Case Background
On March 16,
2020, Peoples Gas System (Peoples or utility) filed a petition (original 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 applications. The original petition would have allowed the utility to
build facilities to convert natural gas into liquid form (liquefaction), provide
necessary LNG storage, and allow for the regasification of the LNG on the
customer’s behalf.
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 on the
original petition. 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 as presented in the original
petition. 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.
The staff
recommendation on Peoples’ original petition was presented at the September 1,
2020 Agenda Conference. During the Agenda Conference, several Commissioners,
OPC, and Eagle LNG expressed concerns about the proposed tariff’s potential
risk to the general body of ratepayers. In addition, Eagle LNG stated that it
believed there are potential competitive market concerns with the proposal. The
Chairman deferred the item to allow Peoples additional time to evaluate
revisions to its petition and proposed tariff in response to the discussion and
comments made at the September 1, 2020 Agenda Conference.
On February 2,
2021, Peoples filed a letter in the docket notifying the Commission that the
utility waived the 12-month deadline
for final Commission action, per Section 366.06(3), F.S.
On February 22,
2021, Peoples filed a modification (modified filing) to its original petition
and an amended tariff sheet that the utility believes addresses the questions
and concerns raised at the September 2020 Agenda Conference. In its modified filing,
the utility states it will no longer offer liquefaction service under the
amended tariff, rather the tariff would only allow for the storage and
regasification of LNG. Peoples stated in its modified filing that the amended
tariff should reduce the average cost to provide LNG service by approximately
40 to 60 percent from the original petition. On March 24, 2021, staff issued
its third data request regarding the modified filing, for which responses were
received from the utility on April 8, 2021. On May 14, 2021, Peoples filed an
additional amendment to its LNG tariff to include a provision regarding
ratepayer protections.
This
recommendation addresses the modified filing and amended tariff. The amended
tariff, as filed by Peoples on May 14, 2021, is included as Attachment A of the
recommendation. For clarity, Attachment B shows in legislative format the
revisions from the tariff as filed with the original petition and the tariff
filed on May 14, 2021.
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’ amended proposed
LNG tariff?
Recommendation:
Yes. Staff recommends that the Commission should
approve Peoples’ amended proposed LNG tariff, as shown in Attachment A,
effective on June 15, 2021. The LNG tariff would provide Peoples with an
opportunity to provide storage and regasification 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 would be
borne by the customer. If Peoples petitions the Commission to evaluate cost
recovery for any tariff default or under-recovery in a future rate petition,
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. (Coston, Ward)
Staff Analysis:
In its original 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 oxide
(SOx) 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 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.
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.
Peoples’ original petition is the first request by a
Florida investor-owned natural gas company for an LNG tariff. The operators currently
providing LNG services in Florida are not subject to the Commission’s
jurisdiction. Peoples seeks to include certain LNG service under its regulated
tariff, rather than through an unregulated subsidiary, because the utility
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 certain LNG service.
Proposed
Amended Liquified Natural Gas Tariff
Under Peoples’ proposed amended tariff, a participating
customer would pay a monthly LNG services charge specific to that customer,
which would be calculated based on Peoples’ gross investment in the storage and
regasification 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 stated in its modified filing that the services offered
under this tariff would be limited to LNG storage and regasification. This is a
significant change from the original petition, which also included the option
to provide liquefaction facilities.
As outlined in the amended tariff, Peoples would enter
into an agreement with the customer to construct an LNG facility to store and
re-gasify LNG. 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, as shown in Attachment A to the
recommendation, provides a listing of specific equipment that could be
necessary for the construction of an LNG facility.
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’ originally-proposed LNG tariff. Eagle LNG asserted four reasons as to
why the Commission should deny the original petition. Eagle LNG stated 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 believed that Peoples should offer LNG services through a
separate, non-regulated, company (i.e., a subsidiary of the corporate parent
Emera). Finally, Eagle LNG believed that approval of the originally-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 asserted that the originally-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
stated 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
stated it will be contracting with well-capitalized customers and it is thus
extremely unlikely that a LNG customer would default or declare bankruptcy.
