Case Background
On March 16,
2020, Peoples Gas System (Peoples or utility) filed a petition for approval of
a Liquified Natural Gas (LNG) Service tariff. LNG is natural gas that has been
cooled to negative 260 degrees Fahrenheit, which causes the gas to condense
into a liquid. Once in liquid form, the natural gas is 1/600th of its original
volume, allowing for increased storage potential. LNG is currently used in
Florida as a transportation fuel for maritime, rail, and other transportation
applications. The proposed LNG tariff is contained in Attachment A of the
recommendation.
Peoples waived
the 60-day file and suspend provision pursuant to Section 366.06(3), Florida
Statutes (F.S.), in an email dated April 9, 2020. Staff issued two data requests in this
docket. Staff issued its first data
request to Peoples on April 2, 2020, to which the utility responded on April
17, 2020. Staff issued its second data request on July 31, 2020, to which the
utility responded on August 7, 2020. The Commission acknowledged the
intervention of the Office of the Public Counsel (OPC) in this docket by Order
No. PSC-2020-0181-PCO-GU, issued June 10, 2020. OPC served interrogatories and
requests for production on Peoples on June 5, 2010, which Peoples responded to
on July 6, 2020.
On May 22, 2020,
a noticed informal telephonic meeting was held with Commission staff, Peoples,
OPC, and other interested persons. At the meeting, Peoples provided a
presentation that has been placed in the docket file. On July 31, 2020, Eagle LNG Partners
(Eagle LNG), an interested person in the docket, submitted a letter to the Commission stating its opposition to the
proposal. On August 13, 2020, Peoples submitted to
the Commission a letter in response to Eagle LNG’s letter of opposition. Copies of both letters have been filed as
correspondence in this docket. On August 17,
2020, a second noticed informal telephonic meeting was held with Commission
staff, Peoples, OPC, Eagle LNG, and other interested persons.
Commission Jurisdiction
Section 366.02(1), F.S., in part, defines a "public
utility" as an entity that supplies gas (natural, manufactured, or similar
gaseous substance) to the public within Florida. Section 366.02(1), F.S.,
also excludes from the definition of “public utility” municipal utilities,
rural cooperatives, and:
persons supplying
liquefied petroleum gas, in either liquid or gaseous form, irrespective of the
method of distribution or delivery, or owning or operating facilities beyond
the outlet of a meter through which natural gas is supplied for compression and
delivery into motor vehicle fuel tanks or other transportation containers, unless such person also supplies electricity
or manufactured or natural gas. [Emphasis added]
Therefore, staff believes that Peoples’ proposed LNG
service would fall under the activities of a public utility, as contemplated
under Section 366.02(1), F.S., and the Commission may exercise jurisdiction
over Peoples’ rates and service in this area, pursuant to Section 366.04, F.S.
Based on this interpretation, the Commission would also have jurisdiction over
this matter pursuant to Sections 366.03, 366.05, and 366.06, F.S.
Discussion
of Issues
Issue 1:
Should the Commission approve Peoples’ proposed LNG
tariff?
Recommendation:
Yes. Staff recommends that the Commission should
approve Peoples’ proposed LNG tariff, as shown in Attachment A, effective with
the issuance of the final Order in this docket. The LNG tariff would provide
Peoples with an opportunity to provide LNG services to interested customers. A
participating customer would enter into a contract with Peoples and all capital
and operating costs associated with the LNG facility should be borne by the
customer. (Ward, Coston)
Staff Analysis:
In its petition, Peoples stated that major maritime
and cruise companies, along with several of Florida’s largest ports, have
expressed interest in the utility providing an LNG fuel option through the
development of LNG infrastructure. The utility highlighted that the
International Maritime Organization, the specialized United Nations agency that
sets global standards for the safety, security and environmental performance of
international shipping, has required the marine sector to reduce sulphur
emissions from ships by 80 percent beginning January 1, 2020. As a result, many
maritime companies are considering natural gas as a fuel for cruise ships,
container vessels, and bulk carriers.
In addition to the maritime industry, the utility also
stated that other industries have expressed an interest in using LNG for
transportation fuel. Examples provided in the petition include refuse companies
using natural gas for transportation fleets and railroads using natural gas to
power locomotives. Peoples stated that a significant challenge to using LNG as
a transportation fuel is the lack of storage and bunkering facilities in
Florida. The proposed tariff would allow Peoples the opportunity to work with
these industries to create the supply infrastructure needed to meet the growing
demand for LNG. Florida currently has three LNG plants (two in Jacksonville,
one in Miami) that are owned and operated by unregulated LNG providers.
