’s retail gas business at the same time the Choice Gas program was being implemented in the Torrington Division.  He noted that the call centers have an effect on the Choice Gas program in that call center representatives must be knowledgeable and able to answer customer questions about Kinder Morgan’s services.  He testified to the importance of call centers, explaining that they allow for the company’s policies and procedures to be applied consistently, which, he stated, lends itself to accuracy.  (Tr. pp. 78-80.)

 

            40.            With regard to Kinder Morgan’s current allocation and disposition of service personnel, and whether or not it serves the public well and provides adequately for the public safety, Watson argued that the Choice Gas program does not change the allocation or disposition of company service personnel and does not affect the company’s ability to serve and provide safe service to the public.  He testified that none of Kinder Moran’s service personnel work in a dual capacity, in both the distribution and marketing divisions.  He testified that he is the only Kinder Morgan officer who holds positions in both the distribution and marketing divisions.  He argued that the Choice Gas program also does not affect the level, type or the timing of service available in different seasons.  He stated that Exhibit F to Kinder Morgan Exhibit 1 shows the disposition of company service and related administrative personnel.  Watson was asked whether he agreed with a statement by the Consumer Advocate Staff characterized as:

 

“. . . the utility operations may lend people to the marketing division when it comes to do sales of the commodity.  In the process of mixed distribution and sales duties, there is a potential to unduly influence the customer’s decisions about which supplier to pick.”

 

He responded, saying:  “That statement is wrong and I disagree with its conclusions.”  (Tr., pp. 81-82 and 311-312.)

 

            41.            Watson testified further on the separation of Kinder Morgan’s Choice Gas and utility personnel.  He stated that:

 

      “The individuals identified with offering and marketing and selling the Choice Gas offerings of Kinder Morgan are not the same people that buy gas for our regulated pass-on tariff rates.  There is an absolute separation in duties and not in allocation of time among those individuals.  As much as anything, the purchase processes are radically different and we have different teams that do that.”  (Tr., p. 673.)

 

            42.            Based on one survey done for the Torrington Division and another done for the Casper and Gillette Divisions, Watson testified that the majority of customers understand that the Choice Gas program is about providing competition.  He stated that the surveys indicated that roughly two-thirds of the customers want Choice Gas in some form.  Watson testified that the surveys did however indicate that some of the customers find the information and decision difficult.  Exhibit I to Watson’s testimony shows that Kinder Morgan surveyed 300 persons in its Gillette and Casper Divisions, and that, overall, 195 preferred fixed price options rather than, as the Kinder Morgan survey characterized it, “the market risk of gas prices swinging up and down”.  The same number favored being able to choose suppliers.  (Tr., pp. 83-84 and 277; and Exhibit I.)

 

            43.            When asked to explain if and how storage is utilized in the Choice Gas program for Casper, Watson explained that all suppliers in the program utilize storage equally or proportionately.  He stated that the primary storage available to the Casper Division comes from the Oil Springs field, which is about 20 miles north of Medicine Bow, and from smaller fields north and west of Rawlins, Wyoming.  Watson stated that, under the Choice Gas program, storage is utilized at the beginning of June with suppliers being allocated a portion of the storage reservoir.  The storage is located on the Kinder Morgan system at points where the capacity is somewhat limited.  He also described the two uses of storage, to ensure supplies on peak demand days and to allow the injection into storage of gas purchased in warm months when the price is traditionally lower.  (Tr., pp. 197-198.)

 

            44.            With regard to the public comments and questions concerning Kinder Morgan’s wholesale price of gas being based on the New York Mercantile and the CIG index, Watson noted that the Colorado Interstate Gas (CIG) price is not a “Colorado” price for gas.  He stated that much of the gas in the entire Rocky Mountains, whether produced in Colorado, Wyoming, or other Rocky Mountain states, is priced based upon the CIG index.  (Tr., p. 203.)

 

            45.            Watson testified that he does not believe the Regulated Rate provides a valuable reference for assessing the prices offered by competing suppliers.  He argued that there are problems with consumer perception of what the Regulated Rate is, as well as problems with establishing prices.  He stated his belief that consumers have trouble understanding whether the rate is regulated by the Commission or in some way established by the Commission.   Watson argued that, due to regulatory lag, the prices established are on a forward projection and are subject to truing up in the form of a surcharge.  (Tr., pp. 308 and 327-328.)

 

            46.            With regard to how Kinder Morgan arrived at the volumes to be hedged under the Regulated Rate from November 2002 to March 2003, Watson testified that Kinder Morgan set out to hedge 40% to 50% of its requirement to take advantage of the suppliers’ portfolios, and the gas already in storage for winter months.  He also testified that Kinder Morgan hedged base loads with simple fixed price swaps but did not incorporate options.  He explained that the company does not use options because, if they are not used, they must still be paid for and will be included in the price.  Watson noted that this was a blend of a hedged rate and the market under the Regulated Rate.  As for the percentage that Kinder Morgan will hedge for the 2003-2004 gas year if the Regulated Rate continues, Watson said that the percentage had yet to be figured out but would be determined by the market.  (Tr., pp. 316-317 and 323.)

 

            47.            With regard to the Regulated Rate, Watson stated that the Commission does not set those rates but rather reviews them under its rules.  He stated that when the Choice Gas program was implemented, the rate which was in effect before the Choice Gas program contained a balancing account surcharge for an over-collection.  He testified that this surcharge caused confusion because it resulted in customer rates being lower than the actual purchased gas costs.  Watson argued that, under the Regulated Rate, the consumer, rather than the supplier [Kinder Morgan, in this case], absorbs the risk of changing prices.  (Tr., p. 320-322.)

 

            48.            Watson responded to a question from the bench prompted by a communication to it from Vern Ellis.  Ellis asked why Wyoming or Kinder Morgan could not buy gas at the current price in Wyoming and resell it to the residents and businesses in Wyoming.  Watson responded, stating his belief that there was a misconception that the price that Wyoming consumers are paying is too high.  After having looked at data from the Energy Information Administration, and the eight top-producing states which export gas, he stated, “Wyoming customers are getting the cheapest gas in the nation.”  (Tr., pp. 344-345.)

 

            49.            Watson conceded that the Choice Gas Service Program added complexity for the consumer and found that having choice because of the program was a tangible, albeit psychological, benefit for customers that should be promoted.  (Tr., pp. 276-278 and 292-293.)

 

Party Positions:  The Consumer Advocate Staff

 

            50.            Denise K. Parrish, Supervisor of the Rates and Pricing Section of the Commission, testified for the Consumer Advocate Staff.  She stated, inter alia, that the Consumer Advocate Staff recommended that the Choice Gas Service Program be eliminated for all three divisions, and that Kinder Morgan should return to being a regulated monopoly utility where gas costs are passed on to customers on a dollar-for-dollar basis.  (Consumer Advocate Staff Exhibit 1, passim.)

 

            51.            Parrish testified that the Consumer Advocate Staff sent out 2,000 customer surveys throughout Kinder Morgan’s service territory and received over 500 responses back, which is, she stated, “. . . an incredible amount of responses if you do any survey work.”  She testified that the survey indicated that one-third of the customers supported elimination of the Choice Gas program, one-third supported continuation of the program, and one-third supported modifications to the program.  She stated that more than half of the customers who responded to the survey offered no opinion as to whether the Choice Gas program was a good or a bad idea.  Of the persons who did have an opinion on this point, most found the concept of customer choice to be a good idea; and 69% of them supported continuation of the program as is or with modifications.  However, she noted that customers had trouble adequately obtaining information to make decisions.  Parrish noted that, while the survey was not a clear indication of whether to continue or eliminate the program, the Consumer Advocate Staff’s suggestions also relied on their technical analysis and expertise.  Parrish stated that, if the Commission were to allow the Choice Gas program to continue, the Consumer Advocate Staff would recommend certain modifications to the program concerning such subjects as [i] how customers receive information, [ii] how customers go about gathering price information and [iii] the type of information they receive relative to the prices for making their selection.  Parrish noted that the survey indicated the majority of customers had not experienced difficulties with the Kinder Morgan call center but that there were enough customers who had negative experiences with it to warrant a closer look into the standards used by the call center.  (Tr., pp. 121-123, 374 and 395.)

