BEFORE THEPENNSYLVANIA PUBLIC UTILITY COMMISSION

Pennsylvania Public Utility Commission : R-2014-2399598Office of Consumer Advocate : C-2014-2402983Office of Small Business Advocate : C-2014-2405372

:v. :

:Peoples TWP LLC :

RECOMMENDED DECISION

BeforeJeffrey A. Watson

Administrative Law Judge

TABLE OF CONTENTS

I. HISTORY OF THE PROCEEDING...................................................................................1

A. The Filings and Procedural History.........................................................................1

B. Prehearing Conference.............................................................................................3

C. Interim Order Suspending, In Part, Litigation Schedule..........................................4

D. The Evidentiary Hearing..........................................................................................4

E. Settlement Petition Filing and the Record...............................................................5

II. TERMS OF THE SETTLEMENT......................................................................................5

A. General Terms..........................................................................................................5

B. Historical Reconciliation Period and Standards......................................................8

C. Interim and Projected Period Findings....................................................................9

D. Conditions of Settlement and Reservation of Rights.............................................10

III. FINDINGS OF FACT.......................................................................................................11

IV. DISCUSSION....................................................................................................................16

A. Applicable Legal Principles...................................................................................16

B. Statements of the Parties in Support of the Settlement..........................................16

1. Peoples TWP’s Position.............................................................................17

a. Design Day.....................................................................................17

b. Extra Demand Factors....................................................................20

c. Balancing Service Fees..................................................................21

d. Retainage........................................................................................22

e. Off-System Sales and Capacity Release Sharing Mechanism.......24

f. Local Gas Pricing Changes............................................................24

g. Permanent Release of Certain Local Gas.......................................26

2. I&E’s Position............................................................................................29

a. Purchased Gas Costs......................................................................30

b. Retainage Rate...............................................................................30

c. Off-System Sales...........................................................................32

d. XTO Purchase Agreements............................................................33

3. OCA’s Position..........................................................................................33

a. Design Day Forecast Methodology...............................................34

b. Repricing and Release of Certain Low Flow Vintage Gas Contracts........................................................................................37

4. OSBA’s Position........................................................................................38

a. Summary of OSBA’s Principal Concerns......................................38

b. Settlement......................................................................................38

5. XTO Energy’s Position..............................................................................40

C. Summary................................................................................................................42

V. CONCLUSIONS OF LAW...............................................................................................45

VI. RECOMMENDED ORDER..............................................................................................47

ii

This decision recommends approval of the Joint Settlement of All Issues of the

Rate Investigation Pursuant to 66 Pa.C.S. § 1307(f)1 (Joint Petition, Joint Settlement Petition,

Settlement Petition or Settlement) submitted in this proceeding by Peoples TWP LLC (Peoples

TWP, PTWP, or Company), the Office of Consumer Advocate (OCA), the Office of Small

Business Advocate (OSBA), the Bureau of Investigation and Enforcement (I&E) of the

Pennsylvania Public Utility Commission and XTO Energy Inc. (XTO or XTO Energy)2

(hereinafter, collectively referred to as the Parties or the Settling Parties).

I. HISTORY OF THE PROCEEDING

A. The Filings and Procedural History

Peoples TWP is a limited liability company formed under the laws of the

Commonwealth of Pennsylvania for the purpose of providing natural gas transmission,

distribution, and supplier of last resort services subject to the Commission’s regulatory

jurisdiction. Peoples TWP is an affiliate of Peoples Natural Gas Company LLC (Peoples). Joint

Petition, p. 2.

Peoples TWP is a “public utility” and a “natural gas distribution company” as

those terms are defined in Sections 102 and 2202, 66 Pa.C.S. §§ 102, 2202. Peoples TWP

provides retail natural gas sales and transportation services to approximately 60,300 customers

throughout its service territory, which includes all or portions of the following Pennsylvania

counties: Allegheny, Armstrong, Beaver, Butler, Cambria, Clarion, Clearfield, Indiana,

Jefferson, and Westmoreland. Joint Petition, p. 2.

Because Peoples TWP’s annual operating revenues, derived from providing gas

service to customers in Pennsylvania, exceed $40 million, Peoples TWP’s recovery of purchased

1 There is a typographical error in the title of the pleading, which omits the words, “Petition For;” however, the words are included in the text of the pleading and are included in this Recommended Decision for consistency.

2 Pennsylvania Independent Oil & Gas Association (PIOGA), an intervenor and the only other party in this proceeding, has indicated that it does not oppose the Settlement. PIOGA’s letter of non-opposition is affixed as Attachment G to the Settlement.

gas costs is governed by Section 1307(f) of the Public Utility Code, 66 Pa.C.S. § 1307(f), and the

Commission’s regulations at 52 Pa.Code §§ 53.61-53.65 and 53.68. Joint Petition, p. 2.

On December 31, 2013, Peoples TWP submitted to the Commission, as required

under 52 Pa.Code §§ 53.64 and 53.65, pre-filing data in support of a tariff supplement proposing

changes in rates for recovery of purchased gas costs (PGC). The supporting data explained

Peoples TWP’s gas procurement practices and the basis for projections of the cost of purchased

gas for the twelve-month period ending July 31, 2015. That pre-filing data reflected a projected

decrease in the purchased gas rate applicable to residential retail service customers of

$0.0402/Mcf, based upon the November 1, 2013 purchased gas rates in effect as of the time of

the pre-filing, as well as changes in the purchased gas rates for other customer classifications.

Joint Petition, p. 2. On January 31, 2014, Peoples TWP filed with the Commission a proposed

supplement to Tariff Gas – Pa. P.U.C. No. 8 or required by Section 1307(f) to provide for

projected changes in tariff rates resulting in its rates for recovery of PGC. Concurrent with the

filing of the Proposed Supplement, Peoples TWP filed the remainder of its direct case, consisting

of prepared statements covering Peoples TWP’s gas procurement policy and the computation of

purchased gas rates contained in the Proposed Supplement. Peoples TWP proposed that the new

rates become effective on August 1, 2014.

The Commission’s Bureau of Investigation and Enforcement entered its

appearance in this proceeding on January 23, 2014. The Office of Consumer Advocate filed a

formal complaint to this filing on January 28, 2014, at Docket No. C-2014-2402983 and the

Office of Small Business Advocate filed a formal complaint to this filing on January 27, 2014 at

Docket No. C-2014-2405372.

On February 25, 2014, a Petition To Intervene Of The Pennsylvania Independent

Oil & Gas Association (PIOGA) was filed and served upon the Parties to this proceeding. No

answer or objection was filed by any party. Accordingly, the Petition was granted by Order

dated March 31, 2014.

2

Formal discovery requests have been propounded by the Parties and Peoples TWP

has provided responses. The Parties also exchanged information through informal discovery.

On March 5, 2014, Peoples TWP submitted supplemental direct testimony. On

March 5, 2014, I&E, OCA, and OSBA each submitted direct testimony.3 On March 25, 2014,

Peoples TWP submitted second supplemental direct testimony. On March 26, 2014, Peoples

TWP submitted rebuttal testimony.

On March 31, 2014, the ALJ issued an Interim Order granting PIOGA’s Petition

to Intervene.

B. Prehearing Conference

By Prehearing Conference Order dated February 3, 2014, Peoples TWP, OCA,

OSBA, I&E and XTO Energy were notified that the proceeding was assigned to the undersigned

ALJ for a telephonic Prehearing Conference conducted from the Commission’s Pittsburgh

Hearing Room on February 12, 2014. In accordance with the regulations pertaining to

prehearing conferences, 52 Pa.Code §§ 5.221-5.224, the Parties were directed to file their

prehearing memorandums prior to the Prehearing Conference. The Prehearing Conference

proceeded as scheduled on February 12, 2014. Counsel for the Company, XTO Energy, and the

statutory parties participated in the Prehearing Conference, which resulted in the establishment

of a litigation schedule.

On February 20, 2014, a Prehearing Order Setting Litigation Schedule And

Consolidating Complaints was issued. The Formal Complaints of OCA at Docket No.

C-2014-2402983 and OSBA at Docket No. C-2014-2405372 were consolidated with Peoples

TWP’s Purchased Gas Costs (PGC) filing pursuant to 66 Pa.C.S. § 1307(f) at Docket

No. R-2014-2399598. In addition, the Petition to Intervene filed by XTO Energy Inc. on

February 4, 2014 was granted, without objection from any party.

3 PIOGA served direct testimony on March 5, 2014, but subsequently withdrew the testimony on March 13, 2014.

3

C. Interim Order Suspending, In Part, Litigation Schedule

In accordance with the Commission’s Rules of Practice and Procedure (52 Pa.

Code § 5.231), the Parties engaged in numerous settlement discussions in an effort to achieve a

full settlement. Having reached a settlement in principle, on April 1, 2014, via email, the

Settling Parties requested that the undersigned ALJ suspend the litigation schedule. As a result,

the undersigned ALJ issued an Interim Order suspending, in part, the litigation schedule in this

proceeding. The Interim Order modified the litigation schedule set forth in the February 20,

2014 Prehearing Order by suspending the due dates for the filing of surrebuttal testimony;

scheduled a telephonic technical evidentiary hearing on April 10, 2014; and required the

submission of a finalized Settlement Petition executed by representatives of the Settling Parties,

together with their respective Statements in Support of Settlement by May 2, 2014.

D. The Evidentiary Hearing

The April 10, 2014 evidentiary hearing was conducted telephonically in order to

admit testimony and exhibits into the record, with the presiding ALJ sitting in Pittsburgh and

counsel for Peoples TWP, I&E, OSBA, XTO Energy, PIOGA and OCA in the Commission’s

Hearing Room 5 in Harrisburg, Pennsylvania.

Counsel for Peoples TWP, I&E, OCA and OSBA offered for admission into the

record Statements and Exhibits, together with respective verifications, which were admitted into

the record, without objection.