Potential
Benefits of LNG
Peoples stated that the benefit of natural gas in its
liquid state is that it is approximately 600 times less voluminous than gas in
its traditional gaseous state. Converting natural gas into a liquid state makes
it possible to transport natural gas to places that pipelines may not currently
serve, thus potentially expanding the use of natural gas as a transportation
fuel. Additionally, on-site LNG could serve as an immediate solution for
customers who are unable to wait for pipeline infrastructure installation. The
utility stated that LNG facilities could also provide greater resiliency for
participating customers by avoiding disruptions caused by weather or supply
interruptions. Currently, Florida does not have any large-scale storage
facilities and relies on natural gas to be transported through interstate and
intrastate pipeline systems.
The provision of LNG in Florida is a competitive market and
other operators in this market are not subject to the Commission’s
jurisdiction. Peoples seeks to include LNG service under its regulated tariff,
rather than through an unregulated subsidiary, because Peoples believes that
doing so creates operating efficiencies in terms of customer points of contact,
operations and management expense, and
economies of scale.
Peoples explains that a prospective LNG customer would
typically issue a Request for Proposals for the construction and maintenance of
LNG facilities and Peoples could potentially compete with other unregulated LNG
providers for the provision of such LNG service. Peoples’ petition is the first
request by a Florida investor-owned natural gas company for an LNG tariff.
Proposed
Liquified Natural Gas Tariff
Under Peoples’ proposed tariff, a participating customer
would receive distribution service from the utility and pay Peoples’ otherwise
applicable rates, clauses and riders, and taxes based on the volume of the
natural gas delivered to the LNG facility. Additionally, customers would pay a
monthly LNG services charge specific to that customer, which would be
calculated based on Peoples’ gross investment in the storage and/or
liquefaction facilities that serve the customer, as established in the LNG
tariff. These facilities would be installed and maintained by Peoples and could
be installed on either utility-owned property or the customer’s premises.
Peoples stated that “each LNG facility built by Peoples pursuant to the tariff
will be unique to the particular customer(s) and industries served by such
facility.” Peoples expects that the requested LNG facilities will be in one of
the following categories: (1) LNG liquefaction, storage, regasification and
truck loading facilities; (2) LNG storage facilities; or (3) LNG mobile storage
and regasification facilities.
As outlined in the proposed tariff, Peoples would enter
into an agreement with the customer to construct the LNG facility and provide
the liquified natural gas. The agreement would include the required monthly
services charge, which is designed for all costs to be fully paid by the
customer over the life of the agreement.
The utility asserted that the monthly services charge
would be designed to recover the cost of service to provide LNG service to a customer.
The cost of service would include, but not be limited to, depreciation expense,
return on capital, property taxes, insurance, operational expenses, and the
fuel and electricity used to operate the LNG facilities. The costs of an LNG
facility would include all of the necessary components and equipment needed to
build the specific LNG facility for a customer’s end use. Peoples stated that
each facility would be designed for the specific needs and anticipated demand
of each customer and the final costs would reflect that specific unit. Proposed
tariff sheet No. 7.406 provides a listing of specific equipment that could be
necessary for the construction of an LNG facility.
Peoples stated in its response to staff’s first data
request that the potential costs to construct an LNG facility under this tariff
could range from $25 million to over $100 million.
The utility stated that it would evaluate each potential customer’s credit
worthiness prior to initiating an agreement under the tariff. Specifically, proposed tariff sheet No. 7.406-1 states that:
The agreement between Company and Customer may require
a commitment by the Customer to purchase LNG Service for a minimum period of
time, to take or pay for a minimum amount of LNG Service, to make a contribution
in aid of construction, to furnish a guarantee, such as a surety bond, letter
of credit, other means of establishing credit, and/or to comply with other
provisions as determined appropriate by the Company.
In addition, Peoples stated that the contract agreements
under the proposed LNG tariff would be required to comply with the utility’s
Corporate Governance policy. This policy requires that contracts of a certain
amount be reviewed and authorized by differing levels of senior management prior
to execution. For the contract to be authorized by Peoples’ governance body,
the customer must have demonstrated that it meets or exceeds a level of credit
worthiness. Peoples stated that this step would help ensure that a customer
taking service under this tariff should have the long-term financial stability
to meet its obligations under the LNG service agreement. Peoples does not
intend to bring individual LNG contracts before the Commission for approval.
