Case No. 8511(aa)
Q. Please state your name and business address.
A. My name is Henry A. Catron. My business address is 200 Civic Center Drive, Columbus, Ohio 43215.
Q. By whom are you employed and in what capacity?
I am Manager, Economic Analysis, in the NiSource Corporate Services' Energy Supply Services Group providing services to Columbia Gas of Maryland, Inc. (Columbia).
Q. Please describe your primary supply related responsibilities.
A. I am responsible for activities related to gas supply and capacity planning, including development of detailed long-range plans, short-term operational planning and strategies to ensure that reliable gas supplies are available and obtained in a best cost manner.
Q. Please describe your professional experience along with your educational background.
A. I have been employed by Columbia in the Gas Supply Area since 1989. From 1989 to 1991 I was Manager, Gas Estimates where I coordinated Columbia’s demand forecasting process. From 1991 until 2000 I was Manager, Operational Planning where I was responsible for short-term operational planning, peak day forecasting & daily supply operations. From 2000 to present I have been Manager, Economic Analysis responsible for Columbia’s supply planning activities.
From 1981 to 1989 I was employed by Illinois Power Company in various positions including, Engineer, Gas Engineer, Planning Engineer, Short Term Planning Engineer & Assistant Gas Distribution Superintendent. In these positions I was responsible for facility planning, gas and electric strategic planning, monthly supply and storage planning and daily activities of construction crews.
I attended the University of Kentucky in Lexington, Kentucky and received a Bachelor of Science Degree in Civil Engineering in 1981.
Q. What is the purpose of your testimony in this proceeding?
A. The purpose of my testimony is to: (1) explain Columbia's strategy for acquiring gas supplies at the lowest possible cost while meeting its public service obligation; and (2) describe the interstate pipeline service and capacity utilized by Columbia in its least cost purchasing plan. My testimony and exhibits demonstrate that Columbia follows competitive practices in procuring gas supplies and that Columbia's gas procurement and purchasing practices are reasonable.
Q. What exhibits are you sponsoring in this proceeding?
A. I am sponsoring four exhibits. Exhibit HAC-1 is a schedule listing the daily and seasonal volumes associated with Columbia's firm contracts for transportation and storage services on Columbia Gas Transmission Corporation (Columbia Transmission) and Columbia Gulf Transmission Company (Columbia Gulf). Exhibit HAC-2 is a schedule of Columbia's capacity release activity from October 2001 through September 2002. Exhibit HAC-3 is a graph illustrating Columbia's adequacy of gas supply and the impact of weather on supply planning strategy. Exhibit HAC-4 is a supply balance showing Columbia's prospective supply mix for Contract Year 2003 under normal weather conditions.
Q. Please explain Columbia's gas supply planning objectives.
A. Columbia's principal supply objective is simply to secure and deliver competitively priced, reliable gas supplies for our customers. Columbia is sensitive to the impact of gas costs on our customers and balances this concern with our utility obligation to provide reliable gas supplies to our firm customers whenever they want gas service under a wide range of weather conditions.
Q. Please explain Columbia's strategy for meeting those objectives.
A. Columbia's gas purchasing strategy is to contract for a portfolio of gas supplies and capacity that has the flexibility to: (1) meet the standards of service reliability for core market customers while retaining sufficient flexibility to be able to take advantage of low price opportunities when available and operationally feasible; (2) adjust supplies to meet highly variable demand caused by fluctuating weather conditions; and (3) incorporate decisions of our core market customers who elect alternate gas suppliers under the Customer Choice Program.
Columbia achieves this reliability through: (1) its analytical supply planning activities, which I will discuss later; (2) the utilization of its firm pipeline storage and transportation service; and (3) contracting for sufficient volumes of gas supplies directly from producers and marketers to meet the needs of its firm customers. Columbia's gas commodity purchases from producers and marketers must provide sufficient reliability to meet the needs of its customers under design weather conditions while also providing Columbia the flexibility to reduce purchases during periods of warmer weather at minimal costs. Columbia has developed a diverse portfolio of producer and marketer suppliers to provide the reliability required by its customers.