Third, Peoples stated the originally-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 asserted that the
proposed LNG tariff would provide another LNG option to potential customers,
increasing competition.
At the September 1, 2020 Agenda Conference addressing the
original petition, Eagle addressed the Commission stating their objection to Peoples’
proposal. In Peoples’ modified filing, the utility stated that it had
discussions with Eagle addressing its concerns. Peoples stated that these
discussions resulted in the utility removing the liquefaction services from its
proposed amended tariff to address Eagles’ concerns. Specifically, this change
would require a customer to obtain liquefaction services from a separate
provider prior to Peoples storing, and potentially, re-gasifying the LNG for
the customer. The utility stated that while the amended tariff does not offer
liquefaction, its ability to provide storage and regasification would still
offer additional options to customers and the LNG market in Florida.
Similar
Tariff Concepts
The
utility 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 vary 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.
In January
2021, the Commission approved a comparable RNG tariff for Florida City Gas.
This tariff is designed similar to Peoples’ RNG tariff in that it includes a
monthly services charge to recover all investment costs from the biogas
customer.
Impact
on General Body of Ratepayers
Peoples
asserted in its modified filing that the LNG tariff is designed such that the
capital investment, operational expenses, and its return on investment are
borne by the LNG customer, via a negotiated contract. In response to staff’s
third data request, the utility modified its amended tariff on May 14, 2021, to
incorporate language emphasizing that the tariff would not cause any additional
costs to non-participants. In
addition, the utility stated 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 fully offset the revenue requirements for
these facilities.
Project Costs
Under the original petition, which allowed for the
liquefaction of natural gas, Peoples stated that the potential costs to construct
an LNG facility could range from $25 million to over $100 million.
Under the amended tariff, which only allows for storage and regasification of
LNG, the utility states that a typical facility would cost between $5 million
and $35 million. This represents a reduction of approximately 40 to 60 percent
from the original petition request.
Peoples stated in its response to staff’s third data request that the removal
of liquefaction facilities from the tariff “reduces the magnitude of risk to
the Company and its ratepayers.”
Corporate Review
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.
Ratepayer Risk
Peoples
stated in its modified filing that while it believes a customer default under the
LNG tariff is unlikely, it would pursue the appropriate legal options to
resolve and recover any outstanding costs as a result of a contract default. In
addition, the utility stated that the physical assets would be owned by the
utility and would have value and the potential for repurposing if a default
occurs. Further, Peoples stated in its modified filing that prior to any
unrecovered costs being included in rate base, the utility would need to
request, and receive, approval from the Commission.
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 amended tariff, based in part based
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. Staff notes that PGS has added
language to the amended proposed tariff clarifying that non-participants would
not incur any additional costs as a result of the tariff. In addition, the
amended proposed tariff removes approximately half of the capital investment
required to construct and operate these facilities, as compared to the original
petition and tariff.
Nonetheless, staff does recognize that, if approved, the Commission may
be asked to evaluate cost recovery for any contract default that results from
the proposed tariff or any 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 amended 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 amended LNG tariff
language, 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 while Peoples’ modified filing
reduces the costs of any projects, 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 amended LNG
tariff, as shown in Attachment A, effective on June 15, 2021. The LNG tariff
would provide Peoples with an opportunity to provide LNG storage and
regasification 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 would be borne by the customer over the
life of the contract.
Issue 2:
Should this docket be closed?
Recommendation:
Yes. If Issue 1 is approved and a protest is
filed within 21 days of the issuance of the order, the tariffs should remain in
effect, with any revenues held subject to refund, pending resolution of the
protest. If no timely protest is filed,
this docket should be closed upon the issuance of a consummating order.
(Trierweiler)
Staff Analysis:
If Issue 1 is approved and a protest is filed within 21
days of the issuance of the order, the tariffs should remain in effect, with
any revenues held subject to refund, pending resolution of the protest. If no timely protest is filed, this docket
should be closed upon the issuance of a consummating order.