Comments
filed by Eagle LNG and Peoples’ Response
On July 31, 2020, Eagle LNG
submitted a letter to the Commission requesting that the Commission deny
Peoples’ proposed LNG tariff. Eagle LNG asserts four reasons as to why the
Commission should deny the proposed tariff. First, Eagle LNG states that the LNG
market is competitive and Commission regulation is only required when there is
a natural monopoly. Second, approval of the tariff would put the general body
of ratepayers at risk if the LNG customer can not fulfill its obligation under
the contract and ratepayer risk is not justified in a competitive market.
Third, Eagle LNG believes that Peoples should offer LNG services through a
separate, non-regulated, company (i.e., a subsidiary of the corporate parent
Emera). Finally, Eagle LNG believes that approval of the proposed LNG tariff
sends the wrong signal to the competitive LNG market in Florida and puts Eagle
LNG at a competitive disadvantage.
On August 13, 2020, Peoples submitted a letter to the
Commission in response. First, Peoples asserts that the proposed tariff does
not require Commission oversight of the LNG market; rather the LNG tariff is a
natural extension of Peoples’ natural gas business. Second, Peoples states that
the LNG tariff would not put ratepayers at risk as Peoples will not be building
speculative facilities, rather the utility will be building specific facilities
to meet a requesting customer’s needs.
Peoples further states it will be contracting with well-capitalized
customers and it is thus extremely unlikely that an LNG customer would default
or declare bankruptcy. Third, Peoples states the proposed LNG tariff will not
cause cross subsidization or regulatory inefficiency. Creating a separate
company for LNG services would create greater inefficiencies and adding
additional customers benefits the general body of ratepayers. Finally, Peoples
asserts that the proposed LNG tariff would provide another LNG option to
potential customers, increasing competition.
Similar
Tariff Concepts
Peoples
believes that the Commission has previously approved tariffs for Peoples that
are similar in concept. The Commission first approved Peoples’ Natural Gas
Vehicle Service (NGVS) tariffs in 1992 and
more recently modified the NGVS tariff in 2017. The
NGVS tariffs provide options for Peoples to install and maintain private or
public fueling stations for compressed natural gas customers while allowing
Peoples to recover its cost of providing these services. The monthly services
charge calculation methodology under this tariff is 1.6 times the utility’s
gross investment in the facilities. Similar to the LNG market, the provision of
fueling stations for compressed natural gas customers is a competitive market.
In 2017,
the Commission approved a tariff to accommodate the receipt of renewable
natural gas (RNG) on Peoples’ distribution system. The
RNG tariff allows Peoples to recover from biogas producers the cost of
upgrading the biogas and does not contain standard charges, as the services
provided varies based on the steps needed to upgrade the biogas to RNG. The
monthly services charge is equal to a mutually agreed upon percentage (between
Peoples and the biogas producer) multiplied by Peoples’ gross investment in the
facilities necessary to provide biogas upgrading services.
Impact
on General Body of Ratepayers
Peoples
asserted that all costs associated with building and operating an LNG facility
under this tariff would be borne by the end-use customers and would have no
impact on the general body of ratepayers. The utility stated in response to
staff’s second data request that the assets, revenue, and expenses associated
with this tariff would be included as part of its rate base surveillance
reports; however, the utility stated that the LNG monthly services charge
received from the LNG customer would offset the revenue requirements for these
facilities.
In
response to OPC’s interrogatory No. 4, the utility stated that in the unlikely
event that unforeseen “risks impact an LNG investment based on the proposed
tariff any application of cost to the general body of rate payers would have to
be sought through a general base rate increase proceeding and approved by the
Public Service Commission.”
Based on this response, and discussions during the informal meetings, Peoples
could consider seeking cost recovery for any remaining costs of an LNG facility
from its general body of ratepayers should a customer default on an LNG
contract. Peoples believes that the likelihood of such an event to be very
remote. Additionally, if Peoples were to
seek cost recovery from the general body of ratepayers for an LNG facility, the
Commission would evaluate the prudency of Peoples’ decision to enter into the
contract and any impacts, including costs and benefits, to the general body of
ratepayers.