 

            52.            Parrish testified to the steps taken to ensure the accuracy of the customer survey, stating that the names and addresses were obtained from a third party.  She testified that she and her colleagues wrote the questions with input from the entire Consumer Advocate Staff.  To avoid a biased survey, she testified that, once the questions had been drafted, they were sent to a party experienced in survey writing which had no affiliation or association with the Commission.  The Consumer Advocate Staff accepted the changes, which became the final questionnaire and the questionnaires were then mailed to customers. (Tr., p. 132.)

 

            53.            Parrish testified to the reasons for the Consumer Advocate Staff’s recommendation that the Choice Gas program be eliminated.  She said Consumer Advocate Staff believed that a “. . . nonprofit item has now become a profit center.”  She testified that data indicated that customers have been “worse off under the Choice program than they would have been under the regulated rate.”  Comparing the regulated rates from the Gillette Division over a three year period to the Torrington Division fixed prices for that same period, Parrish testified that there was a $12 differential per month for those rates.  (Tr., pp. 123-124)  Parrish stated:

 

      “So that on average, we believe that the Torrington customers who had selected the fixed price may have been paying as much as ten or twelve dollars more than what the Gillette customers were paying on a monthly average . . . .”  (Tr., p. 124.)

 

With regard to the allegation that Torrington Division customers were shielded from price volatility during the winter of 2000-2001 because of the fixed rate,  Parrish testified that other regulated utilities had also entered into fixed price contracts during that same period.  She noted that in some cases, rates were even lower than Torrington Division rates for that period.  She concluded that

 

      “There has been stability, but it has cost customers for that stability, and I believe that if the program is to continue, customers need to be aware that they are paying a price for being able to select those stable rates.”

 

(Tr., pp. 124-125.)

 

            54.            Parrish testified on the cost of hedging and the price differential which has gone into effect because of Kinder Morgan’s hedging [i] regarding the uncertainty of the winter weather and [ii] the uncertainty of the prices which Kinder Morgan would pay over time.  Parrish stated that, for example, on average at Louisiana’s Henry Hub, a company could have entered into a contract in April 2002 for a fixed price of $4 per dekatherm for delivery of gas in January.  She noted that there is a pricing differential of between 50¢ and $1.00 between the Henry Hub and Wyoming gas prices.  Using the lower number of 50¢, Parrish concluded that suppliers could have entered into a fixed price of $3.50 for January delivery at the time prices were being offered to customers in the spring of 2002.  Parrish stated:

 

      “The differential, then, would be to pay for between that $3.50 or $3, or whatever the number may be on a conservative or liberal basis, would be used to pay for profit, administrative and general costs and as was pointed out to me in discussions with the company last week other delivery costs.  However, January is usually the highest priced gas. January and February is the highest priced gas.

 

      “So if you say, well, gee, the difference between $3.50 and plus all the costs we have to pay and what we’re charging customers really isn’t that much, I would simply point out that the price that customers -- most customers are paying is a fixed price for a 12-month period, and it’s running in the five to six-dollar range.  I believe one of the gentlemen earlier indicated about over $6.”  (Tr., pp. 126-127.)

 

            55.            Parrish suggested that, if the Commission should choose not to eliminate the Choice Gas program, the Regulated Rate option should be extended to the Torrington Division and should be continued in the Casper and Gillette Divisions, stating that 19% of the customers in the Casper and Gillette Divisions had chosen that option.  The Consumer Advocate Staff believed this to be a substantial number of customers who found the Regulated Rate to be a benefit.  Parrish testified that the Consumer Advocate Staff believed the regulated rate provided a useful benchmark.  She discussed a study by the National Regulatory Research Institute, which concluded that it is reasonable to have a regulated rate or a profit-free benchmark against which to compare other rates.  Parrish further testified that the Regulated Rate and fixed price option rates are not the same and that, therefore, the Regulated Rate option should be continued.  She stated that the Consumer Advocate Staff would support Kinder Morgan’s proposal for a toll-free telephone number where customers could obtain information relative to the prices of all the suppliers.  She stated that the program change which allowed customers to make their selections by telephone was successful, noting that 33% of the customers used the telephone option as opposed to the two-thirds who chose to mail in their selections.  (Tr., pp. 127-129.)

 

            56.            Parrish agreed with Kinder Morgan’s proposal to implement an e-mail or an Internet option, stating that some changes would be needed to better assist customers when attempting to verify that the company, or its third party service entity, Orcom, had properly reflected the customer’s selection on their bills and that the customers were being billed at the rate and with the supplier which they had chosen.  She also suggested that Kinder Morgan’s sharing of employees be limited and that the employees who work on the company’s regulated day-to-day operations not be allowed to become marketers during the selection process.  (Tr., pp. 129-130.)

 

            57.            Bryce Freeman, Lead Rate Analyst in the Rates and Pricing Section of the Commission, testified for the Consumer Advocate Staff.  He provided written prefiled direct testimony and an attached exhibit.  (Consumer Advocate Staff Exhibit 2.)

 

            58.            Freeman described the rigorous statistical methods employed by the Consumer Advocate Staff in constructing and interpreting its survey and found that the Commission could be 95% confident that the survey truly represented the thinking of the public served by Kinder Morgan under the Choice Gas Service Program.  He testified that there were 532 responses to the Consumer Advocate Staff survey, including 426 who were Choice Gas customers -- well more than the minimum needed for statistical validity.  He testified that 68% of the respondents wanted the program eliminated altogether or modified.  He explained the 5% margin of error in this survey, and the practical adequacy of the survey analysis based on the statistically valid minimum sample of Kinder Morgan’s customers used.  He noted that any sample would have some errors in it, stating:

 

      “What I’ve done in my analysis is try to quantify an acceptable level of error, and what I’ve done essentially is base my sample size estimation on some known properties of standard normal distributions.”

 

(Tr., p. 447; and Consumer Advocate Staff Exhibit 2.)

 

Party Positions: The Wyoming Association of Municipalities

 

            59.            Bobbe Fitzhugh, City Administrator of the City of Douglas, Wyoming, testified as the elected chairman of Wyoming Community Gas (more formally, the Wyoming Association of Municipalities Joint Powers Agreement for the acquisition of or contracting for natural gas).  Fitzhugh stated that she had been appointed by the Douglas City Council to represent Douglas on the Joint Powers Board.  She explained that WCG is a nonprofit Wyoming consortium of communities in the areas served by Kinder Morgan.  The WCG board includes representatives from each of the 10 communities in the Torrington Division, and has as members 14 of the 22 communities in the Casper and Gillette Divisions, including Casper, Laramie, Newcastle, Riverton, Hanna, Shoshoni, Midwest, Edgerton, Bar Nunn, Rawlins, Saratoga, Sinclair, Moorcroft and Upton.  She spoke in support of the Choice Gas program.  (Tr., pp. 450-451.)

 

            60.            Fitzhugh testified that WCG entered into a gas sales agreement with ONEOK Energy Marketing Company of Tulsa, Oklahoma (ONEOK), to supply natural gas on a firm basis to WCG.  She noted that ONEOK provides nomination and scheduling services and performs the obligations imposed on suppliers participating in the Choice Gas program, including: the firm supply commitment, the firm supply warranty, the gas quantity and tariff requirements, general supplier representations and warranties and gas scheduling and ballot provisions.  In addition, ONEOK also assists WCG in the development of its marketing plan, advertising materials, and website.  (Tr., p. 451.)