Counsel at the hearing agreed to the submission of a Joint Petition For Settlement

by May 2, 2014, and to provide information to support the necessary statutory findings required

under Section 1307(f). Tr. 20-21.

4

E. Settlement Petition Filing and the Record

On May 2, 2014, Peoples TWP, the statutory parties, OCA, OSBA, and I&E, and

XTO Energy filed with the Secretary’s Bureau for the undersigned ALJ’s recommendation and

Commission’s approval their Joint Settlement of All Issues of the Rate Investigation Pursuant to

66 Pa.C.S. § 1307(f), proposing a full settlement of this case, together with their respective

Supporting Statements. The Settling Parties represent they are in full agreement that the

Settlement is in the best interest of Peoples TWP’s customers. They request approval of the

Settlement without modification and that OCA’s and OSBA’s complaints be marked closed.

Counsel for Peoples TWP attached a Certificate of Service to the Settlement Petition, certifying

that the Parties were duly served with a copy of the Settlement Petition on May 2, 2014.

The record in this proceeding consists of the transcripts of the Prehearing

Conference on February 12, 2014 and the April 10, 2014 evidentiary hearing, the aforementioned

testimony and documents admitted into the record, orders issued herein, the Formal Complaints

filed by OCA and OSBA, and the Joint Settlement of All Issues of the Rate Investigation

Pursuant to 66 Pa.C.S. § 1307(f) with appendices. On May 7, 2014, the undersigned ALJ issued

an order closing the record. See Interim Order Admitting Settlement Petition and Statements in

Support and Closing the Record, entered May 8, 2014.

II. TERMS OF THE SETTLEMENT

The Settling Parties agree upon the following:

A. General Terms

1. Peoples TWP agrees to further evaluate design day requirements,

specifically incorporating data from Winter 2013-2014 in the statistical analysis, and evaluating

the appropriateness of the following factors:

Use of matched (calendar or gas day) sendout and weather data or other appropriate adjustments;

5

Continued use of a quadratic Heating Degree Day (HDD) term;

Use of a trend variable;

Use of a weekday variable (or variables);

Examination of the possible causes (and solutions) for autocorrelation; and

Restricting statistical analysis to use of winter-only or high HDD days.

The Company agreed to provide an update on its evaluation as part of the 2015

PGC filing. Joint Petition, p. 5.

2. The extra demand factors applicable for the 2014 PGC Application

Period will be as set forth in Attachment A to the Settlement Petition. These factors are

based upon extra demand allocation factors derived from design day and average day

usage of customer classifications, adjusted for new and lost large volume customers. The

Parties’ acceptance of this methodology is limited to this proceeding, and may not be

used to constrain any Party’s rights to offer alternative proposals for development of

extra demand factors in future base rate or Section 1307(f) proceedings. Joint Petition, p.

5.

3. The Company shall be permitted to continue to recover shortfalls

from customers with discounted retainage rates through higher PGC charges on sales

customers and increased retainage rates on regular rate transportation customers in the

2014-2015 PGC year. Effective July 1, 2014, the tariffed retainage rate for Small

Volume transportation customers (Rate Schedules RS-T, SGS-T and MGS-T) shall be

5.0%, and the tariffed retainage rate for Large Volume transportation customers (Rate

Schedules LGS-T and FTS) shall be 3.4%. The Company has agreed that it will use its

best efforts to avoid entering into any new customer agreements, or to extending any

existing customer agreements, with retainage rates that are discounted below 2.4 percent

for LGS customers and 4.2 percent for non-LGS customers. The Company further

agreed to provide a justification for any new or extended agreements entered into during

6

calendar year 2014 with retainage rates discounted below those levels, in its next Section

1307(f) filing. Joint Petition, pp. 5-6.

4. The Company’s proposal for repricing and ultimate release of

certain low flow vintage gas contracts is approved. Joint Petition, p. 6.

5. The Company’s proposal to adopt an off-system sales sharing

mechanism, in addition to its current capacity release sharing mechanism, is approved.

Under the mechanism, 75% of net proceeds will be provided to customers and 25% of net

proceeds will be retained by the Company. Joint Petition, p. 6.

6. The Company will be permitted to continue to credit toward

recovery of PGC demand costs the actual amounts charged to transportation customers

under discounted and full-tariff load balancing rates for the 2014-2015 PGC year. The

Company further has agreed that it will use its best efforts to avoid entering into any new

customer agreements, or extending any existing customer agreements, with discounted

load balancing rates. The Company agrees to provide a justification for any new or

extended agreements with discounted load balancing rates entered into during calendar

year 2014 in its next Section 1307(f) filing. Joint Petition, p. 6.

7. The Company’s proposal for repricing gas purchased under its

standard local purchase contracts, as described in the Supplemental Direct Testimony of

Company witness Wachter, is approved. Joint Petition, p. 6.

8. Effective January 1, 2015, the Company will permanently release

from dedication to Peoples TWP all local gas under current gas purchase agreements with

XTO that contain a dedication provision. Such release will be done in lieu of the ongoing

monthly or annual releases from dedication to Peoples TWP that were historically done

in order to make gas supplies available for Peoples TWP’s transportation customers. The

Company shall enter into a new gas purchase agreement to be effective January 1, 2015,

7

that will provide the Company with the unilateral option to purchase gas from XTO as

follows:

a) Peoples TWP shall have the option but not the obligation to purchase from XTO each month a fixed daily quantity of gas at the Inside FERC, Dominion Transmission, Inc. Appalachia Index first of the month price, such option to be exercised on the day before the start of bidweek as defined by Platts. The fixed quantity available for purchase shall be up to the total daily quantity of gas that is produced by XTO into Peoples TWP’s system but not purchased by a licensed natural gas supplier (“NGS”) on the Peoples TWP system; and

b) Peoples TWP shall have the option but not the obligation to purchase during any calendar month a variable daily quantity of gas at the Gas Daily Midpoint Appalachia Dominion, South Point Index daily price, such option to be exercised on or before 8:00 a.m. eastern time of the day preceding the gas delivery day. The variable quantity available for purchase shall be up to the total daily quantity of gas that is produced by XTO into Peoples TWP’s system but not purchased by a NGS on the Peoples TWP system and less any quantities purchased under a), above.

Peoples TWP and XTO have agreed to enter into a seven-year agreement with

these terms along with an agreement to negotiate in good faith at the end of the term an extension

along similar terms and conditions. Joint Petition, pp. 7-8.

B. Historical Reconciliation Period and Standards

1. With respect to Peoples TWP’s gas purchases and gas purchasing

practices during the twelve-month historical reconciliation period ended November 30, 2013,4

the Settling Parties have requested that the ALJ and the Commission find that Peoples TWP has

met the standards of Section 1318 of the Public Utility Code, 66 Pa.C.S. § 1318, as required by

Section 1307(f)(5) of the Public Utility Code, 66 Pa.C.S. § 1307(f)(5), as to all actual purchased

4 The reconciliation period for Peoples TWP in this proceeding is the twelve-month period ended November 30, 2013, in accordance with the Commission’s regulations at 52 Pa.Code § 53.64(i)(1).

8

gas costs in the historical period. The Settling Parties have further requested that the

Commission find that, during the twelve months ended November 30, 2013:

a. Peoples TWP met the requirements of Section 1318(a) of the Public Utility Code by pursuing a least-cost fuel procurement policy, consistent with its obligation to provide safe, adequate and reliable service to its customers; and

b. All gas purchases by Peoples TWP from entities that are considered an affiliated interest have met the requirements of Section 1318(b) of the Public Utility Code relating to purchases from and services provided by entities that are considered affiliates. Joint Petition, p. 14.

C. Interim and Projected Period Findings

1. During the eight-month interim period beginning on December 1, 2013,

and the projected twelve-month period beginning August 1, 2014, when rates contained in the

Settlement will be in effect, the Settling Parties have requested that the Commission find, based

upon information presently available and based upon evidence of record in this proceeding

concerning Peoples TWP’s projected purchases and purchasing policies, that the rates to be

adopted by the Commission result from Peoples TWP’s compliance with the provisions of

Section 1318 of the Public Utility Code, including Sections 1318(a)(1), 1318(a)(2), 1318(a)(3),

1318(a)(4), 1318(b)(1), 1318(b)(2) and 1318(b)(3). 66 Pa.C.S. §§ 1318(a)(1), 1318(a)(2),

1318(a)(3), 1318(a)(4), 1318(b)(1), 1318(b)(2) and 1318(b)(3).

2. The Settling Parties have agreed, based upon evidence of record in this

proceeding concerning Peoples TWP’s projected gas purchases and gas purchasing policies, that

Peoples TWP’s projected gas purchases and projected gas purchasing policies may comply with

the standards of Section 1318 of the Public Utility Code. Nevertheless, it is expressly

understood and agreed by the Settling Parties that Section IV.B. of the Settlement is made solely

for the purpose of setting prospective rates that shall be subject to the standards of Section 1318

of the Public Utility Code, 66 Pa.C.S. § 1318, and to further review in an appropriate future

9

proceeding. Section IV.B. of the Settlement is not intended in any way to limit or prevent I&E,

OCA or OSBA from reviewing, after such projected gas purchases actually have been made and

gas purchasing practices actually have been implemented, whether Peoples TWP’s gas purchases

and gas purchasing practices complied with Section 1318. If, in an appropriate future

proceeding, gas purchases and gas purchasing practices from December 1, 2013 through July 31,

2015 were challenged, the Settling Parties have agreed that the Commission’s findings based

upon Section IV of the Settlement shall not bar the examination of such purchases and practices

including, but not limited to, disallowance of, or reductions to, such costs during the eight-month

interim period commencing December 1, 2013, and the twelve-month application period

commencing August 1, 2014, and ending on July 31, 2015. Joint Petition, p. 15.