Q. Please explain Exhibit HAC-1.
A. Exhibit HAC-1 lists the firm pipeline capacity Columbia has under contract with two interstate pipelines, Columbia Gas Transmission Corporation (Columbia Transmission) and Columbia Gulf Transmission Company (Columbia Gulf). Columbia has firm transportation capacity on Columbia Gulf and on Columbia Transmission to deliver 15,012 Dth of natural gas each day to Columbia's city gates in the State of Maryland.
Columbia has access to Columbia Transmission's storage fields under Columbia Transmission's Firm Storage Service (FSS) Rate Schedule. Columbia's seasonal storage capacity or Storage Contract Quantity (SCQ) is 1,867,560 Dth. Under Columbia Transmission's tariffs fuel retention is required for volumes transported from storage to the city gate. Therefore, 1,819,863 Dth of the seasonal storage capacity can be delivered to Columbia's city gates. Columbia’s Maximum Daily Withdrawal Quantity (MDWQ) from storage is 33,698 Dth per day. The MDWQ ratchets down as volumes remaining in storage are reduced. When the volume of gas in storage falls below 30% of the SCQ the MDWQ is reduced to 80% of maximum. Subsequent MDWQ reductions to 65% and 50% of maximum occur when gas volumes remaining in storage fall below 20% and 10% of SCQ, respectively. Columbia transports storage supplies from the storage fields to its city gates under Columbia Transmission's Storage Service Transportation (SST) Rate Schedule.
In addition to the firm contracts discussed above, Columbia has a propane-air facility, located in Hagerstown, which provides firm peak day supplies to meet projected peak day demand. This facility's design capacity is 10,000 Dth/day and is used to meet peak day demands and post peak day demands on colder days after storage deliverability ratchets downward.
Q. In addition to the contracts shown in Exhibit HAC-1, does Columbia have other supply or transportation contracts?
A. Yes, in addition to these firm contracts, Columbia has Interruptible Transportation Service (ITS) contracts with Columbia Gulf, Columbia Transmission, Tennessee Gas Pipeline Company and Texas Eastern Transmission Company to transport interruptible purchases from various producing regions.
Q. You have indicated that Columbia contracts for a portfolio of gas supplies. Please indicate the components of that portfolio.
A. Columbia purchases gas supplies under contracts with three general term lengths: long-term, short-term, and spot. The long-term and short-term contracts include language providing Columbia the ability to purchase contracted gas on a baseload or swing basis. Baseload and swing capability in spot purchase contracts are determined through negotiation at the time Columbia commits to the spot purchase.
Q. Please provide a definition of those contracts.
A. Columbia defines long-term contracts as firm gas purchase agreements with a contract length of greater than one year. Short-term contracts are firm gas purchase agreements with a contract length of one year or less. Spot market contracts are gas purchase agreements with varying contract lengths, typically 30 days or less. Depending on market conditions and Columbia’s requirements spot purchases may be under either interruptible or firm contract provisions. Baseload generally refers to the commitment to purchase the same volume every day of the nomination period, typically a month. Swing generally refers to the ability to purchase varying levels of supply throughout the nomination period.
Q. What are Columbia's goals with respect to its portfolio of gas supply contracts?
A. Columbia's gas supply contract portfolio is designed to meet the following goals:
1. Assure that sufficient firm gas supplies are available on the coldest days of the year to fill Columbia's FTS capacity.
2. Contract for firm gas supplies with sufficient reliability to meet the firm requirements of human needs and Standby Service customers.
3. Provide a level of daily and seasonal flexibility needed to meet the changing demands of a volatile, weather-sensitive customer base.
4. Maintain sufficient flexibility in contract term to adjust to changing market conditions.
5. Provide all of the above at the lowest possible price.
Q. Please describe the process Columbia follows to contract for long-term and short-term firm supplies.
A. Annually Columbia reviews its gas supply requirements and submits a Request For Proposal (RFP) to multiple suppliers identified as capable and willing to provide firm gas supplies to Columbia. Upon receipt of proposals submitted in response to the RFP, Columbia evaluates the responses and begins negotiations with suppliers whose proposals provide the required supply assurances at the least cost. Negotiations continue with those suppliers until satisfactory agreements are reached or until an impasse is reached after which another supplier negotiation is initiated.