 

            61.            Fitzhugh stated that, at a Joint Powers Board meeting in September 2002, the board voted unanimously to support the continuation of the Choice Gas program in Wyoming.  She testified that the board felt that the program was in the best interests of the general public because it provided choices in the selection of natural gas supplies and provided multiple pricing options rather than one regulated supplier with one price.  She testified that the program promotes the development of creative options for customers who have different needs and different tolerances for risk, stating:

 

      “The benefits of the Choice Program are the customers can choose a fixed rate which gives them long-term price stability or they can choose a price option that fluctuates with the market.” (Tr., p. 452.)

 

            62.            Fitzhugh acknowledged that education and understanding of the program continue to be inadequate.  She agreed that customers needed to be educated on the benefits and risks of the different pricing options so they could make informed decisions about what type of pricing best fitted their needs.  She said that the Joint Powers Board has worked with the company and with the suppliers to develop basic educational material to increase program awareness and understanding.  She noted that training on the basic components of the Choice Gas program is also provided on an annual basis for city and town employees for all communities in the Choice Gas program region.  (Tr., pp. 452-454.)

 

            63.            Fitzhugh argued that the Commission and the public at large had focused too much concern on the fact that fixed prices among suppliers during the selection period did not always result in the lowest possible pricing structure for consumers.  She stated that it was more important that customers have the right to choose their own pricing option.  Fitzhugh further stated that it is the marketplace and not the Choice Gas program which determines commodity pricing.  (Tr., pp. 454.)

 

            64.            Fitzhugh offered suggestions to improve the Choice Gas program by making it more “user friendly.”  She suggested:  [i] designating a third-party to handle all Choice Gas program functions, [ii] a simplified selection process, [iii] implementing a toll-free number giving customers access to all suppliers’ current prices, and [iv] a central website where all suppliers’ current prices are posted.  She stated that the WCG board also recommended the development of an independent clearinghouse that could consolidate all this information, whereby links to each supplier web site or phone number would ease the complexity of the selection process.  The board further recommended improvements to the phone selection process, and better education to alleviate customer fears with regard to their utility service being cut off should they select a supplier other than Kinder Morgan.  Fitzhugh stated that the board had at first been opposed to the permanent implementation of the Regulated Rate option, but said that, if the continuation of this rate is necessary to preserve the Choice Gas Program, WCG would not oppose its continuation.  She did not oppose extending the Regulated Rate to the Torrington Division (Tr., pp. 454-458.)

 

            65.            Fitzhugh testified that WCG’s contract with ONEOK provides that WCG receives 3¢ per dekatherm for the volume of gas WCG’s customers purchase in a year.  This sum covers the direct costs incurred by the WAM staff which provides administrative services that ONEOK does not, about $1100 per year.  Additional earnings of about $10,000 per year in the Torrington Division, are distributed to the participating municipalities pro rata based on the number of participants.  Douglas, with 28% of the participants, would receive $2800.  She expected the same overall results for the Casper and Gillette Divisions.  The money is to be used for community projects.  (Tr., pp. 463-464.)

 

Party Positions: The Wyoming Association of Municipalities

 

            66.            Deputy Director Stephanie Reeves testified for WAM and provided prepared direct testimony.  (WAM Exhibit 1.)  She stated that WAM has been involved in the Choice Gas program since its inception in 1996 and was instrumental in the formation of the Wyoming Community Gas Joint Powers Board, which consists of the 10 municipalities in the Torrington Division and an additional 14 in the Casper and Gillette Divisions.  (Tr., pp. 483-484.)

 

            67.            Reeves stated that WAM supports the Choice Gas program because it provides competitive and stable pricing options as well as a choice in pricing options.  She noted that: “. . . the most meaningful choice for customers is the opportunity to choose the type of pricing options that they are most comfortable with and best fits their budget.”  She stated that WAM is not convinced that the Regulated Rate is necessary; but, to preserve the Choice Gas program, WAM would not oppose its continuation as long as it [i] is identified as a Regulated Rate on the selection form and [ii] is not included in the list of the true Choice Gas unregulated energy price options under the Kinder Morgan supplier name.  In addition, WAM would not oppose the expansion of the Regulated Rate option to the Torrington Division.  In her opinion, there needs to be a better understanding of the Regulated Rate option and the Commission’s role with regard to it.  (Tr., pp. 486-487 and 493.)

 

Party Positions: ACE

 

            68.            Gary Lay, Chief Operating Officer, testified on behalf of ACE.  He submitted prefiled direct testimony in support of the continuation of the Choice Gas Program.  (ACE Exhibit 1.)  Lay stated that ACE is a Nebraska interlocal entity, which has 66 members including 65 municipalities and one public power district.  He noted that ACE is part of NMPP Energy, which provides electrical and natural gas services at wholesale to 180 municipal utilities throughout the mid-continent in seven states.  Lay testified that ACE has been involved with gas choice programs since 1995 and with the Kinder Morgan Choice Gas Service Program since 1997.  ACE currently serves 22,000 customers in Nebraska and approximately 3,000 customers in Wyoming.  (Tr., pp. 498-501.)

 

            69.            Lay testified that ACE’s position was that the Choice Gas program should continue with some modifications, stating that ACE believes that the Choice Gas program is in the public interest although he said that it was too early to determine whether the expanded program has been a success.  He advocated that the Regulated Rate not be called that because it was “misleading.”  He argued that, with the Regulated Rate, customers take all of the risk, but advanced the idea that, with a fixed rate, the supplier took all of the risk (although he did not explain how the supplier practice of purchasing forward strips of gas to serve individual customers might lessen the “risk” for a supplier).  He thought that the quality and timing of customer informational outreach for the Choice Gas program should be improved, stating that:

 

      “We also are concerned because of the timing that we are going to end up in the same situation we ended up a year ago.  The longer we put this decision off and if the decision is to go forward, then we’re ending up with a relatively short time frame to educate, to provide information, to allow consumers to adjust.  And if you narrow that window, it makes it very difficult to get all of that information out and consumers feel pressured and it’s like a high-pressure salesman.  I don’t like that.  I want to be able to make that decision with some thought kind of process.

 

      “So the more time the consumer had to think about, hey, this is coming, I’m going to be making that decision, is one of the reasons I think it needs to be an  ongoing program, because then the consumer has that process time to allow it to process, how did I do, did I make the right decisions, all of those kinds of things, and I think that’s a real key component.”  (Tr., pp. 511-512.)

 

This led Lay to suggest that Choice Gas education be taken over by the Commission as a nonbiased neutral third party, advocating that 75¢ of the one dollar customer charge be given to the Commission for educational expenses and that 25¢ be retained by Kinder Morgan for program expenses.  He thought education should be a continuous multimedia effort.  He also advocated discontinuance of the Regulated Rate because the market would provide sufficient protection for the consumers and because Kinder Morgan’s Regulated Rate gives it an unfair advantage.  If the regulated rate were to be retained, he advocated disallowing hedging and other costs not found in a “true PGA.”  He did not think that Kinder Morgan should be allowed to share employees between the distribution and Choice Gas functions (and he later acknowledged that this was not done), and thought that, if Kinder Morgan remained as a competitive supplier, that it should differentiate itself from Kinder Morgan the utility.  He defined program success as 69% of the customers wanting the program or wanting it with modifications.  He thought failure would be seen when suppliers dropped out of the program.  (Tr., pp. 502, 504, 511-512, 515-524, 526-527 and 531.)

 

            70.            Lay admitted later that hedging with respect to a Regulated Rate option could lessen risk to consumers and agreed that the Commission should not deliberately order the Regulated Rate to become riskier.  (Tr., pp. 539-540.)  Lay explained that customers could be in a position not to save money under the Choice Gas program depending on their choice of options.  He also admitted that this had resulted in some customer dissatisfaction with the program.  (Tr., pp. 544-545.)  Although he testified that the Regulated Rate produced too many “mixed signals” to be a benchmark for program performance, his point of view concentrated on the viewpoint of the public rather than the Commission.  (Tr., p. 551-554.)  Finally, in response to questioning from the bench as to whether eliminating the Regulated Rate would eliminate a customer choice, Lay stated that the Regulated Rate “is not really a choice.”  (Tr., p. 556.)