D. Conditions of Settlement and Reservation of Rights

1. The Settling Parties have acknowledged and agreed that this Settlement

shall have the same force and effect as if the Parties had fully litigated this proceeding with

regard to the historic period ended November 30, 2013. Joint Petition, p. 16. 2. The Settling Parties have agreed that the Settlement is conditioned upon

the Commission’s approval of terms and conditions contained in the Joint Petition, without

modification. If the Commission modifies or fails to approve the Settlement reached by the

Settling Parties, any party may elect to withdraw from the Settlement and may proceed with

litigation; and in such event, the Settlement shall be void and of no effect. Such election to

withdraw must be made in writing, filed with the Secretary of the Commission and served upon

all Parties within five (5) business days after the entry of an order modifying the Settlement.

Joint Petition, p. 16.

3. The Settling Parties have agreed that if the Commission does not approve

the Settlement and the proceedings continue to hearings on the issues that are the subject of this

Settlement, the Parties reserve their respective rights to present additional testimony and to

conduct full cross-examination, briefing and argument on these subjects. Joint Petition, p. 16.

10

4. The Settling Parties have agreed that the Commission’s approval of this

Settlement shall not be construed to represent approval of any Party’s position on any issue,

except to the extent required to effectuate the terms and agreements of this Settlement in this and

future proceedings involving Peoples TWP. It is understood and agreed among the Settling

Parties that the Settlement is the result of compromise, and does not necessarily represent the

position(s) that would be advanced by any Party if this proceeding were fully litigated. Joint

Petition, p. 16.

5. The Settling Parties have agreed that the Settlement is being presented

only in the context of this Section 1307(f) proceeding in an effort to resolve outstanding issues in

a manner which is fair and reasonable. The Settlement is the product of compromise. With the

exception of matters identified in Section II.B. above, with respect to the twelve-month period

ended November 30, 2013, and Section II above, with respect to the twelve-month period

beginning August 1, 2014, the Settlement is presented without prejudice to any position which

any of the Parties may have advanced and without prejudice to the position any of the Parties

may advance in the future on the merits of the issues in future proceedings. Further, the

Settlement does not preclude the Parties from taking other positions in proceedings under

Section 1307(f) concerning the recovery of purchased gas costs by other natural gas distribution

companies. Joint Petition, p. 17.

6. The Settling Parties have agreed that upon acceptance of the Settlement,

the Commission will terminate its inquiry and investigation at Docket No. R-2014-2399598.

Joint Petition, p. 17.

7. Peoples TWP, I&E, OCA, OSBA and XTO have prepared and attached to

the Joint Petition, as Attachments “B” through “F” respectively, Statements of Position setting

forth the basis upon which they believe the Settlement is fair, just and reasonable and is,

therefore, in the public interest. Joint Petition, p. 17.

III. FINDINGS OF FACT

11

In the Joint Petition, the Settling Parties agreed to several proposed findings of

fact with citations to the record of admitted evidence. These proposed findings provide the

information necessary to support the “Findings of Fact” set forth below:

1 Peoples TWP uses the new Peoples Service Company (PSC) to monitor

the rate and related tariff filings of the interstate pipelines serving Peoples TWP, as well as other

important generic Federal Energy Regulatory Commission (FERC) proceedings.5 PSC monitors

the proceedings before FERC on behalf of affiliates Peoples and Peoples TWP, and undertakes

legal action as necessary to protect the interests of the ratepayers of these companies. Peoples

TWP Exhibit No. 1, Filing Response Requirement (FRR) No. 4, p. 15. Joint Petition, p. 8.

2. Through PSC, Peoples TWP monitors Dominion Transmission Inc.

(Dominion), Columbia Gas Transmission Corporation (Columbia Transmission) and Equitrans,

L.P., because the outcome of the FERC proceedings of these interstate pipelines may directly

affect the services that Peoples TWP provides to its customers. PSC also has monitored

proceedings of Tennessee Gas Pipeline Company (TGP) and Texas Eastern Transmission

Corporation (TETCO) for Peoples TWP. However, as of November 1, 2013, all Peoples TWP

capacity agreements with these two pipelines have expired. Peoples TWP Exhibit No. 1, FRR

No. 4, p. 16; Peoples TWP Exhibit No. 1, Filing Response Exhibit (FRE) No. 10. Joint Petition,

pp. 8-9. From time to time, Peoples TWP has intervened in, monitored the progress of and

occasionally submitted written comments in FERC proceedings where it has determined that

such participation could be accomplished in a cost-effective manner. Going forward, PSC

representatives will consider joint interventions and/or comments on behalf of Peoples TWP and

Peoples in proceedings which are cost effective and where it has joint interests. Peoples TWP

Exhibit No. 1, FRR No. 4, pp. 16-17. Joint Petition, pp. 8-9.

3. During 2013, Peoples TWP made purchases from an affiliate, PA Gas

Marketing LLC (PAGM). Purchases from PAGM were made pursuant to Peoples TWP’s

standard form Non-Dedication gas purchase agreement used to cover gas purchases from

unaffiliated Pennsylvania producers. As a result, the purchase price paid to PAGM and the other 5 Peoples TWP asserts PSC’s service offerings and pricing were established pursuant to

Commission-approved affiliated interest agreements. Peoples TWP Statement No. 1, p. 1.

12

terms and conditions of the Company’s gas purchases from PAGM are identical to the purchase

price and terms and conditions under which Peoples TWP purchased gas from non-affiliated

local Pennsylvania producers. Peoples TWP Exhibit No. 1, FRR No. 16, pp. 54-55. Joint

Petition, p. 9. Effective November 14, 2013, PAGM transferred its book of business to an

unaffiliated entity and no longer sells supply to Peoples TWP, as a result of the Commission-

approved transaction that resulted in Peoples merger with Equitable Gas Company. Joint

Application of Peoples Natural Gas Company LLC, Peoples TWP LLC, and Equitable Gas

Company, LLC for All of the Authority and the Necessary Certificates of Public Convenience (1)

to Transfer All of the Issued and Outstanding Limited Liability Company Membership Interest of

Equitable Gas Company, LLC to PNG Companies LLC, (2) to Merge Equitable Gas Company,

LLC with Peoples Natural Gas Company LLC, (3) to Transfer Certain Storage and Transmission

Assets of Peoples Natural Gas Company LLC to Affiliates of EQT Corporation, (4) to Transfer

Certain Assets between Equitable Gas Company, LLC and Affiliates of EQT Corporation, (5) for

Approval of Certain Ownership Changes Associated with the Transaction, (6) for Approval of

Certain Associated Gas Capacity and Supply Agreements, and (7) for Approval of Certain

Changes in the Tariff of Peoples Natural Gas Company LLC, Docket Nos. A-2013-2353647,

A-2013-2353649, and A-2013-2353651 (November 14, 2013). Joint Petition, p. 9.

4. Peoples TWP has a policy of purchasing substantial supplies of natural gas

from local Pennsylvania gas producers for base load supply requirements. Peoples TWP Exhibit

No. 1, FRR No. 1, p. 3. Joint Petition, p. 10.

5. In order to provide safe and reliable gas service during the peak demand

period (i.e., the winter months of November through March) and for the peak day to weather-

sensitive customers, Peoples TWP has acquired interstate firm storage and transportation

capacity. Peoples TWP Statement No. 2, p. 5. Joint Petition, pp. 10-11.

6. Interstate gas storage and transportation services and the availability of

cost-competitive interstate gas supplies are used by Peoples TWP to complement the base load

Pennsylvania gas supplies and satisfy Peoples TWP’s design peak day and peak demand period

13

system supply requirements. Peoples TWP Exhibit No. 1, FRR No. 1, pp. 3-4. Joint Petition,

p. 11.

7. Peoples TWP purchases gas from over 100 local Pennsylvania producers

at over 2,100 receipt points pursuant to several forms of gas purchase agreements. Peoples TWP

Exhibit No. 1, FRR No. 6, p. 36. Joint Petition, p. 13.

8. The Company has implemented a Marcellus Shale policy approved in

PGC-2010. During the Historical Period, the Company accepted gas production, totaling over 4

Bcf, from 16 deep wells drilled into the Marcellus strata adjacent (within one-mile) to the

Company’s large volume pipeline system. Peoples TWP Exhibit No. 1, FRR No. 1, p. 11. Joint

Petition, p. 13.

9. Peoples TWP is a limited liability company formed under the laws of the

Commonwealth of Pennsylvania for the purpose of providing natural gas transmission,

distribution, and supplier of last resort services subject to the Commission’s regulatory

jurisdiction. Peoples TWP is an affiliate of Peoples Natural Gas Company LLC (Peoples). Joint

Petition, p. 2.

10. Peoples TWP is a “public utility” and a “natural gas distribution

company” as those terms are defined in Sections 102 and 2202 of the Public Utility Code, 66

Pa.C.S. §§ 102, 2202. Joint Petition, p. 2.

11. Peoples TWP’s annual operating revenues, derived from providing gas

service to customers in Pennsylvania, exceed $40 million. Joint Petition, p. 2.

12. Peoples TWP is pursuing a least cost fuel procurement policy, consistent

with its obligation to provide safe, adequate and reliable service to its customers. Joint Petition,

p. 14.

14

13. Peoples TWP has taken all prudent steps necessary to negotiate favorable

gas supply contracts and to relieve it from terms in existing contracts with its gas suppliers,

which are or may be adverse to the interests of its ratepayers. Joint Petition, pp. 14-15.

14. Peoples TWP has taken all prudent steps necessary to obtain lower cost

gas supplies on both short-term and long-term bases both within and outside the Commonwealth,

including the use of gas transportation arrangements with pipelines and other distribution

companies. Joint Petition, pp. 14-15.

15. Peoples TWP has not withheld from the market or caused to be withheld

from the market any gas supplies, which should have been utilized as part of a least cost fuel

procurement policy. Joint Petition, pp. 14-15.