On May 10, 2002 Columbia submitted twenty-four (24) RFPs to potential natural gas suppliers to provide gas supplies to Columbia during the 2002-03 winter season and beyond. Columbia received responses to these RFP’s on or about June 10, 2002. Columbia reviewed these responses and conducted extensive negotiations with the respondents. These negotiations resulted in the extension or renewal of four (4) short-term contracts. Five (5) new short-term contracts were negotiated. In addition, eleven (11) short-term contracts were canceled. Columbia's present portfolio of contracts provides it sufficient gas supplies to meet the needs of its firm customers for the 2002-03 winter season. Columbia also renewed one (1) back-up supply agreement. The back-up supply agreement is available to Columbia in the event of a failure by a term contract supplier. Gas costs under the back-up supply agreement is market based. Columbia does not pay any demand charges to maintain the back-up supply agreement.
Q. Please describe, in general, how Columbia achieves reliability through the use of its firm interstate pipeline capacity.
A. Columbia achieves reliability in two ways. First, each summer season Columbia will purchase sufficient gas supplies to fill the seasonal contract quantity under its storage contracts and meet firm summer season customer demand. The summer season purchases placed into storage provide Columbia with approximately 44% of the supply required to meet projected firm customer demand under design winter conditions. The combination of summer season injections and location of the storage fields in the market area make storage Columbia's most reliable supply.
Second, Columbia includes strong performance obligations in its firm gas supply contracts and transports those supplies under its FTS capacity entitlement. These firm contracts flowing under Columbia's FTS capacity entitlement coupled with the back-up supply agreement previously identified provide Columbia the reliability required by its core market customers.
Q. Does Columbia participate in the Mid-Atlantic Natural Gas Supply Contingency Group?
A. Yes. Columbia played a key role in the initial development of the current Mid-Atlantic Natural Gas Supply Contingency Plan and remains an active participant. Currently 18 LDCs and other holders of firm pipeline capacity from Maryland, Virginia and North Carolina participate in this mutual assistance plan. In the event of a supply disruption, Columbia could possibly receive assistance from one or several of these participants if service to Columbia’s firm customers is threatened. Columbia may also provide assistance to other participants in this group if their firm customers are threatened and Columbia is able to provide assistance.
Q. Does Columbia participate in a cooperative effort with other LDCs to contract for low cost natural gas supplies?
A. Yes. Columbia participates with four (4) other distribution companies of NiSource, Inc. (Columbia Gas of Kentucky, Inc.; Columbia Gas of Ohio, Inc.; Columbia Gas of Pennsylvania, Inc.; and Columbia Gas of Virginia, Inc.) to negotiate purchases of natural gas supplies.
Q. What benefits does Columbia receive through participation in this cooperative effort?
Columbia Gas of Maryland, Inc. is the smallest of the five distribution companies in this group. Participation in this cooperative effort provides Columbia with market negotiating power it could not achieve on its own. In addition, Columbia is able to diversify its supplier portfolio, purchasing relatively small volumes from numerous suppliers at little if any additional cost. Columbia would not be able to achieve this combination of diversity, low cost and reliability if it were to negotiate its supply contracts independently.
Q. How does Columbia price gas purchases under these contracts?
For the short and long-term contracts, the pricing provisions are generally negotiated based upon market indices that reflect the market price of gas during the period of time that the gas is nominated each month. Spot gas prices are generally negotiated at the time the purchase is agreed to and reflect market prices for that location and time. Does Columbia hedge or lock in the price of gas it intends to purchase under term purchase contracts?
Not currently. In recent years, however, Colulmbia managed a pilot hedging program. Under such program Columbia could convert a portion of its gas supply from current market-based pricing into fixed, collared or capped prices. On February 25, 2002, Columbia filed an Application to make this program permanent. However, on October 8, 2002 Columbia withdrew its Application for a Permanent Gas Price Portfolio Guideline Program. The Commission Staff, the Office of Peoples Counsel and Columbia worked towards reaching agreement on the program’s design. However, the parties were unable to come to agreement on fundamental issues pertaining to the program. The parties agreed that Columbia should withdrawal the application and allow the program to terminate. Further, Columbia agreed to unwind any future price positions that were already put in place if that unwinding action would result in a beneficial credit to the gas costs of Columbia’s customers. Columbia did unwind those future positions that it had and the action resulted in a credit to gas costs of $828,357.