 

Party Positions:  Midwest United

 

            71.            James Krebs, chief executive officer, testified for Midwest United, a supplier participating in the program.  He testified that the Choice Gas program benefited Midwest United’s 2573 Wyoming customers by offering competitive rates and risk management to protect customers from price volatility in the wholesale gas commodity market.  He noted that only 3% of Midwest United’s customers in the Casper and Gillette Divisions switched to the Regulated Rate when given a chance to do so.  He stated that customers had spoken approvingly of the risk management opportunities offered by Midwest United rates and would wait for the end of the first program year to assess the value of the program to them.  Krebs also described the various price related risks borne by Midwest United as part of its service offerings in Wyoming, noting that his company bought financial products at the time of the purchase of gas to minimize price fluctuation risk to it.  Krebs argued that the Regulated Rate should be abolished or at least distanced from the program with Regulated Rate customers not paying the $1 customer charge.  Hedging the Regulated Rate (to control risk or provide price stability) should not be allowed.  (Tr., pp. 569-574.)

 

            72.            Krebs asserted that the purpose of the Choice Gas program was “. . . to deregulate the sale of commodity gas to Wyoming consumers.”  (Tr., p. 573.)  He asked the Commission to ensure that the various regulated and competitive Kinder Morgan functions and personnel did not work together to allow an unfair competitive advantage or to confuse the public.  He urged the Commission to:

 

      “. . . conduct regular audits of KMI’s regulated rate if it’s continued to determine that KMI is not, quote, "gaming the system," unquote, by offering lower-priced gas to Choice Program customers while charging higher-priced gas to regulated rate customers.”  (Tr., pp. 576-577.)

 

He admitted to having no evidence of any unfair cross subsidization at Kinder Morgan with respect to the program.  (Tr., p. 586.)

 

            73.            Krebs presented a list of revisions he advocated with respect to the Choice Gas program and the Regulated Rate.  (Midwest United Exhibit 1, sections 6 and 7.)  He supported a centralized call center with knowledgeable personnel.  He urged the Commission to act quickly in this case and suggested that the program year should be moved back to run from September to allow more time for education and informed customer choice.  (Tr., pp. 577-578.)

 

            74.            Krebs voiced Midwest United’s concerns as a competitive supplier over the position of Kinder Morgan in the Choice Gas program.  He advocated viewing the Regulated Rate option as “. . . an opting out of the Choice Gas Program,” noting that only Kinder Morgan the utility could offer the rate and that it is “structurally different” from the other rates offered under the program.  He also testified to concerns with the administration of the Choice Gas Service Program, arguing that Kinder Morgan “. . . has been placed in the untenable position of wearing several unseemingly [sic] conflicting hats.”  He described the situation:

 

      “. . . KMI Retail Gas Division, the distribution entity identified on the company’s website, acts as administrator for the Choice Gas Program.  At the same time, KM Gas Services Division, the marketing entity again identified on the website, competes for Choice Gas customers and KMI, the regulated utility, offers the regulated rate.  At times it’s difficult for me as an unregulated Choice Gas supplier to know with whom I’m competing.

 

      “One obvious example of this confusion can be found on the selection forms which were used by the customers to choose their Choice Gas supplier.  The name "Kinder Morgan" appears without the descriptive words "retail gas division" or "gas services division" on the ballot.  These selection forms must -- the customers must be made aware on these selection forms that KMI, the distribution company, is revenue neutral, regardless of the gas supplier, and that KMI’s distribution service is the same, regardless of the Choice Gas supplier.

 

      “Changing the selection form to identify the appropriate KMI division and having KMI personnel wear name tags in public meetings identifying the division for which they’re working will dispense with some of this confusion.

 

      “However, additional concerns are raised by the fact that KMI acts as administrator, competitor, regulated entity gas marketer for the Choice Gas Program  sharing office space in both Lakewood and Casper.  The  possible cross-subsidization of KMI officers and  personnel of information on sales and marketing  opportunities and of costs and profits between KM’s  retail gas division, the distributor, and KM’s gas  services division, the marketer, must be addressed.

 

      “[Midwest United] encourages the Commission to address these  concerns in the following ways:  Determine if KMI officers and service personnel are functioning in a dual capacity.  I think we’ve heard some information about that in this proceeding.  Limit the possible flow of information between the distribution and the marketing divisions, or if there is information being transferred, make it available to all Choice Gas suppliers and, if necessary, conduct regular audits of KMI’s regulated rate.”  (Tr., pp. 574-576.)

 

Party Positions: City of Gillette

 

            75.            In its post hearing brief in this matter, Gillette urged that the Regulated Rate should be an option for all consumers whether in the Casper, Gillette, or Torrington Division since the Regulated Rate is the actual purchase price of the gas which is passed on to the consumer while the Choice Gas rates include a profit markup. The City of Gillette emphasized that the regulated rate should be made available throughout the Kinder Morgan system.

 

Pro se statements by members of the public

 

            76.            Joe Salveson of Casper, Wyoming, expressed concern with the Choice Gas program with regard to the impact that it has made on his bill and on him personally.  Specifically, Salveson testified as to his concerns and questions with the commodity or distribution charge.  (Tr., pp. 87-96.)

 

            77.            Eric C, Taylor of Douglas, Wyoming, described his familiarity with the natural gas industry and the production aspect of natural gas discovery and development.  He expressed his concern with regard to the similar pricing options of the various Choice Gas suppliers and the add-on fees some of those companies attach to consumer bills.  Specifically, Taylor testified as the rates paid by consumers in Colorado and California; and he questioned the higher cost of Wyoming consumer’s natural gas.  (Tr., pp. 104-111.)

 

            78.            Joanne Tanner of Casper, Wyoming, made a statement as a customer of Kinder Morgan.  She expressed her concern with the delivery charge and the amount of profit the suppliers make as a result of this delivery charge.  She further expressed her displeasure with Kinder Morgan’s budget program for people on limited incomes.  (Tr., pp. 114-117.)

 

            79.            James Lawrence of Casper, Wyoming, expressed his displeasure with the Choice Gas program stating: “I feel the Choice Gas program does not offer realistic choices, but does offer much higher prices.”  He noted that Kinder Morgan rates were 40% higher during June 2002 to October 2002 over the base period of January 1999 to May of 2000.  Lawrence stated that, during this time, gas prices fell from 22¢ per therm to 14¢ per therm, which implied that Kinder Morgan’s margins increase over 100%.  (Tr., p. 135.)  Lawrence stated:

 

“It appears our gas rates are determined from two items:  First, a distribution charge of operating the distribution system in Casper.  Since this is a single system operated by KM, it is a monopoly and should be regulated by the PSC.”

 

“The second item in our rate is the cost of gas at the entrance of the distribution system.  I feel a feeble attempt was made to make this a competitive price, but it’s not competitive.  And there have recently been very low prices paid for gas in the nearby Powder River Basin.  There are few purchasers of this gas and KM is one of them.  If there are very few purchasers, then there may be an oligopoly, and again, this should be regulated by the PSC.  It is not competitive price.” (Tr., p. 136.)

 

He recommended that an audit be performed with respect to Kinder Morgan’s purchase of gas locally, its purchased costs of that gas and the transportation costs that it paid to get the gas to the entrance of the distribution system.  He further recommended rolling the company’s rates back to the base period of January 1999 to May 2000, and having Kinder Morgan demonstrate its need for rate relief in either the distribution system costs or the cost of delivering gas to the system.  (Tr., p. 137.)

 

            80.            Bob Hubbard of Mills, Wyoming, offered his comments at the public hearing as a customer of Kinder Morgan.  He expressed his displeasure with the program, stating that, “ . . . we don’t care about therms necessarily as customers.  We care about how many dollars we spend.”  Hubbard stated that he believed the Commission should regulate the gas since the costs are higher than they would be under a regulated choice.  He further expressed his displeasure with the call center in Scottsbluff.  (Tr., pp. 140-143.)