16. Peoples has fully and vigorously attempted to obtain less costly gas

supplies on both short-term and long-term bases from non-affiliated interests. Joint Petition, pp.

14-15.

17. Each contract that Peoples TWP held for the purchase of gas from any

affiliated interest is consistent with a least cost fuel procurement policy. Joint Petition, pp. 14-

15.

18. Neither Peoples TWP nor any affiliated interest has withheld from the

market any gas supplies, which it should have utilized as part of a least cost fuel procurement

policy. Joint Petition, pp. 14-15.

19. Peoples TWP has caused the interests of its ratepayers to be fully and

vigorously represented in proceedings before the Federal Energy Regulatory Commission. Joint

Petition, pp. 14-15.

15

IV. DISCUSSION

A. Applicable Legal Principles

The Commission encourages parties in contested on-the-record proceedings to

settle cases. See 52 Pa.Code § 5.231. Settlements eliminate the time, effort and expense of

litigating a matter to its ultimate conclusion, which may entail review of the Commission’s

decision by the appellate courts of Pennsylvania. Such savings benefit not only the individual

parties, but also the Commission and all ratepayers of a utility, who otherwise may have to bear

the financial burden such litigation necessarily imposes.

By definition, a “settlement” reflects a compromise of the parties’ positions and

arguably fosters and promotes the public interest. When parties in a proceeding reach a

settlement, the principal issue for Commission consideration is whether the agreement reached

suits the public interest. Pa. Pub. Util. Comm’n v. C.S. Water and Sewer Associates, 74 Pa. PUC

767 (1991). B. Statements of the Parties in Support of the Settlement

For the Commission’s consideration, the Settling Parties submitted separate

Statements in Support of the Settlement Petition. PIOGA, an intervenor in this proceeding, has

indicated that it does not oppose the Settlement and provided a letter of non-opposition which is

attached to the Settlement as Attachment G. Joint Petition, p. 1. In their supporting statements,

Peoples TWP, I&E, OCA, OSBA and XTO conclude, after extensive discovery and discussion,

that this Settlement resolves all contested issues in this case, it fairly balances the interests of

Peoples TWP and its ratepayers, it is in the public interest and it should be approved. Noting

there is no opposition to the Settlement, the Settling Parties submit two primary reasons why

adoption of this Settlement is in the public interest. The Settlement satisfactorily resolves all

issues raised by the Settling Parties in this proceeding and thereby avoids further litigation

expense. The Settlement establishes purchased gas rates that will be consistent with a least cost

16

fuel procurement policy in accordance with the standards set forth in the Public Utility Code.

Their positions are summarized below.

1. Peoples TWP’s Position

Peoples TWP submits that the Settling Parties have reviewed its purchased gas

costs and purchasing practices and have concluded that both are consistent with the standards set

forth in the Public Utility Code. Several issues were raised by the Settling Parties to the

proceeding and are resolved in the Settlement. In order to accept a settlement, the Commission

must first determine that the proposed terms and conditions are in the public interest. Pa. Pub.

Util. Comm’n v. York Water Co., Docket No. R-00049165 (Order entered Oct. 4, 2004); Pa. Pub.

Util. Comm’n v. C.S. Water and Sewer Associates, 74 Pa. PUC 767 (1991). Therefore, Peoples

TWP asserts the Settlement is in the public interest because of the following.

a. Design Day

The Company explains that natural gas distribution companies (NGDCs) must

arrange for sufficient upstream deliverability capacity, from a combination of local supply

sources, transportation capacity, and storage deliverability capacity, to meet the extreme peak

demands of its customers. Pursuant to the settlement of the Company’s 2013 PGC proceeding at

Docket No. R-2013-2341604, Peoples TWP agreed to perform a comprehensive evaluation of its

design day peak requirement. Peoples TWP Statement No. 1, p. 10. Peoples TWP Statement in

Support, p. 3. Peoples TWP asserts it has refined its methodology for projecting weather

sensitive peak day requirements. Peoples TWP Filing Requirement No. 13. Peoples TWP

Statement in Support, pp. 3-4. Specifically, the Company asserts it made two modifications to

its design day methodology. First, Peoples TWP revised its regression model for heat-sensitive load to now be

based on available daily sendout data,6 rather than customer monthly billing data as had been

6 A portion of the locally-produced supplies delivered to the Company’s system are measured only on a monthly basis, and the Company estimated daily deliveries of this portion. Peoples TWP Statement No. 1, p. 11.

17

used in the past. Peoples TWP Statement No. 1, p. 11. Peoples TWP Statement in Support, pp.

3-4. Daily sendout data is the total daily amount of gas entering the system to serve customer’s

usage requirements. According to the Company, this modification allows the model to better

capture the ‘cause and effect’ relationship between weather and daily requirements that will be

used to determine supply needs under design conditions. Second, the Company now includes a

wind speed variable along with Heating Degree Day variables to determine heat-sensitive usage.

Id. Peoples TWP explains this added variable captures changes in usage associated with changes

in wind speed, thereby improving the Company’s projection of customer usage under design day

conditions. Peoples TWP continues to use 76 heating degree days for calculating its design peak

day system requirements. Peoples TWP Statement No. 1, p. 12. Peoples TWP Statement in

Support, p. 4. As noted by Peoples TWP witness Petrichevich, 76 heating degree days have

occurred twice in the last 31 years in western Pennsylvania, yielding a probability of occurrence

of about 7%. Id. Peoples TWP Statement in Support, pp. 3-4.

Peoples TWP explains that OCA and OSBA noted certain concerns with Peoples

TWP’s design day forecast. Specifically, OCA witness Pereria stated that the Company’s new

forecast methodology was generally reasonable, but suggested that the Company’s forecast

model might overestimate the heating load design day requirements. OCA Statement No. 2, pp.

2-3. Peoples TWP Statement in Support, p. 4. Therefore, Peoples TWP asserts, Dr. Pereira

identified alternative formulations that, if adopted, would lower the Company’s design day

requirement. OCA Statement No. 2, pp. 5-8. Peoples TWP Statement in Support, pp. 4-5.

Further, Dr. Pereira and OCA witness Whitten recommended that Peoples TWP complete

additional review and analysis of the Company’s design day, including an examination of the

level of reserve margin for capacity above projected design day requirements. OCA Statement

No. 2, p. 9; OCA Statement No. 1, p. 13. Peoples TWP Statement in Support, p. 5.

The Company explains that OSBA witness Knecht noted that the Company’s

revised design day methodology, “represents a much more accurate picture of customer loads”

and accepted the Company’s use of 76 heating degree days in developing its design day

requirements. OSBA Statement No. 1, p. 4. Peoples TWP Statement in Support, p. 5. However,

Mr. Knecht also identified several concerns with the Company’s design day model that he

18

believed might overstate design day requirements. OSBA Statement No. 1, pp. 4-5. Peoples

TWP Statement in Support, p. 5.

Peoples TWP explains that witness Petrichevich presented evidence regarding

customer usage during the recent winter, and the “polar vortex” weather event, which supported

the Company’s design day projections. Through March 2014, Peoples TWP had experienced a

13% colder than normal winter. Peoples TWP Statement No. 1-R, p. 2. Peoples TWP Statement

in Support, p. 5. The Company explains that this very cold weather has provided real world data

regarding customer usage in near peak day temperatures, which has not been experienced in a

number of years. Further, Peoples TWP witnesses Petrichevich and Wachter presented evidence

relative to usage on January 7, 2014, when the Company experienced 67 heating degree days in

the Pittsburgh area. Peoples TWP Statement No. 1-R, pp. 2-3; Peoples TWP Statement No. 2-R,

pp. 2-3. Peoples TWP Statement in Support, p. 5. As demonstrated in Peoples TWP Exhibit

LWP-5, and further supported by Peoples TWP Witness Wachter in his rebuttal, the Company

asserts that it flowed an estimated 147,794 Mcf on January 7, 2014. Peoples TWP Exhibit LWP-

5; Peoples TWP Statement No. 2-R, pp. 2-3. This total throughput on the Peoples TWP system,

on a day that was warmer than design conditions, was only 16 MMcf below projected design day

requirements (147 MMcf vs. 164 MMcf). Peoples TWP Statement No. 1-R, p. 3. Peoples TWP

Statement in Support, pp. 5-6.

Further, the Company explains that its heat-sensitive load on January 7, 2014,

including company use and unaccounted for gas, was 102 MMcf, which was only 5 MMcf or 5%

below projected design day heat-sensitive requirements of 107 MMcf. The Company contends

this data supported the reasonableness of the Company’s design day projections, considering that

January 7th was nine heating degree days or 12% warmer than the Company’s peak design day.

Id.7 Peoples TWP Statement in Support, p. 6. The Company concluded that it would be

appropriate to further examine its design day requirements and supply in light of the information

provided by this recent experience. Peoples TWP Statement in Support, p. 6.

7 The Company also provided information to show that its on-system storage fields were not able to provide as much gas under peak conditions as the Company’s design day study assumed. Peoples TWP Statement No. 2-R, p. 4.

19

Peoples TWP asserts the Settlement reflects the agreement among the Parties that

the Company should further review its design day forecast. Settlement ¶ 20. According to the

Company, the review will incorporate data from this past winter, and consider the

appropriateness of additional factors that may further refine the Company’s design day

projections. Peoples TWP will provide an update on its evaluation as part of the Company’s

2015 PGC proceeding. Settlement ¶ 20. Peoples TWP Statement in Support, p. 6. The

Company concludes that the Settlement reflects an appropriate recognition that the experience

this winter and on January 7, 2014 in particular will provide Peoples TWP with beneficial

information in evaluating its forecast of design day requirements and future capacity needs and

reflects agreement that the Company will evaluate whether other factors, proposed by OCA and

OSBA witnesses in this proceeding, will improve the quality of the Company’s future forecasts.