Q. Please describe how Columbia manages the daily demand swings of its customers.
A. Columbia manages the majority of its customers' daily demand swings through the no notice capability provided under Columbia Transmission's FSS Rate Schedule. However, during certain months of the year, restrictions placed on FSS flexibility require Columbia to contract for additional flexibility in its flowing gas supplies. Without this additional flexibility in its flowing gas supplies, Columbia could incur significant daily imbalance penalties, particularly in the shoulder months when flexibility under Columbia Transmission's FSS tariff is reduced. These additional flexibility requirements have been incorporated into the firm gas supply contracts Columbia has in its contract portfolio. In addition, Columbia often determines that these additional swing needs can best be addressed through the use of daily spot supplies. In that way, the decision to purchase or not to purchase can be made each day. Columbia's utilization of its capacity and supply portfolio along with close monitoring of its daily requirements enable it to continue to provide the cost effective service upon demand that its customers require.
Q. Interstate pipeline tariffs permit holders of firm capacity to release this capacity on either a permanent or temporary basis. Does Columbia have an active capacity release program?
A. Yes. Exhibit HAC-2 provides a compilation of Columbia's capacity release activity from October 2001 through September 2002.
A. Columbia's capacity release program is designed to assure service to its firm customers on the coldest day of each month given a 10% probability of occurrence (Monthly Peak Day). For the months of December - February the coldest day is set equal to the annual Design Peak Day.
Each month Columbia utilizes the SENDOUT least cost planning model to identify the levels of flowing gas and storage supplies required for the following month. I will discuss SENDOUT in more detail later in my testimony. Transportation capacity, whether FTS or SST, not required to meet demand on the Monthly Peak Day can be made available for release by Columbia on a non-recallable basis for that month. Columbia then identifies recallable capacity by: (1) determining the demand corresponding to a temperature under a normal weather scenario which will be met or exceeded on average 5 days during the month; and (2) subtracting that demand level from the demand on the Monthly Peak Day. This procedure limits recalls to about five days in typical months.
When monthly capacity available for recallable and non-recallable release is known, Columbia assesses the market for the value of released capacity and offers its releasable capacity to the market in a manner that attempts to maximize the value of the capacity. The net revenue received from capacity release is shared between Columbia and its sales customers under Columbia’s Capacity Release Incentive Plan. This plan is discussed in more detail later in my testimony. The customer’s share of the capacity release revenue is deducted from demand costs in the PGA calculation.
Q. Please explain Exhibit HAC-2.
A. Exhibit HAC-2 is a schedule of capacity release activity Columbia has completed during the period of October 2001 through September 2002. Exhibit HAC-2 lists total daily and monthly capacity release volumes by pipeline and rate schedule and the estimated monthly credits received from this capacity release activity.
Capacity released under Columbia Gulf’s rate schedule FTS-1 and Columbia Transmission’s rate Schedule FTS are listed more than once in certain months. This multiple listing denotes capacity release quantities made to: (1) marketers participating in Columbia’s Customer Choice programs (Unbundled); (2) marketers in conjunction with their firm supply contracts with Columbia (Administrative); and (3) releases to other parties in the general capacity release marketplace (Marketed). During the October 2001 to September 2002 period Columbia did not have any administrative releases.
A. In 1996 Columbia implemented transportation pilot programs for residential and small commercial customers which provided those customers with a choice of whom they would like to provide their gas commodity requirements. Over the next four to five years, the pilots developed into programs that allowed for open enrollment throughout the year and also provided for optional capacity assignment.
Are these programs still in the pilot phase?
A. No. The Choice Transportation service for residential and small commercial customers was made permanent effective June 1, 2002.
Q. What have been the impacts of these changes on Columbia’s gas purchasing practices?
A. The primary impact has been the need for Columbia to incorporate additional flexibility in its gas supply planning and procurement practices to facilitate the greater level of uncertainty resulting from the open enrollment process.