 

            81.            Ralph Meyers of Casper, Wyoming, offered his comments with regard to the Choice Gas program, stating that he thought his 40 years in the oil and gas business would help him make an informed choice.  He noted that his experience did not help him at all.   He testified to his questions concerning the distribution cost and whether it has in fact, remained the same since 1987 or had changed.  He questioned how it was affected by the initiation of the Choice Gas program.  (Tr., pp. 145-149.)

 

            82.            The Honorable Paul Bertoglio of Casper, Wyoming, offered his comments on behalf of the Casper City Council (City Council) with regard to the Choice Gas program.  Bertoglio stated that the City Council initially supported the Choice Gas program based on what it was told of the success in the Torrington Division.  However, he noted that, once the City Council became aware of the prices and what the costs actually were, the City Council’s position changed.  Bertoglio stated that the structure of the program is not in the best interests of the citizens and would need significant changes.  He explained that:

 

“First, the historical data shows the Choice-offered prices afford no benefit to the consumer; two, there is no confidence that the pricing being offered are not going to gouge the consumer; three, the existing infrastructure allows for little true competition; and, four, the bid process and structure leaves the consumer frustrated and confused.”  (Tr., p. 157.)

 

Bertoglio stated that the exhibits of both Kinder Morgan and the Consumer Advocate Staff clearly show that, in a stable environment, the Choice Gas program offers no benefit to the consumer, and that, in times when the market is not stable, the price risk is being passed on to the consumer.  Bertoglio also expressed his displeasure with Kinder Morgan’s provision of information to consumers and answering questions when they call the company.  He also suggested that the suppliers be more forthright with information.  Bertoglio further expressed his displeasure with regard to Kinder Morgan’s infrastructure monopoly stating that,   “ . . . unless this monopoly is broken up, there is little avenue for competition and that all that is occurring is an additional administrative cost is being added into the cost structure.”   He made further suggestions as to how the program could be improved, but noted that he did believe that the Choice Gas program itself was good for the consumer that chooses it.  (Tr., pp. 158-163, 166.)

 

            83.            Bruce Allen of Casper, Wyoming, expressed his displeasure with the minimum charges and vague billing.  He further testified that he believed the Colorado Interstate Gas (CIG) index should be made more available to the customer who chooses the index rate.  (Tr., pp. 172-176.)

 

            84.            John Brodrecht of Casper, Wyoming, stated that Kinder Morgan’s wholesale price of gas is based on the New York Mercantile and the CIG index but should be based on what the price of gas is in Wyoming.  He stated that it was extremely deceptive to base the wholesale price of gas on the New York Mercantile and the CIG index, noting that, in 1999, and based on the price which was paid for gas, the cost to customers in the Torrington Division was actually more than what was saved.  (Tr., pp. 180-185.)

 

            85.            Leo Chernick of Casper, Wyoming, offered his comments questioning whether or not Kinder Morgan could store gas in the summer for use in the winter months.  (Tr., p. 194.)

 

            86.            Richard L. Innes of Casper, Wyoming, expressed his displeasure with Choice Gas stating that, “Choice Gas has turned out to be anything but choice.  We were slammed into Choice Gas.”  With regard to choice, Innes stated,  “… to have choice, you have to have differences.  And when you’re only talking about pennies or even a nickel . . . that isn’t choice.”  (Tr., pp. 210-211.)

 

            87.            David Lillywhite testified as an officer of Summit Energy on behalf of Wyoming Producer Consumer Alliance, a joint venture between Summit Energy and natural gas producers with production in Wyoming (Summit Energy) as a potential future supplier in the Choice Gas program.  He stated that Summit Energy markets natural gas in Wyoming for natural gas producers and has been marketing natural gas for Kinder Morgan on a wholesale basis for over five years.  He stated that Summit Energy has sold gas to Kinder Morgan which has been sold to customers outside of the Choice Gas program.  Lillywhite testified that his company had spent a significant amount of money investigating the opportunity to participate in the Choice Gas Service Program along with producers.  He discussed in detail the three cost components of natural gas, the commodity itself, interstate transportation, and local distribution.  He asked whether the program will be better this year than last year and stated that he thought it would be better because the Wyoming Producer Consumer Alliance would try to come into the Program and make it more competitive.  He further stated his belief that the Choice Gas program will be better off five years from now than it is today.   He predicted that the Program would continue to improve and asked the Commission to “. . . give it a chance to work.”  (Tr., pp. 222-228 and 238-239.)

 

            88.            Cora Innes of Casper, Wyoming, stated that she chose to purchase gas from a supplier other than Kinder Morgan, and asked questions with regard to the minimum charge, the customer charge, and distribution charge in the Casper Division.  She told the Commission she received a bill for 39 days of service which was explained as being out of the ordinary and based on difficulty in obtaining a meter reading.  (Tr., pp. 247-253.)

 

            89.            C. W. Clark of Casper, Wyoming, expressed his displeasure with the Choice Gas program stating, “ . . . I see no redeeming value as it stands today in Choice Gas.”  (Tr., p. 255.)

 

            90.            Rhett Shumway of Laramie, Wyoming, offered his comments in support of the Choice gas program as a University of Wyoming graduate student and as a former summer intern for WAM.  He emphasized that, with “modifications and a continued education process, the Choice Program could grow in the Casper and Gillette Divisions to be as successful as has been reported in the Torrington Division . . . .”  (Tr., pp. 264 and 267.)

 

            91.            Lance Neiberger of Casper, Wyoming, offered comments in opposition of the Choice Gas program and voiced displeasure with his experiences with trying to contact Kinder Morgan for information on the PGA [Regulated Rate] option.  (Tr., pp. 270-273.)

 

            92.            Walter Schnorenberg of Casper, Wyoming, questioned whether or not in Wyoming, and through the ratemaking process, the prices charged for natural gas service include political contributions.  (Tr., pp. 435-438.)

 

            93.            Frances R. Harris of Casper, Wyoming, offered her comments as a customer of ACE and Kinder Morgan.  Harris testified that she believes the issue in this case is one of trust, stating “human nature is to be more comfortable with what they know than for new and vague promises.”  She further stated that “Choice Gas is not a benefit because the public does not know how to risk manage, [and] cannot spend their days studying the gas business . . . .”  She stated that the Commission should eliminate the Choice Gas program.  (Tr., pp. 589-593.)

 

Applicable Legal Standards

 

            94.            The general Wyoming legal standard in this case is that we must uphold the public interest, and the desires of the utility are secondary to the public interest.  Mountain Fuel Supply Company v. Public Service Commission, 662 P.2d 878 (Wyo. 1983). 

 

            95.            The Wyoming Administrative Procedure Act requires our decisions, for purposes of review, to be supported by substantial evidence (W. S. § 16-3-114(c)(ii)(E)); and this requires the support of “the type of evidence commonly relied upon by prudent men in the conduct of their serious affairs” (W. S. § 16-3-108(a)).  The Wyoming Supreme Court has described substantial evidence as “relevant evidence which a reasonable mind might accept in support of the conclusions of the agency.”  McTiernan v. Scott, 2001 WY 87, ¶11, 31 P.3d 749, ¶11 (Wyo. 2001).  The Supreme Court has stated that:

 

      “The substantial evidence standard also requires that there be more than a scintilla of evidence.  It is not required that the proof attain such a degree of certainty as to support only one conclusion to the exclusion of all others.  Once the measure of evidence has surpassed the scintilla threshold, the possibility of drawing two inconsistent conclusions from the entire record does not mean that the conclusion drawn by the administrative agency is not supported by substantial evidence.  Even where this court, after reviewing the record, arrives at a different conclusion, the court cannot substitute its judgment for that of the agency’s as long as the agency's conclusion is supported by substantial evidence.”  Sinclair Oil Corporation v. Wyoming Public Service Commission, et al., 2003 WY 21, ¶8 (citations omitted).