Peoples TWP Statement in Support, p. 6.

b. Extra Demand Factors

The Company explains that it uses the Extra Demand Cost of Service

Methodology to allocate demand costs it incurs to serve customer classes. The methodology

uses the ratio of peak day requirements to average day requirements to allocate demand charges.

Peoples TWP explains that historically, it has calculated extra demand based upon a three-year

average of experienced peak day requirements to average day requirements. In this proceeding,

the Company explains it modified the procedure to use design peak day and projected average

day requirements by class. As explained by Peoples TWP witness Folks, interstate capacity

requirements, and resulting costs, are needed to meet design day requirements. Therefore, the

Company asserts the use of design peak day projections is appropriate. Peoples TWP Statement

No. 3, p. 12. Peoples TWP Statement in Support, p. 7. Peoples TWP notes that no party

challenged this change, and OSBA witness Knecht stated his agreement with the Company’s

change to use design day demand for cost allocation. OSBA Statement No. 1, p. 6. Peoples

TWP Statement in Support, p. 7.

Attachment A to the Settlement provides for the extra demand factors applicable

for the 2014 PGC Application Period. The Company asserts that these factors are based upon

20

extra demand allocation factors derived from design day and average day usage of customer

classifications, adjusted for new and lost large volume customers. Peoples TWP argues that the

Settlement also recognizes that the Parties’ acceptance of this methodology is limited to this

proceeding, and may not be used to constrain any party’s rights to offer alternative proposals for

development of extra demand factors in future base rate or Section 1307(f) proceedings.

Settlement ¶ 21. Peoples TWP Statement in Support, p. 7.

c. Balancing Service Fees

Although no party challenged Peoples TWP’s use of the Extra Demand Cost of

Service Methodology for allocating demand costs among customer classifications, OSBA

witness Knecht did identify two concerns regarding Peoples TWP’s methodology for allocating

and recovering demand-related costs. Specifically, Mr. Knecht questioned whether the Company

requires natural gas suppliers to provide balancing services for their customers, and whether

Peoples TWP credits toward recovery of PGC costs the amounts charged to transportation

customers under discounted and full balancing rates. OSBA Statement No. 1, pp. 8-9. Peoples

TWP Statement in Support, pp. 7-8.

In rebuttal, Peoples TWP witness Petrichevich explained that the Company has

historically calculated the balancing charges for transportation customers based upon an

allocation of firm storage (FS) costs using the Extra Demand Cost of Service Methodology.

Peoples TWP Statement No. 1-R, pp. 9-10. Peoples TWP Statement in Support, p. 8. Further,

she explained that this approach, which allocates FS costs based upon total throughput, is

designed to recognize that storage capacity is used to provide balancing services and has been

considered in various base rate and PGC cases over the years. Id. In addition, Peoples TWP

points out that witness Petrichevich explained that the Company does credit the amounts charged

to transportation customers under discounted balancing rates to the recovery of purchased gas

cost (PGC) demand costs. To the extent the Company discounts load balancing charges as

permitted by its tariff, any resulting shortfall remains within the same class. Therefore, no

balancing cost recovery is shifted to other classes. Peoples TWP Statement in Support, p. 8.

21

Peoples TWP notes the Settlement provides that Peoples TWP is permitted to

continue to credit toward recovery of PGC demand costs the actual amounts charged to

transportation customers under discounted and full-tariff load balancing rates for the 2014-2015

PGC year. Settlement ¶ 25. Peoples TWP Statement in Support, pp. 8-9. In addition, the

Settlement provides that the Company will use its best efforts to avoid entering into any new

customer agreements, or extending any existing customer agreements, with discounted load

balancing rates. To the extent that the Company enters into any new or extends any existing

agreements with discounted load balancing rates during calendar year 2014, Peoples TWP is

required to provide justification for such contracts in its next Section 1307(f) filing. Id. Peoples

TWP Statement in Support, p. 9.

d. Retainage

The Company explains that natural gas distribution companies (NGDCs)

experience a difference between the volume of gas metered at the city gate and the volume of gas

metered at the customer burner tip, which is referred to as lost and unaccounted for gas (LUFG).

In addition to LUFG, the NGDC also will consume some of the gas delivered to its city gate as

part of its operations, which is referred to as company use (CU). The Company explains that

sales customers pay for the LUFG and CU through their PGC charges, which reflect the actual

costs for gas delivered and actual volume of gas consumed. Transportation customers also

contribute to LUFG and CU and, therefore, are required to supply extra gas to meet this

requirement. OSBA Statement No. 1, pp. 9-10. Peoples TWP Statement in Support, p. 9.

Peoples TWP explains the extra gas delivered for a transportation customer is referred to as

“retainage.” For Peoples TWP, retainage is expressed as a percentage of the gas delivered by the

customer to Peoples TWP for transportation to the customers’ facilities. Peoples TWP Statement

No. 1, pp. 9-10. Peoples TWP Statement in Support, p. 9. The Company asserts it has separate

retainage rates for Small Volume transportation customers (Rate Schedules RS-T, SGS-T and

MGS-T) and Large Volume transportation customers (Rate Schedules LGS-T and FTS), which

reflect differences in system usage and resulting responsibility for LUFG. The Company is

authorized by its tariff to discount retainage for customers with certain competitive alternatives,

22

and the effect of discounting is considered in setting retainage rates. I&E Statement No. 1, p. 8.

Peoples TWP Statement in Support, pp. 9-10.

In this proceeding, Peoples TWP indicates it updated its calculation of LUFG and

CU based upon a new three-year average ended July 31, 2013. Peoples TWP Exhibit LWP-1.

Peoples TWP Statement in Support, p. 10. Peoples TWP asserts the data showed a large

reduction in LUFG for the most recent 12-month period, which demonstrates the success of the

Company’s efforts to reduce LUFG, and shows that the Company is already below the metric to

be applied to next year’s PGC filing. 52 Pa.Code § 59.111(c). However, as explained by

Company witness Petrichevich, while the Company supports appropriate reductions to retainage

charges, the large single year drop may not be repeatable. Peoples TWP preferred to see a

sustained decrease in LUFG prior to proposing to reduce the retainage percentages charged to

transportation customers. Peoples TWP Statement No. 1, p. 14; Peoples TWP Statement No.

1-R, p. 11. Peoples TWP Statement in Support, p. 10. Therefore, the Company asserts it

proposed to continue the current retainage rates of 5.4% for Small Volume customers and 3.4%

for Large Volume customers another year. Peoples TWP Statement in Support, p. 10.

Peoples TWP explains the only party to challenge this proposal was OSBA.

Specifically, OSBA witness Knecht recommended that the Company reduce its retainage rates,

based upon a methodology that assumed a specific segregation of losses between upstream and

downstream mains, and accounted for discounted retainage in the calculation of class retainage

rates. OSBA Statement No. 1, p. 11. Peoples Statement in Support, p. 10.

The Company explains that the Parties have agreed, effective July 1, 2014,

Peoples TWP’s tariffed retainage rates for Small Volume transportation customers will be

reduced from 5.4% to 5.0%, and the tariffed retainage rate for Large Volume transportation

customers will remain at 3.4%. Settlement ¶ 22. Peoples TWP Statement in Support, p. 11.

With respect to discounting of retainage rates, the Parties agreed in the Settlement that Peoples

TWP would use best efforts to avoid entering into any new customer agreements, or to extending

any existing customer agreements, with retainage rates that are discounted below 2.4 percent for

LGS customers and 4.2 percent for non-LGS customers. Id. Peoples TWP Statement in

23

Support, p. 11. To the extent that the Company does enter into such contracts during calendar

year 2014, it will provide a justification for entering into such contracts with retainage rates

discounted below those levels, in its next Section 1307(f) filing. Id. Peoples TWP Statement in

Support, p. 11.

Peoples TWP argues the agreed upon retainage rates are within the reasonable

range of retainage rates for the Small Volume and Large Volume transportation customers. The

result is a compromise of the Parties’ positions, and in particular recognizes that the Company

has had to discount retainage for substantial amounts of Large Volume transportation volumes

due to interstate bypass threats, access to gas from non-jurisdictional entities, alternate fuel

supplies and economic development. Peoples TWP Statement No. 1, p. 15. Peoples TWP

Statement in Support, p. 11. The Company asserts these retainage rates will ensure that

transportation customers bear their fair share of the LUFG and CU costs incurred to provide

service to the transportation customers. Peoples TWP Statement in Support, p. 11.

e. Off-System Sales and Capacity Release Sharing Mechanism

Peoples TWP asserts that it currently has in place a capacity release sharing

mechanism, but not an off-system sales sharing mechanism. Peoples TWP Statement No. 1,

p. 16. Peoples TWP Statement in Support, p. 12. In this proceeding, Peoples TWP proposed to

implement a sharing mechanism for off-system sales wherein, it asserts, ratepayers would

receive 75% of any incremental revenue that can be obtained by Peoples TWP making off-

system sales, and the Company would retain 25% of the revenue. Peoples TWP Statement

No. 1, p. 16. No party challenged this proposal. Peoples TWP Statement in Support, p. 12.

f. Local Gas Pricing Changes

Peoples TWP explains that it has various types of local production contracts in

place. The Company has traditional vintage contracts which contain fixed prices per Mcf that

were set many years ago (fixed price vintage contracts) and revised larger volume vintage

contracts which converted traditional fixed price vintage contracts into contracts that contain a

24

percentage of market pricing mechanism, which were renegotiated as a result of prior PGC

settlements. The Company also purchases local gas pursuant to a standard form of contract that

has been used for a number of years, which is designed to relate the price paid for local gas to the

cost of gas purchased on interstate pipelines (standard local field price contract). Peoples TWP

Statement No. 2, pp. 31-32; Peoples TWP Statement No. 2-S, p. 2. Peoples TWP Statement in

Support, p. 12.