An additional impact on the general body of ratepayers under this tariff
could be potential technical and administrative personnel costs associated with
implementing the tariff. Peoples stated in response to staff’s second data
request that the utility does not anticipate incurring significant upfront
costs to implement this tariff. The utility does anticipate hiring technical
and administrative support in order to respond to customer requests for LNG
services and will incorporate this program into its existing pipeline, compressed
natural gas, and renewable natural gas development team. The utility stated
that the additional staffing cost would be subject to review by the Commission
as part of a future base rate proceeding.
Under this tariff, the utility would actively participate in Requests for
Proposals by companies interested in obtaining LNG services. This process will
require Peoples to place resources towards bidding for, and potentially
negotiating, an LNG services contract. In response to staff’s data request, the
utility stated that it does not anticipate requesting recovery from its general
body of ratepayers of any costs incurred as a result of an LNG bid or contract negotiations
that does not result in a constructed facility.
With respect to the Commission’s Purchased Gas Adjustment (PGA) clause,
Peoples asserted in response to OPC’s interrogatory No. 2 that the proposed LNG
tariff is not contemplated to have any impact on the PGA costs for the general
body of ratepayers. Peoples explained that an LNG customer will procure its own
natural gas supply and, therefore, will not be included as a PGA customer.
Staff is recommending approval of the petition based, in part, on
Peoples’ assertion that it will implement a reasonable process to evaluate the
credit worthiness of a potential customer and the utility’s internal risk
assessment policies. Based on this process, the utility does not anticipate any
cost impact on the general body of ratepayers. Nonetheless, staff does
recognize that, if approved, the Commission may be asked to evaluate cost
recovery for any tariff default or under-recovery in a future rate petition. If
this occurs, the utility should be put on notice that, as part of its review,
the Commission will complete a thorough analysis of the utility’s due diligence
in entering into the contract, including the sufficiency of contract provisions
designed to protect the general body of ratepayers.
Potential Benefit to the General Body of
Ratepayers
Peoples stated that the proposed tariff would provide a benefit to the
general body of ratepayers. The utility
stated that potential customers under this tariff would increase the volume of
gas on the existing distribution system. The utility stated this should result
in lower overall costs to Peoples’ general body of ratepayers through economies
of scale, by spreading fixed costs across a larger customer base. Peoples noted
that customers receive the same benefit through its existing NGVS tariff.
In addition, Peoples stated that LNG has been used as a viable option by
natural gas utilities to meet peak customer demand. While not currently
planned, the utility highlighted that there could be a potential scenario in
which Peoples could expand its supply portfolio for diversity and reliability
using LNG by partnering with a customer under this tariff, potentially taking
advantage of economies of scale. If this scenario were to arise, the utility
stated that the capacity or reliability needs that benefit the general body of
ratepayers would require recovery through a general base rate proceeding.
Conclusion
Staff has reviewed Peoples’ proposed LNG tariff, the utility’s
responses to staff’s and OPC’s data and discovery requests, and the letter
submitted by Eagle LNG and Peoples’ response. Staff believes that Peoples’
proposed LNG service would fall under the activities of a public utility, as
contemplated under Section 366.02(1), F.S., and the Commission may exercise
jurisdiction over Peoples’ rates and service in this area, pursuant to Section
366.04, F.S. Based on this interpretation, the Commission would also have
jurisdiction over this matter pursuant to Sections 366.03, 366.05, and 366.06,
F.S.
Staff recognizes that, if approved, the Commission may be
asked to evaluate cost recovery for any tariff default or under-recovery in a
future rate petition. If this occurs, the utility should be put on notice that,
as part of its review, the Commission will complete a thorough analysis of the
utility’s due diligence in entering into the contract, including the
sufficiency of contract provisions designed to protect the general body of
ratepayers.
Staff recommends approval of Peoples’ proposed LNG tariff,
as shown in Attachment A, effective with the issuance of the final Order in
this docket. The LNG tariff would provide Peoples with an opportunity to
provide LNG services to interested customers and the utility has demonstrated a
reasonable approach to implementing the tariff. A participating customer would
enter into a contract with Peoples and all capital and operating costs
associated with the LNG facility should be borne by the customer over the life
of the contract.
Issue 2:
Should this docket be closed?
Recommendation:
If no protest is filed by a substantially affected
person within 21 days of the issuance of the order, a consummating order should
be issued and the docket should be closed. (Schrader)
Staff Analysis:
If no protest is filed by a substantially affected
person within 21 days of the issuance of the order, a consummating order should
be issued and the docket should be closed.