Earlier you demonstrated Columbia’s reliability for your sales customers. Do Choice customers enjoy this same reliability?
A. Yes. Columbia has designed its Choice programs to maintain the reliability participating customers have always enjoyed regardless of whether the customer selects Columbia to provide their gas commodity requirements or a third party marketer.
Q. Earlier you described Columbia's capacity release program. Please provide a brief description of Columbia's capacity release incentive program.
A. The capacity release incentive program was implemented to provide Columbia an incentive to actively participate and maximize revenue in the capacity release marketplace. Under this program Columbia is permitted to retain 10% of the first $100,000 in capacity release revenue and 20% of the revenue received over $100,000 for each 12-month period ending January 31 of each year. Effective January 7, 1998, the Commission approved the continuation of Columbia’s Capacity Release Incentive Program on a permanent basis.
Q. Are any capacity release revenues excluded from this program?
A. Yes. Columbia excludes two types of capacity releases, the Administrative and Unbundled releases discussed earlier. In both cases, the fact that they are excluded from the capacity release incentive program means that all of the capacity release revenue flows to the PGA customer. The first type is releases Columbia may enter into to increase efficiency and reduce administrative burden related to Columbia's own supplies. These are full margin releases to Columbia's suppliers for the purpose of having the supplier schedule and balance Columbia's gas that will flow through that capacity. These releases would represent capacity that Columbia would not otherwise have available for release. In these cases, Columbia is using the release mechanism to shed administrative responsibility, not to generate capacity credits towards reducing fixed demand costs.
The second type of release in this category is the full margin release to marketers participating in Columbia's choice programs. These releases are similar to the first type in that Columbia is releasing the capacity to marketers for the marketers to provide supplies to firm, core market customers. This capacity is being assigned to continue firm service to these customers, not to generate credits to reduce fixed demand charges.
Q. What has been Columbia's experience for the period under review in the capacity release incentive program?
A. Utilizing the projected revenue projections contained in Exhibit HAC-2, Columbia has recovered approximately $8,151, excluding credits for the GRI surcharge, in Marketed capacity release revenues for the period October 1, 2001 through September 30, 2002. Under the incentive program rules, Columbia will retain 10% of this revenue.
Q. Does Columbia's portfolio of transportation and storage contracts provide adequate coverage for the requirements of Columbia's customers?
A. Yes. This is demonstrated graphically in Exhibit HAC-3.
Q. Please explain Exhibit HAC-3.
A. Exhibit HAC-3 is a chart containing four columns. The column on the left represents Columbia's portfolio of firm natural gas transportation and storage capacity for the 2002-03 winter. These are the contracts that were identified in exhibit HAC-1. The remaining three columns illustrate Columbia's prospective firm requirements for the 2002-03 winter season. The second column from the left represents firm requirements under warmer-than-normal weather conditions; the third column from the left represents firm requirements under normal weather conditions; and the column on the right represents firm requirements under colder-than-normal weather conditions. Columbia utilizes the firm demands under these three weather scenarios as a tool in developing a supply portfolio that provides the reliability required to meet colder-than-normal demand yet retains sufficient flexibility to meet reduced demand in warmer-than-normal conditions with minimal cost impact to its customers.
Horizontal lines on Exhibit HAC-3 are drawn to indicate the relationship between Columbia's firm contracts and the volume of prospective demand for each of the three scenarios. As this graph illustrates, Columbia has sufficient firm transportation and storage capacity to meet its core market customer’s firm requirements under colder-than-normal weather conditions.
Q. Please explain the difference between supply mixes in each of the weather scenarios.
A. The primary differences between the supply mixes shown for these weather scenarios are: (1) the reduction in the level of direct purchase supplies transported under FTS capacity; and (2) the reduced turnover of seasonal storage. In actual practice Columbia's supply portfolio provides it the opportunity to adjust supply options between storage volumes and direct purchases flowing under FTS capacity to provide the most reliable, least cost supplies for its customers.