In this proceeding, Peoples TWP identified two modifications relative to the

contractual rates paid under these contracts. First, the Company requested approval to release

certain, older, low-producing, fixed-price vintage gas purchase contracts from their lifetime

dedication to the utility. Peoples TWP Statement No. 2, p. 32. Peoples TWP Statement in

Support, pp. 12-13. The Company explains that in response to comments from producers that

the low-producing wells under fixed-price vintage contracts are uneconomical for continued gas

production and may be shut-in, plugged and abandoned, the Company agreed as part of the

settlement in the Equitable Acquisition proceeding (Docket Nos. A-2013-2353647, A-2013-

2353649 and A-2013-2353651) to seek approval through the 1307(f) process to permit the

release of older low-producing wells under certain defined terms. Peoples TWP Statement No.

2, p. 33. Peoples TWP Statement in Support, p. 13.

Pursuant to this agreement, Peoples TWP asserts it requested Commission

approval to offer to release from the fixed-price supply contract terms those meter stations at

which less than 10 Mcf/day of gas is measured over a consecutive twelve-month period under

contracts having an initial term of 25 years or longer. If the release offer is accepted, as

consideration, the producer would have to agree to sell the gas to Peoples TWP at an initially

discounted rate for the first year and the standard local purchase price for the second year. Under

the Company’s proposal, the Company would pay local producers a rate per Mcf equal to 80% of

the then-standard local field price the Company pays for local gas for an initial twelve

consecutive month term and then another twelve-month term at the then-standard local field

price. Thereafter, the production would be released from the fixed-price vintage contract, and

the supplier could opt to enter into a new standard local field price contract. This release

provision is substantially the same as exists for Peoples TWP’s affiliate, Peoples Natural Gas

25

Company LLC. Peoples TWP Statement No. 2, pp. 34-35. Peoples TWP Statement in Support,

p. 13.

Second, the Company provided information relative to the recent modification to

its current standard local field price contracts with local gas producers. Peoples TWP witness

Wachter explained that under the Company’s current standard local field price contracts, the

Company has the right to modify, at its sole discretion, the price paid for local gas under the

existing gas purchase contracts. Consistent with this provision, the Company explains it

provided notice to modify the standard field price from its existing New York Mercantile

Exchange (NYMEX) based pricing formula to a price that more accurately reflects the current

market pricing of Appalachian-produced gas supply. The Company asserts the same change is

being made in Peoples TWP’s contract forms for new supplies of Pennsylvania natural gas.

Peoples TWP Statement No. 2-S, p. 3. Peoples TWP Statement in Support, p. 14. Specifically,

effective March 1, 2014, Peoples TWP asserts it revised the local field price to be equal to the

Inside F.E.R.C.’s Gas Market Report, “Price of Spot Gas Delivered to Pipelines,” for deliveries of

Appalachian production into Dominion Transmission’s dry transmission system. Peoples TWP

Statement No. 2-S, p. 4. Peoples TWP Statement in Support, pp. 14-15.

The Company explains the Settlement reflects the Parties’ agreement to these

modifications. Settlement ¶¶ 23 and 26. Peoples TWP asserts the release proposal for fixed

price vintage contracts addresses concerns raised by local producers relative to lower volume

wells that are paid prices below market, thereby making it hard for such wells to continue to

operate. Peoples TWP Statement in Support, p. 14.

g. Permanent Release of Certain Local Gas

The Company explains that, during the course of this proceeding, Peoples TWP

and XTO Energy, a natural gas producer that produces natural gas that feeds directly into the

Peoples TWP system and an intervenor in this case, engaged in discussions regarding Peoples

TWP’s purchase of XTO Energy’s gas in the future. Based upon these discussions, Peoples

26

TWP and XTO Energy reached an agreement on the terms of such purchases. Peoples TWP

Statement in Support, p. 15.

As explained by Peoples TWP witness Wachter, XTO Energy is the successor to

Peoples TWP’s former affiliated production company, T. W. Phillips Gas Supply Corp. (Supply

Corp.) and Phillips Exploration, Inc. (PEI). Peoples TWP ceased to be affiliated with Supply

Corp. and PEI following the acquisition of Peoples TWP’s predecessor, T. W. Phillips Gas and

Oil Co. (T. W. Phillips) by LDC Holdings LLC in May 2011. Peoples TWP Statement No.

2-SS, pp. 2-3. Peoples TWP Statement in Support, p. 15.

T. W. Phillips had contracts to purchase gas from Supply Corp. and PEI, which

continued after the acquisition and are now contracts with XTO Energy. Certain of these

contracts have provisions dedicating gas production to Peoples TWP’s system. Peoples TWP

Statement in Support, p. 15.

The Company asserts that XTO Energy has requested that all natural gas

production that is subject to dedication to Peoples TWP be permanently released from

dedication. This would end the process of releasing the gas on an annual or shorter basis to serve

transportation customers. Although Peoples TWP explains that it does not anticipate a need to

purchase base load, local gas for its customers in the quantities that could be produced from the

wells and leaseholds that are dedicated pursuant to the XTO Energy agreements, permanent

release will not deprive Peoples TWP of the opportunity to purchase supply from XTO Energy.

Peoples TWP Statement No. 2-SS, pp. 3-4. Peoples TWP Statement in Support, p. 16. The

Company asserts that it has agreed with XTO Energy to enter into a replacement gas

purchase/sale agreement whereby Peoples TWP would have the option but not the obligation to

purchase, at the new market index price, gas produced by XTO Energy that is not used for

transportation service and that would have been subject to the dedication. Settlement ¶ 27(a) and

(b). Peoples TWP Statement in Support, p. 16.

Peoples TWP explains the permanent release of XTO Energy’s natural gas

production that is subject to dedication to Peoples TWP has not been challenged by any party

27

and is in the public interest for several reasons. First, there has been a dramatic change in the

natural gas marketplace in the region around the Company’s service area in recent years, which

continues to support modification of gas agreements that were entered into at a different time.

According to Peoples TWP, these changes became apparent around 2009, with the development

of gas from the Marcellus Shale formation. Peoples TWP Statement in Support, pp. 16-17.

Since its adoption of a Marcellus Gas Release Policy, the Company asserts gas supplies in the

area continue to be abundant, and there is no longer any advantage to locking in large quantities

of potential supplies under long-term dedication provisions. Peoples TWP Statement No. 2-SS,

p. 5. Peoples TWP Statement in Support, pp. 16-17.

Next, the Company explains, on a small distribution system such as Peoples

TWP, long-term dedication provisions can deter development of leaseholds, where producers are

aware that no steady market for gas supplies is available on the system to which the gas is

dedicated. Peoples TWP continues, these dedication provisions can in particular deter any

further development of shallow production, where the producer has the option of allocating

capital to more lucrative Marcellus production that can flow to more robust markets. Peoples

TWP asserts the dedication provisions also can deter transfers of leasehold interests to new

entities who may be interested in developing further supplies. Peoples TWP Statement No.

2-SS, p. 5. Peoples TWP Statement in Support, p. 17.

Third, by eliminating the long-term dedication provision, Peoples TWP explains,

these gas supplies can potentially be more marketable. The Company asserts XTO Energy can

use its production not only to provide gas to NGSs to serve customers on Peoples TWP’s system,

but potentially can develop more leaseholds and sell those excess supplies into other markets,

particularly the interstate market. Peoples TWP Statement No. 2-SS, p. 6. Peoples TWP

Statement in Support, p. 17.

Finally, Peoples TWP asserts that the permanent release of the XTO Energy

production from the dedication provisions, with the continued right of Peoples TWP to purchase

excess supplies, is consistent with Peoples TWP’s obligations under Section 1307(f) of the

Public Utility Code. As explained by Peoples TWP witness Wachter, XTO Energy’s gas is

28

produced into Peoples TWP’s system at a steady flow rate and is, therefore, best suited for use as

a base load supply. Peoples TWP Statement No. 2-SS, pp. 7-8. Peoples TWP Statement in

Support, pp. 17-18. The Company explains the gas has been released and is used primarily by

the transportation market as base load supply on Peoples TWP’s system. Peoples TWP asserts it

does not need that released gas as a base load supply for its remaining, primarily heat-sensitive,

sales service customers. Further, the Company explains that usage by heat-sensitive customers

in the non-winter months is insufficient to use all the local production that can be available to

Peoples TWP. Id. Peoples TWP Statement in Support, p. 18.

Peoples TWP explains it has reserved the option to purchase at reasonable

market-based prices any gas not sold to a NGS on the Peoples TWP system. The Company

asserts this option provides it with the ability to vary its purchases on a monthly and even daily

basis, creating supply flexibility that is not available when the gas is being purchased as a base

load supply, and that is not currently available on this production from XTO Energy. Id.

Peoples TWP Statement in Support, p. 18.

For all of the above reasons, Peoples TWP concludes that the Settlement is in the

public interest and requests Commission approval of the Settlement.

2. I&E’s Position

I&E is charged with the representation of the public interest in proceedings

relating to rates, rate-related services and application proceedings affecting the public interest

held before the Commission. Consequently, in negotiated settlements, it is incumbent upon I&E

to ensure that the public interest is served and to quantify to what extent amicable resolution of

any such proceeding will benefit the public interest. I&E submits that the proposed Settlement is

in the public interest and should be approved by the ALJ and the Commission for the following

reasons.

29

a. Purchased Gas Costs

I&E represents that the purchased gas costs that Peoples TWP incurred during the

historic period adhered to a least cost fuel procurement policy. I&E asserts that adhering to a

least cost procurement policy benefits ratepayers because least cost gas directly impacts

customer gas bills and obligates the Company to provide safe, adequate and reliable service to its

customers. After review of the filing and extensive discovery and settlement discussions, I&E

maintains that the Company’s gas purchasing practices have satisfied its least cost procurement

obligation. I&E Statement in Support, p. 3.