 

The Court has provided further guidance on what constitutes the required “scintilla” of evidence:

 

“We readily admit the record before us does reflect some evidence that is contrary to the ultimate decision made by PSC.  However, this evidence is not sufficient to convince us the determination of PSC was incorrect.  We, therefore, determine the findings and rulings reached by PSC were based on substantial evidence and within established law.  We hold the record provides a rational basis for PSC’s ultimate findings of fact and conclusions of law.  As such, we hold these findings of fact and conclusions of law were not clearly contrary to the overwhelming weight of the evidence.  Further, we recognize, as we have on numerous other occasions, that we will not substitute our judgment for that of an agency when substantial evidence supports the decision rendered by the agency involved.”  Sinclair Oil, 2003 WY 21, ¶38 (citations omitted).

 

The Commission has the ability to use its informed discretion in reaching a just and reasonable result in cases under its jurisdiction.  This is discussed in Mountain States Tel & Tel. Co. v. Public Service Commission, 698 P.2d 627, 630-631 (Wyo. 1985).

 

            96.            We are principally concerned here with the statutes which allow natural gas utilities to propose innovative programs for the benefit of their customers.  These statutes provide reasonable latitude for innovation, as long as that innovation does not go against the public interest and does lead to just and reasonable results.  Wyoming statutes set up a procedure under which the utility may propose, and the Commission may approve, a wide variety of innovative regulatory concepts.  The first is W.S. § 37-2-121, which states, in part, that:

 

      “If upon hearing and investigation, any rate shall be found by the commission to be inadequate or unremunerative, or to be unjust, or unreasonable, or unjustly discriminatory, or unduly preferential or otherwise in any respect in violation of any provision of this act, the commission may fix and order substituted therefor such rate as it shall determine to be just and reasonable and in compliance with the provisions of this act.  * * *  Any public utility may apply to the commission for its consent to use innovative, incentive or nontraditional rate making methods.  In conducting any investigation and holding any hearing in response thereto, the commission may consider and approve proposals which include any rate, service regulation, rate setting concept, economic development rate, service concept, nondiscriminatory revenue sharing or profit-sharing form of regulation and policy, including policies for the encouragement of the development of public utility infrastructure, services, facilities or plant within the state, which can be shown by substantial evidence to support and be consistent with the public interest.“  [Emphasis added.]

 

The companion statute is W.S. § 37-2-122(b), concerning services and facilities, which states that:

 

      “(b)  If, upon hearing and investigation, any service or service regulation of any public utility shall be found by the commission to be unjustly discriminatory or unduly preferential, or any service or facility shall be found to be inadequate or unsafe, or any service regulation shall be found to be unjust or unreasonable, or any service, facility or service regulation shall be found otherwise in any respect to be in violation of any provisions of this act, the commission may prescribe and order substituted therefor such service, facility or service regulation, as it shall determine to be adequate and safe, or just and reasonable, as the case may be and otherwise in compliance with the provisions of this act, including any provisions concerning the availability or reliability of service.”  [Emphasis added.]

 

W.S. § 37-3-101 makes it clear that the competitive marketplace may play a part in natural gas utility rates, stating, in part, that:

 

      “All rates shall be just and reasonable, and all unjust and unreasonable rates are prohibited.  A rate shall not be considered unjust or unreasonable on the basis that it is innovative in form or in substance, that it takes into consideration competitive marketplace elements or that it provides for incentives to a public utility.  * * *  The commission may determine that rates for the same service may vary depending on cost, the competitive marketplace, the need for universally available and affordable service, the need for contribution to the joint and common costs of the public utility, volume and other discounts, and other reasonable business practices.” [Emphasis added.]

 

Regarding services, W.S. § 37-3-112 requires that the “. . . service and facilities of every public utility shall be adequate and safe and every service regulation shall be just and reasonable” but states that  “[t]his provision shall not be construed as prohibiting a public utility from establishing classifications which distinguish among its various services, facilities or service regulations if the classifications are not unduly discriminatory among the customers in the same class of service.”  [Emphasis added.]

 

            97.            We are mindful that the primary and overriding requirements of W.S. §§ 37-3-101 and 37-3-112 are that rates and service regulations must be just and reasonable.  This again restates the public interest standard which we are bound to uphold.  From these statutes we also draw the conclusion that substantial latitude for innovation is allowed to utilities as long as the results serve the public interest.  We note, however, that this general statutory system is not deregulatory.  It requires continuing Commission oversight of an approved innovative regulatory plan, such as the Choice Gas Service Program and its elements, to ensure that the various statutory tests are being met on an ongoing basis.  Wyoming law is also explicit in its requirement that this conformance must be proved in public hearing.  The evidence necessary for our decisions could not be properly adduced otherwise.  Thus, the Choice Gas Service Program must be expressed in tariff as to every significant point; and the Commission retains the jurisdiction to deal with it as it would any tariffed service, that is, to act in the future to make certain that the public interest is served at all times.  Suppliers participating in the program, although they do not become Wyoming utilities by participating, are also under this oversight jurisdiction, inter alia, because of their signing of the Supplier Participation Agreement in which they are “. . . bound by the provisions of this Agreement and all applicable tariff provisions, rules, regulations or orders of the Wyoming Public Service Commission, . . . .”

 

            98.            W.S. § 37-2-112 gives the Commission general regulatory jurisdiction over public utilities in Wyoming; and W.S. § 37-2-117 allows the Commission to initiate investigations on its own motion “. . .  in order to secure compliance with the provisions of this act and orders of the commission, . . . .”

 

            99.            Sections 249 and 250 of the Commission’s Rules set forth the general parameters for purchased gas cost adjustments and balancing accounts like the Kinder Morgan Regulated Rate option.

 

Findings of Fact

 

            100.            Many of our findings of fact are set forth hereinabove and will therefore not be repeated here.

 

            101.            Kinder Morgan is a “public utility” as defined in W.S. § 37-1-101(a)(vi)(D) and (G); and the Commission has general jurisdiction to regulate it under W.S. § 37-2-112.

 

            102.            Kinder Morgan is duly certificated to provide retail natural gas utility service to the public in Wyoming under Certificates of Public Convenience and Necessity issued by the Commission.  It provides service in three divisions.  The Casper Division includes areas in and around the communities of Allendale, Arapahoe, Casper, Dempsey Acres, Edgerton, Ethete, Evansville, Fort Washakie, Hanna, Hudson, Jeffrey City, Lander, Laramie, Lost Cabin, Medicine Bow, Midwest, Midwest Heights, Mills, Mountain View, Natrona County Airport and vicinity, Paradise Valley, Pavillion, Pineview, Rawlins, Red Buttes Village, Riverbend, Riverton, Saratoga, Shoshoni, Sinclair, and Wind River and a number of rural areas, including taps served directly from Colorado Interstate Gas Company’s interstate pipeline.  The Gillette Division includes the areas in and around the communities of Gillette, Newcastle, Moorcroft, Wright and Upton, Wyoming.  The Torrington Division includes the areas in and near the communities of Douglas, Fort Laramie, Glendo, Glenrock, Guernsey, Lingle, Lusk, Torrington and Wheatland, Wyoming.

 

            103.            The Choice Gas Service Program is a customer commodity choice program administered and supported by Kinder Morgan in its Gillette, Casper and Torrington Divisions.  The Regulated Rate option is available as part of the Choice Gas program to customers taking service in the Casper and Gillette Divisions.  All aspects of the program are provided for and exist by virtue of Kinder Morgan tariffs duly approved by the Commission and on file with the Commission.

 

            104.            The evidence in this case shows us that the Choice Gas program should be continued, but that it should be modified to better serve the public interest.  Among the factors contributing to this decision are the affirmative vote of the 24 participating municipalities to continue the program and the survey results which, though decidedly mixed, show that a substantial number of persons either support customer choice or support the program with modifications, generally to make the program more easily understood and user friendly.