Q. How does Columbia conduct its economic analysis to develop its gas supply mix?
A. Columbia's basic analytical supply planning tool is SENDOUT, a PC-based, decision support modeling system, provided by New Energy Associates of Atlanta, Georgia. SENDOUT uses the technique of linear programming, a proven mathematical "global optimization" method, to find a least cost solution to the problem of choosing which gas supply quantities to flow (including the use of storage supplies) time-dependently through a gas supply and transportation network. SENDOUTrecognizes demand, capacities, constraints and time dependent variables in determining a least cost supply. SENDOUT develops a least cost supply plan by developing a supply balance for demand sub-periods selected by the user.
Columbia utilizes SENDOUT for both long-term strategic planning and short-term operational planning. Long-term planning is conducted over a five-year time horizon and is utilized to assure adequacy of supply and evaluate supply options to meet changing customer demand. Short-term operational planning utilizes SENDOUT to develop a least cost scheduling priority over short-term periods up to one year in length.
Q. Is Exhibit HAC-4 the product of a SENDOUT analysis?
A. Exhibit HAC-4 is the rearranged output of an internally developed program that takes the supply mix produced by SENDOUT and restates those results into a month-by-month supply plan. The results shown in Exhibit HAC-4 are for contract year 2003, assuming normal weather conditions and projected gas costs. The units shown are thousands of dekatherms (MDth).
Exhibit HAC-4 provides detail from SENDOUT indicating the mix of supplies selected to meet prospective firm sales requirements. Those requirements, which are 4,672 MDth for Contract Year 2003, are shown at the top of the page on the lines marked "Residential, Commercial & Other" and "Industrial". The firm sales requirements do not include requirements of small commercial and residential customers participating in Customer Choice transportation programs. These volumes are estimated at 173 MDth for contract year 2003.
Q. Please describe the Supply Sources identified in Exhibit HAC‑4.
A. Under the heading, "TERM", are supplies which are purchased by Columbia from producers under short and long-term contracts. The supplies labeled "GULF-TCO" are delivered to Columbia's city gates via firm transportation on Columbia Gulf and Columbia Transmission. These supplies are forecast to account for 2,089 MDth of Columbia's total annual supply.
Under the heading, "Spot - via FTS", are monthly spot market purchases which are delivered to Columbia via Columbia Transmission FTS and Columbia Gulf FTS-1 capacity that is not filled with firm contracted supply. These supplies are forecast to account for 2,847 MDth of Columbia's total annual supply.
Supplies under the heading, "PEAKING", represent utilization of Columbia's Hagerstown propane-air peaking facility. Columbia forecast the need of 21 MDth of "Peaking" supplies for contract year 2003, under normal weather.
Also included on Exhibit HAC-4 are the projected monthly supply requirements of customers participating in Columbia's small commercial and residential Choice transportation programs. Columbia estimates Choice supplies of 179 MDth for contract year 2003. As noted earlier, Columbia is providing the daily and seasonal balancing needed to meet these customers’ demands under these programs. The line shown as "Fuel Loss" represents the quantities of gas Columbia and Choice marketers must purchase and provide to the interstate pipeline companies as required by their transportation tariffs.
The last section of Exhibit HAC-4 projects Columbia's storage activity. The line labeled “TCO-FSS-W/D” is a projection of monthly withdrawal levels. The line labeled “TCO-FSS-INJ” is a projection of monthly injection volumes. The injection and withdrawal volumes are totaled to provide a net monthly storage activity projection.
Q. Has Columbia participated in any gas cost related proceedings before the FERC?
A. Yes, Columbia continues to participate in and to monitor FERC proceedings that could potentially affect the level of its purchased gas cost.
Q. Does this conclude your prepared testimony?
A. Yes, it does.
Columbia Gas of Maryland, Inc.
Firm Contract Entitlements Supplier: Columbia Gas Transmission Corporation
Firm Transportation Service (FTS)
Daily Quantity: 15,012
Firm Storage Service (FSS)
Max. Daily Storage Quantity (MDSQ): 33,698
Storage Contract Quantity (SCQ): 1,867,560
Storage Service Transportation (SST)
October - March 33,698
April - September 16,849
Supplier: Columbia Gulf Transmission Corporation
Firm Service: Firm Transportation Service (FTS-1)