I&E explains it analyzed the Company’s E-factor (over/undercollection) and

found that it was calculated in accordance with established Commission practices. This review,

according to I&E, is critical because the proper calculation of the E-factor ensures that rates are

adjusted appropriately. I&E is satisfied that the Company’s E-factor calculation is appropriate

and accurate. I&E Statement in Support, p. 3.

Additionally, I&E explains that it reviewed the Company’s projected gas costs

and determined that it appears those costs are consistent with a least cost fuel procurement

policy. The filing projects a $0.0402/Mcf decrease in the purchased gas rate applicable to

residential retail service customers based upon the November 1, 2013 purchased gas rates in

effect. While those costs are subject to review in a future PGC proceeding. I&E maintains that

ratepayers are protected in that Peoples TWP gains no unwarranted financial advantages through

its projected gas purchases and projected gas purchasing policies. I&E Statement in Support, pp.

3-4.

b. Retainage Rate

I&E explains that the Settlement provides that, effective July 1, 2014, the tariffed

retainage rate for Small Volume transportation customers will be reduced from 5.4% to 5.0% and

the retainage rate for Large Volume transportation customers will remain at 3.4%. Joint Petition

¶ 22. I&E Statement in Support, p. 4. Retainage percentages are based on a three-year average

30

of Unaccounted for Gas (UFG) and company use (CU) gas, which decreased from 3.47% in the

2013 PGC proceeding to 3.09% in the current proceeding. On a weighted average basis, Peoples

TWP’s retainage rate is 3.59%. I&E Exhibit No. 1, Schedule 1. I&E Statement in Support, p. 4.

However, I&E points out the Company provides retainage discounts to some transportation

customers who have competitive alternatives (interstate bypass, alternative fuel supply, etc.) so it

does not actually recover 3.59%. According to I&E, these discounts resulted in a 245,702 Mcf

retainage shortfall that is not collected from transportation customers; therefore, Peoples TWP only

collected approximately 2.2% due to the retainage discounts. I&E Statement No. 1, pp. 9-10; I&E

Exhibit 1, Schedule 1. I&E Statement in Support, p. 4.

I&E asserts it is critical that transportation customers are charged the appropriate

retainage rate because collecting too much retainage harms transportation customers by requiring

them to pay more than their share of the losses, and not collecting enough retainage harms sales

customers by causing them to pay for the UFG and CU that should be paid by transportation

customers. I&E Statement in Support, p. 4. Despite the fact that UFG and CU decreased and the

3.59% weighted average retainage rate is slightly higher than the Company’s three-year average

of 3.09% UFG and CU, I&E recommended that retainage rates remain at their current levels to

ensure that transportation customers share in the cost of providing retainage discounts to other

transportation customers with competitive alternatives. I&E Statement No. 1, p. 8. I&E Statement

in Support, pp. 4-5.

I&E further asserts the retainage rates proposed in the Settlement are reasonable as

it ensures that transportation customers contribute to the discounts. According to I&E, under the

Settlement, the retainage rate for Small Volume transportation customers will decrease from 5.4%

to 5.0%. While I&E initially recommended that this rate not be changed, I&E explains the agreed

upon retainage rate is in the public interest as these Small Volume customers do not cause the bulk

of the discounts. As demonstrated in I&E Exhibit 1, Schedule 1, the retainage under-recovery from

Small Volume transportation customers is 915 Mcf whereas the under-recovery for Large Volume

transportation customers is 244,787 Mcf.

31

I&E asserts as the Company’s UFG and CU have decreased, it is appropriate to

decrease the retainage rate for Small Volume transportation customers. I&E Statement in Support,

pp. 5-6. I&E explains the Settlement does not provide a retainage decrease for Large Volume

Transportation customers, which is appropriate given that this class caused the bulk of the retainage

shortfall and should be required to share in the cost of retainage discounts. By keeping the retainage

rate at 5.0% for Large Volume Customers despite the recent decrease in UFG and CU, I&E

explains, it spreads the cost of retainage discounts to these transportation customers. Currently, that

burden is borne by sales customers, but transportation customers also benefit from retaining

customers with competitive alternatives on the system; therefore, they should also be required to

contribute to the revenue shortfall that results from granting some transportation customers a

retainage discount. I&E Statement in Support, pp. 5-6.

Further, I&E notes the Settlement provides that Peoples TWP will use best efforts to

avoid entering into agreements in 2014 with retainage rates discounted below 2.4% for LGS

customers and 4.2% for non-LGS customers and, if such contracts are entered into, the Company

will provide justification for agreements with retainage discounts below those levels in its next

1307(f) filing. I&E recognizes that the Commission has historically approved retainage discounts

for alternative fuel; however, it is important that this practice continue in a prudent manner that

mitigates the burden these discounts place on other customers. Pa. Pub. Util. Comm’n v. Equitable

Gas Company, a division of Equitable Resources, Inc., Docket No. R-00050272, p. 43 (Order

entered September 28, 2005); Pa. Pub. Util. Comm’n v. The Peoples Natural Gas Company, t/a

Dominion Peoples, Docket No. R-00050267, p. 32 (Order entered September 30, 2005). I&E

Statement in Support, p. 6. Accordingly, I&E concludes this term is in the public interest because

it allows the Company the flexibility to continue to offer discounts that will retain customers on its

system, but requires it to use best efforts to avoid discounting below the agreed upon levels so that

the cost shifting to other customers is minimized. I&E Statement in Support, p. 6.

c. Off-System Sales

I&E explains the Settlement provides that the Company will adopt an off-system

sales sharing mechanism, under which 75% of net proceeds will be provided to customers and

32

the remaining 25% will be retained by the Company and recommends that the off-system sales

mechanism contained in the Settlement should be approved. Joint Petition ¶ 24. I&E Statement

in Support, p. 7.

d. XTO Purchase Agreements

I&E explains that the Settlement provides, effective January 1, 2015, the

Company will permanently release from dedication all local gas under current gas purchase

agreements with XTO that contain a dedication provision. Peoples TWP has released

substantially all of XTO’s local production and the Company does not anticipate a need for this

local gas for its system supply. Peoples TWP Statement No. 2-SS, p. 3. I&E Statement in

Support, p. 7.

I&E points out that the Company contends that eliminating the dedication

provision could make XTO’s gas supplies substantially more marketable and encourage shallow

production of Pennsylvania gas supplies. Peoples TWP Statement No. 2-SS, p. 6. I&E

Statement in Support, pp. 7-8.

Although the gas production will be permanently released from dedication, I&E

explains the Settlement provides Peoples TWP the option to purchase gas from XTO at

reasonable market-based prices. Accordingly, I&E asserts this term is in the public interest

because the supplies will continue to be available to Peoples TWP if needed; however, if not

needed, XTO will be able to sell the excess supplies to other markets and transport this

production on the Company’s system. I&E Statement in Support, pp. 7-8.

3. OCA’s Position

OCA points out that on January 31, 2014, the Company submitted its formal 2014

PGC filing in which it proposed a decrease in the residential PGC rate of $0.0402 per Mcf

compared to the rate then in effect. The new rates would take effect on August 1, 2014. The

proposed decrease would lower the PGC rate for residential customers from $5.1866 per Mcf as

33

of November 1, 2013 to $5.1464 per Mcf effective August 1, 2014. OCA Statement in Support,

pp. 1-2.

OCA submitted the Direct Testimony of its expert witnesses, Melissa Whitten and

Dr. Alvaro Pereira.8 Ms. Whitten’s testimony addressed three areas of PTWP’s filing: a

perceived discrepancy in the calculation of the E-factor (over/undercollection) component of the

PGC rate; the Company’s revised design peak day forecast methodology and the cost

implications of that methodology; and the coordination of the Company’s proposal to reprice its

vintage producer contracts with its ongoing pipeline segmentation plan. Dr. Pereira’s testimony

provided an overall assessment of the Company’s revised design day forecast methodology and

the reasonableness of the results it yielded. OCA Statement in Support, pp. 1-2.

a. Design Day Forecast Methodology

OCA explains that historically, Peoples TWP has used a statistical technique

referred to as “regression” to develop its design day demand forecast. Through this technique

PTWP calculates demand by establishing a mathematical relationship between heating degree

days (HDDs) and customer demand. OSBA Statement No. 1, p. 2. In its mathematical model,

Peoples TWP includes both a linear term, HDDs, and a quadratic term, HDDs squared or HDD².

The quadratic term is used to reflect Peoples TWP’s belief that under more extreme weather

conditions, its load increases more than proportionally as HDDs increase. OSBA Statement No.

1, p. 4, Note 3. OCA Statement in Support, p. 3.

According to OCA, in both its prefiled materials and its Direct Testimony,

Peoples TWP reported on the results of its design day demand methodology review. The

Company indicated that based on its review, it moved from using sendout data based on monthly

customer billing information to using daily sendout data, which it compiled from a number of

sources. Peoples TWP Statement No. 1, pp. 10-11. OCA Statement in Support, p. 3. OCA

asserts the daily sendout data represents the total daily amount of gas entering the Company’s

8 OCA Statement No. 1 and OCA Statement No. 2, respectively.

34

system to serve customers’ usage requirements and that the Company also added wind speed as a

variable to its regression model. Id. at 11. OCA Statement in Support, pp. 3-4.

The testimony of OCA witness Pereira and OSBA witness Robert Knecht found

that the revisions made by Peoples TWP to the design day methodology were helpful in refining

the Company’s approach to demand forecasting, but both also testified that additional revisions

may be necessary to further refine the model. OCA Statement No. 1, pp. 2-8; OSBA Statement

No. 1, pp. 4-5. OCA Statement in Support, p. 4. Specifically, OCA witness Pereira testified that

he examined several alternative mathematical formulae to that used by Peoples TWP and found

that while the alternative formulae were similar in statistical significance, they yielded a lower

heating load design day forecast. OCA Statement No. 1, p. 3. OCA Statement in Support, p. 3.