 

            105.            The record shows that the Regulated Rate option was the second most popular choice among persons participating in the Choice Gas program in the Casper and Gillette Divisions, even though it was offered only for a short time in an extension of the selection period in those Divisions.  It appears that some persons do not wish to engage in the research needed to participate in the Choice Gas program, and that others are positively hostile to it.  We find that Regulated Rate data will continue to be a useful tool to help the Commission assess the program and its effectiveness in serving the public interest.  Even though it may not be a perfect tool, it contributes pertinent information on “utility” rates which would not be available otherwise and which is important in our ongoing oversight role concerning the program.  Kinder Morgan conceded that the Choice Gas program introduced additional complexity for customers and that some of the benefits of the program are purely psychological.  In view of the facts that substantial numbers of customers disliked the program, did not understand it and would not like to see it continued, the Regulated Rate option allows such persons, and the substantial number of nonparticipant (“default”) customers a way to obtain natural gas utility service without having to become engaged with the Choice Gas program.

 

            106.            Taking all of this into account, it is clear that the Regulated Rate option, suitably renamed as discussed below, should be continued.  We also find that the Regulated Rate option should be the default option for the program in the ensuing years.  The substantial number of persons in the Torrington Division who expressed concern with the program or a lack of understanding of it, leads us to decide that the Regulated Rate option must be available in the Torrington Division and that it should be the default option there also.  This option allows the substantial number of persons not wishing to deal with the program to avoid doing so altogether.  They do not have to become unwilling participants in the program by being assigned by default to the various competing suppliers.

 

            107.            The statistics show that there is very little difference in the prices or in the service plans offered by the competing suppliers in the program.  Whether this is due to “effective” competition driving all suppliers to cut prices to the same “bone,” to a relative lack of competition allowing competitors simply to mirror each other’s prices and services, or to the economic facts of a wholesale natural gas market in which the entire Kinder Morgan Wyoming customer base is too small to generate substantial price concessions, allowing the Regulated Rate option to be the default under the program will stimulate suppliers to sharpen their competitive outreach and examine the competitiveness of their offerings very carefully.  We hope that it will also improve the quality and vigor of the outreach of suppliers to customers.  With this option, persons seeking to have choice may freely have choice and may exercise it as willing participants in the program.  No supplier would hereafter be able to count on a “harvest” of unwilling, uninformed or confused customers whose “choice” was made for them without their input.  This would further sharpen the competitive aspect of the program.  We will look at this aspect of the program very carefully in the future because gas is a fungible commodity.  One methane molecule is just as good as another from the standpoint of value, and the program should not simply add costs for the sake of allowing “choice.”

 

            108.            We find that Kinder Morgan’s data shows that the great majority of the expenses (the “lion’s share”) involved in its administration of the Choice Gas program is not attributable to providing program service to all retail customers but mostly are expended to facilitate the running of the program for the benefit of customers and suppliers already engaged in it.  Defaulting customers receive very little from the charge, and those who have chosen the Regulated Rate option appear to receive none at all.  Therefore, we find that the $1 customer charge associated with the Choice Gas program shall not be charged to persons who obtain service under the Regulated Rate option.  This fact shall be advertised prominently as an aspect of the Regulated Rate, as renamed below.

 

            109.            We do not believe that it is a good utility practice to immediately reflect every possible change in the costs underlying the Regulated Rate in that rate.  Persons taking service under the Regulated Rate should be entitled to a reasonable level of stability similar to that provided in the past by Kinder Morgan and as still provided by most other natural gas utilities in Wyoming which provide service under commodity balancing account and pass on procedures.  On the other hand, we do not believe that changes at yearly intervals allow adequately for changes in wholesale prices underlying the rate.  Therefore, we find that quarterly or semi-annual adjustments should be explicitly provided for under the Regulated Rate option, and that Kinder Morgan should elect one of these intervals and incorporate it in the compliance tariffs filed in response to this order.  Having decided that, we also note that the volatility of the wholesale markets during 2000-2001 have shown us that there are extraordinary times when adjustments need to be made more often.  Kinder Morgan should be free to propose out of period adjustments to the Regulated Rate to cover such unexpected situations.

 

            110.            Part of a utility’s duty of providing service which is adequate and which is offered at just and reasonable prices is the duty to manage its gas supplies to balance carefully the cost and availability of gas with the various risks of volatility in the supply and price of gas.  As a consequence, we find that Kinder Morgan should be allowed to reflect reasonable hedging transactions in its Regulated Rate adjustment applications.  They will be reviewed just as every other pass on application is.  We will not configure a litmus test for what is reasonably includable as a hedging or risk management cost in the Regulated Rate, noting only that hedging 100% of the Regulated Rate supplies or hedging none of the supplies would appear, at this point, to be unjustifiably extreme.

 

            111.            There was considerable confusion at the public hearing about the name of the Regulated Rate option.  Some spoke of it by its original name, and others used what would be, for those experienced in utility regulation, adequately descriptive phrases to express the concept.  We agree with the criticism of the term “Regulated Rate” that it is misleading.  Even if the rate is established in proceedings before the Commission, it reflects wholesale natural gas costs which are not regulated by the Commission.  It would be easy for a customer to get the false impression that the Commission was somehow controlling the underlying gas costs which drive the rate.  On the other hand, the Regulated Rate which will be placed before the consuming public has been known by this name in the past, and the approach to the setting of the rate will not change.  Therefore, we find that the rate should henceforth be known as the “Pass-On Rate [Regulated Rate]” to show persons that this is the same rate but also to alert them to the nature of the rate with greater accuracy and exclusively referred to by the name “Pass-On Rate [Regulated Rate].”  There are enough utility consumers who expressed confusion over the Choice Gas program, that we do not believe that persons should be left to sort out what a number of possibly similar but differently worded phrases are describing when Pass-On Rate [Regulated Rate] is an acceptably descriptive name.

 

            112.            For clarity, we reiterate that the Pass-On Rate [Regulated Rate] shall be the “default” under the Choice Gas Service Program; that is, the Pass-On Rate [Regulated Rate] shall be the applicable rate for all persons who either affirmatively select the Pass-On Rate [Regulated Rate] or who make no selection.  The information provided by Kinder Morgan, in its capacity as a utility and as a supplier, and by the other participating suppliers, to the public shall prominently include these facts.  Customers residing in the Torrington, Casper and Gillette Divisions should also have it made clear to them that they may do nothing and receive service under the Pass-On Rate [Regulated Rate].

 

            113.            We approve of the concept of “one-stop shopping” because it will help consumers make better and more informed choices under the Choice Gas program.  We applaud Kinder Morgan’s understanding of the informational problems with the program and its undertaking to move ahead with these important informational resources.  Internet information might be of the highest and most comprehensive quality, but not all persons have access to the Internet.  Consequently, “one-stop shopping” should include both toll free telephone and Internet resources.  The toll free telephone option should allow customers to obtain the latest information on options and rates for each participating supplier with directions on how to obtain more information from the particular supplier.  The customer should have the ability to navigate between and among various suppliers without having to redial the single toll free number.  The recorded information provided by each supplier should be prepared and updated by it alone.  Information available on the single web site should be similar and should take care not to disable consumers’ “back” buttons which allow the efficient viewing of the information of more than one supplier. The Internet facility should be navigable by a reasonably skilled, but not expert, home Internet user.  Consistent with our findings above, the “one-stop shopping” informational resources and the selection materials should describe the Pass-On Rate [Regulated Rate] and its position as the default option.  Our staff should monitor these resources and materials carefully to ensure simplicity of operation, timeliness, quality and completeness of information, and lack of competitive bias among competitors.

 

            114.            All informational resources, written or otherwise, should let customers know that budget billing is available to all customers, no matter which option might be chosen, including the Pass-On Rate [Regulated Rate].  This may encourage persons to think more favorably about the various options and to choose among them, secure in the knowledge that budget billing is available.  This requirement would not apply, of course, to rates which are already budget billing plans in and of themselves.

 

            115.            We find that the potential for competition to temper increases or drive down prices is one of the most important public interest aspects of the Choice Gas Service Program.  Our actions are taken to encourage the development of effective competition among suppliers for the benefit of the people.

 

            116.            One of the overriding concerns about the program is that education must be improved and made more useable in form and content for the customers, and we agree that it is of the utmost importance to the acceptance and success of the program.  We find, however, no evidence in the record that would lead us to conclude that allowing a third party entity to perform the educational or informational outreach is required for the continuance of the Choice Gas Service Program.  It has the potential to increase the cost of the program without providing any increased benefit.  Kinder Morgan and the suppliers are free to use the assistance of any person or entity they select to help them; but Kinder Morgan or the supplier, as the case may be, should retain control of its own informational content.  If informational problems continue to persist, the Commission would be open to further consideration of the use of third parties or other approaches to informational outreach.

 

            117.            Kinder Morgan has sufficiently made its point that it maintains in fact an adequate separation of employees who work on the Choice Gas program and those who work for the regulated utility business of Kinder Morgan.  We do not believe that there is sufficient evidence to support [i] structural changes in Kinder Morgan or its work force; or [ii] changes to the existing codes of conduct applicable to Kinder Morgan.  However, Kinder Morgan’s regulated utility business provides distribution utility service to the public, Choice Gas program administration services to all suppliers, and the Pass-On Rate [Regulated Rate].  Kinder Morgan is also a competitive commodity supplier under the Choice Gas program.  These closely associated roles can cause, in one view, some confusion to the public.  In another view, it can give Kinder Morgan an unfair competitive advantage in the Choice Gas Service Program.  In either event, the current situation does not adequately serve the public.  Therefore, we should direct Kinder Morgan to make a clear and consistent name distinction between these two aspects of its business so that customers and others can clearly identify the capacity in which particular employees serve and so that these different functional portions of the company can be visibly differentiated.  This will assist Kinder Morgan in the application of codes of conduct and will help to assuage supplier and public fears that the noncompetitive portion of the company might be producing an unfair competitive advantage for Kinder Morgan.  We leave it up to Kinder Morgan to decide on the name distinctions it will use, but they should file information on how they will implement this directive with the Commission on or before April 1, 2003.  This response should make provision, inter alia, for a clear identification of the Pass-On Rate [Regulated Rate] as being offered by the regulated business.

 

            118.            We do not find sufficient evidence to make changes in existing supplier qualifications.  We will examine Kinder Morgan’s storage study carefully before continuing the examination of possible adjustments in Choice Gas program deadlines and possible changes in how suppliers are allowed to use Kinder Morgan’s storage.

 

            119.            Our observations about the relatively small size of the Kinder Morgan Wyoming market in relation to the wholesale market in which suppliers must operate, leads us to conclude that suppliers should continue to serve in all three Divisions rather than picking and choosing among them.  In this way, customers throughout the Choice Gas program area will be assured of choices from among competing suppliers.  It is, however, acceptable for Kinder Morgan to work with persons interested in competing in only one or two Divisions.  The existence of the Pass-On Rate [Regulated Rate] in each division provides a “backstop” position ensuring the availability of service and freeing Kinder Morgan to negotiate meaningfully with suppliers seeking to serve smaller markets.

 

            120.            We note that the explanations of the various distribution, customer and related charges appearing on Kinder Morgan standard bills are very confusing, uninformative, and misleading to the public.  KM should propose simpler and more descriptive language clearly showing the reason for the particular charge and its relationship (or lack of it) to other charges on the bill form.  These should be filed with the Commission for review and approval by April 1, 2003, for implementation with the new Choice Gas plan year.

 

            121.            We find that Kinder Morgan should file compliance tariffs with the Commission reflecting this order for review and approval no later than April 1, 2003.

 

Conclusions

 

            122.            Kinder Morgan provides retail natural gas public utility service in the Torrington, Casper and Gillette Divisions as described hereinabove.  All of this is done under Certificates of Public Convenience and Necessity issued by the Commission.  Kinder Morgan is a public utility as defined by W.S. § 37-1-101(vi)(D) and (G); and, as such, it is subject to the Commission’s jurisdiction pursuant to W.S. § 37-2-112.  The Commission has sufficient jurisdiction over the Choice Gas Service Program to determine revisions affecting competitive suppliers who participate by agreement in the program under the tariffs and subject to orders of the Commission.

 

            123.            Proper and sufficient public notice was given in this proceeding and the public hearings were held in compliance with the requirements of Title 37 of the Wyoming Statutes, the Wyoming Administrative Procedure Act and the Commission’s Rules.  The interventions of all parties were properly granted and they became parties to the proceeding for all purposes.  At the public hearings held with respect to this matter, all parties and the public were given the opportunity to participate fully in the proceedings, in person and through counsel.

 

            124.            With the modifications and additions described above in paragraphs 105 through 120, the Choice Gas Service Program will produce just and reasonable rates and service for the customers of Kinder Morgan; and it will serve the public interest.

 

            125.            The Pass-On Rate [Regulated Rate], as modified and extended hereinabove, is central to the potential of the Choice Gas program to produce just and reasonable rates and should, in the form approved hereinabove, be the program’s universal default rate and should continue permanently.  The Pass-On Rate [Regulated Rate], with the directed changes, would comply with Sections 249 and 250 of the Commission’s Rules, as applicable in the Choice Gas Service Program context.

 

            126.            Our findings and conclusions stated above are supported by substantial evidence of record in this proceeding.

 

            NOW, THEREFORE, IT IS HEREBY ORDERED THAT:

 

            1.            The Choice Gas Service Program, but only as specifically modified and extended hereinabove in paragraphs 105 through 120 hereof, is hereby approved for continued use in Kinder Morgan’s Casper, Gillette and Torrington Divisions.

 

            2.            The approved program modifications, including without limitation, all changes related to the Pass-On Rate [Regulated Rate] option, shall be embodied in tariffs which Kinder Morgan shall file on or before April 1, 2003, for Commission consideration and potential approval.  Kinder Morgan shall file, by that day, [i] clarifications to its bill forms to improve the explanation of charges appearing on the bill as described above in paragraph 120, and [ii], the name differentiations and related explanations described above in paragraph 117, all for Commission consideration and potential approval.

 

            3.            The Commission’s investigation in this docket shall remain open pending further order.

 

            4.            This order is effective immediately.

 

            MADE and ENTERED at Cheyenne, Wyoming, on March 11, 2003.

 

                                                            Public Service Commission of Wyoming

 

 

                                                                                                                                                           

                                                            STEVE FURTNEY, Deputy Chair

 

 

                                                                                                                                                           

(SEAL)                                              KRISTIN H. LEE, Commissioner

Attest:

 

 

                                                                                               

STEPHEN G. OXLEY, Secretary and Chief Counsel

 

Special Concurring Statement of Chairman Steve Ellenbecker

 

            I have long applauded the leadership Kinder Morgan has shown as a pioneer, in Wyoming and the nation, by voluntarily opening its Wyoming retail natural gas markets to commodity supplier competition.  Unfortunately, the results over time have not produced much price or product differentiation, and customers have been forced to deal with the complexities of volatile wholesale markets for relatively little observable gain.  In deliberating this case, I voted to terminate the program on these and related grounds.  However, given that the Choice Gas program will continue, I concur in the modifications directed by the majority in this case described in paragraphs 105 through 120 of the order above.  In my opinion, these modifications will help the program to be more easily understandable and may stimulate greater competition.  It will also make it clear that persons who do not wish to participate in the program may take service under the Pass-On Rate [Regulated Rate].  It is properly the default option.

 

            Dated:            March 11, 2003.

 

 

 

                                                                                                                                                           

                                                            STEVE ELLENBECKER, Chairman