OCA asserts that Dr. Pereira first tested the use of the quadratic term (HDDs squared) as a

variable in the equation and found its use to have only marginal benefit statistically compared to

an equation that did not use the term and found that an equation including the term produced a

higher forecast than may be required. Id. OCA Statement in Support, p. 3. Dr. Pereira also

found that applying the full annual dataset gathered by Peoples TWP to the Company’s

recommended load forecast formulation, rather than the final three years of data, resulted in a

lower forecast. Id. OCA Statement in Support, p. 3. Finally, OCA points out that Dr. Pereira

found that including a trend variable (used to capture non-weather-related factors, such as

economic conditions or increased energy efficiency) in the load forecast model was statistically

significant and yielded a lower design day forecast. Id. OCA Statement in Support, p. 3.

OCA further explains that OSBA witness Knecht testified that he had the

following concerns regarding Peoples TWP’s design day forecast methodology: (1) that the

Company’s daily sendout data includes only estimates of the daily sendout from local producers

due to lack of daily metering; (2) that the daily demands used in the Company’s statistical

analysis are largely based on “gas day” (10 AM to 10 PM) data, while the weather data (HDDs

and wind speed) are based on calendar day data; (3) that the Company’s analysis is based on

daily data in all seasons, when, in general, the most relevant period for assessing design

conditions is the winter period or even just relatively cold days during the winter period; (4) that

Peoples TWP makes no adjustment for lower demand on weekends; (5) that Peoples TWP has

35

not included any trend value to reflect declining loads resulting from energy conservation and

energy efficiency efforts; and (6) that Peoples TWP’s regression analysis suffers from a technical

statistical problem known as “autocorrelation.” OSBA Statement No. 1, pp. 4-5. OCA

Statement in Support, pp. 4-5.

OCA points out that in rebuttal testimony, Peoples TWP witness Lynda

Petrichevich testified that the winter of 2013-2014 produced colder temperatures than any in

recent years, including a peak day (January 7, 2014) which had weather conditions that had not

been experienced in years. Peoples TWP Statement No. 1-R, pp. 3-4. Ms. Petrichevich stated

that the weather and load data from the winter of 2013-2014 will provide Peoples TWP with

invaluable data and experience with which to evaluate the Company’s existing design day

forecast methodology. Peoples TWP Statement No. 1-R, p. 4. OCA Statement in Support, p. 5.

OCA asserts the instant Settlement addresses the various concerns and views

expressed in the testimony of OCA witness Pereira, OSBA witness Knecht and Peoples TWP

witness Petrichevich. According to OCA, under the Settlement, Peoples TWP agrees to continue

to evaluate its design day requirements by specifically including data from the winter of 2013-

2014 in its analysis and by evaluating the appropriateness of the following factors: (1) use of

matched (calendar or gas day) sendout and weather data; (2) continued use of the quadratic term,

HDD squared; (3) use of a trend variable; (4) use of a weekday variable (or variables); (5)

examination of the possible causes (and solutions) for “autocorrelation”; and (6) restricting the

statistical analysis to use of winter-only or high HDD days. Peoples TWP is to provide an

update of its evaluation of the factors it has studied in its 2015 PGC filing. OCA Statement in

Support, pp. 5-6.

OCA submits that by incorporating the data from the 2013-2014 winter into its

analysis, and by continuing to study the various factors enumerated, Peoples TWP will be able to

refine and improve the ability of its design day model to produce more accurate forecasts.

Improving such accuracy will benefit customers by narrowing the potential to either over-

procure or under-procure needed gas supply. OCA Statement in Support, p. 6.

36

b. Repricing and Release of Certain Low Flow Vintage Gas Contracts

OCA explains that in the 2013 settlement of the case involving the merger of

Peoples Natural Gas Company (Peoples) and Peoples TWP with Equitable Gas Company,9

Peoples and Peoples TWP agreed that in future PGC proceedings they would seek Commission

approval to release older low-producing gas wells from the fixed price, dedicated (for 25 years or

longer) contracts they have with Peoples and Peoples TWP, be repriced for a period of two years

and thereafter be permitted to sell their gas to anyone. Peoples TWP Statement No. 2. p. 33.

OCA Statement in Support, p. 6. Accordingly, in the instant proceeding, Peoples TWP proposed

that wells under vintage fixed price and long-term dedicated contracts that produce less than 10

Mcf/day would be released from those contracts. In return for that release, well owners would

agree to enter into gas purchase contracts with Peoples TWP for a two-year term under which

gas would be purchased during the first year at a price equal to 80% of the then-standard price

Peoples TWP pays for local gas, and during the second year at a price of 100% of the then-

standard local price. At the end of the two-year contract, the well owner would be released and

able to sell its output on the open market. Id. at 34-35. OCA Statement in Support, pp. 6-7.

According to OCA, among the reasons that Peoples TWP cited for repricing and ultimately

releasing these contracts was that under the current contracts, these wells are uneconomic and in

danger of being shut-in, plugged and abandoned. Id. at 33. OCA Statement in Support, p. 7.

OCA indicates that in Rebuttal Testimony, Peoples TWP witness Wachter

explained that before abandoning a section of pipeline, the Company would consider the net

benefit of the abandonment including the impact of any possible production loss. He also

explained that even if a section of pipeline was ultimately abandoned, paying the higher

renegotiated rates for two years would serve as an incentive for the producers to continue to

produce gas rather than shut-in the wells if they were to continue to be paid at the vintage

contract levels. Peoples TWP Statement No. 2-R, pp. 7-8. OCA Statement in Support, pp. 7-8.

OCA explains that Mr. Wachter’s explanation alleviated OCA’s concern that

renegotiation of the vintage contracts with low-producing wells may be premature in light of the

9 The merger case was docketed at A-2013-2353647, A-2013-2353649, and A-2013-2353651.

37

Company’s plan to consider certain pipeline segments for abandonment or sale. OCA therefore

has no objection to the Company’s proposal to re-price and release the vintage contracts with

low-producing wells. OCA Statement in Support, p. 8.

4. OSBA’s Position

a. Summary of OSBA’s Principal Concerns

OSBA points out that it has identified several issues of concern, primarily

regarding whether the Company’s proposed PGC rates are consistent with a least cost fuel

procurement policy. Additionally, OSBA wanted to ensure that the resulting rates and charges

were not excessive, unjust, unreasonable, or discriminatory to small business customers, or

otherwise contrary to Commission regulation or policy.

b. Settlement

OSBA notes that it does not object to the resolution of any of those issues as

detailed in the text of the Settlement and points out that its principal issues of concern were the

Company’s methodology for developing design day demand, cost allocation and rate design, and

retainage.

Regarding the first issue, the Company has proposed a new method for deriving

its design day demand in this proceeding, based on the use of daily load data to the extent it is

available. OSBA agrees that the modifications made by the Company provides a step in the right

direction and in settlement, OSBA asserts the Company has agreed to review and evaluate its

methodology for developing the design day demand, specifically incorporating data from Winter

2013-2014 in the statistical analysis, and evaluating the appropriateness of the following factors:

Use of matched (calendar or gas day) sendout and weather data or other appropriate adjustments;

Continued use of a quadratic HDD term;

38

Use of a trend variable;

Use of a weekday variable (or variables);

Examination of the possible causes (and solutions) for autocorrelation; and

Restricting statistical analysis to use of winter-only or high HDD days.OSBA Statement in Support, p. 2.

Additionally, OSBA notes the Company will present the full results of its review,

in its next purchased gas cost (PGC) filing. OSBA Statement in Support, p. 3.

Regarding cost allocation and rate design issues, OSBA had two concerns regarding retainage

rates. First, the Company proposed to hold retainage rates at their current levels, rather than

updating the calculations to reflect the reduction in the three-year average unaccounted-for gas

rates. OSBA asserts the Settlement addresses OSBA’s concern by reducing the retainage rate for

the smaller volume customers from the Company’s proposed level of 5.4 percent to 5.0 percent,

consistent with OSBA testimony. OSBA Statement in Support, p. 3.

Second, OSBA indicates that it retains a long-standing concern that the Company

requires that some customers absorb the costs associated with discounted retainage rates for

other customers. As shown in OSBA testimony, this discounting essentially requires a subsidy

from the non-discounted customers, both PGC and full freight transportation customers, of

approximately 0.8 percent of throughput. OCA suggests that as the Commission has long

permitted the Company to engage in this practice, OSBA did not attempt to make any changes to

the Company’s proposals in this respect. OSBA Statement in Support, p. 3.

However, in an attempt to reduce this issue going forward, OSBA notes the

Settlement provides that, while the Company will be permitted to continue to recover shortfalls

from customers with discounted retainage rates through higher PGC charges on sales customers

and increased retainage rates on regular transportation customers through the 2014-2015 PGC

year, the Company has agreed to use its best efforts to avoid entering into any new customer

agreements, or to extending any existing customer agreements, with retainage rates that are

discounted below 2.4 percent for LGS customers and 4.2 percent for non-LGS customers.

(These target retainage rates reflect the retainage rates that would be in place if discounted rate

39

customers were not subsidized. They are based on the analysis in OSBA testimony. OSBA

Statement in Support, p. 3.

Further, OSBA indicates the Company has agreed to provide justification for any

new or extended agreements entered into during 2014 with retainage rates below the stated levels

in its 2015 PGC filing. OSBA Statement in Support, p. 2.

Regarding cost allocation issues, OSBA notes that, consistent with OSBA

testimony in prior PGC proceedings, the Company proposed to modify the development of the

“extra” demand factor for its cost allocation procedures to reflect design day demands in the

allocation factors, rather than its previous practice of using estimates of actual historical peak

demands. OSBA Statement in Support, pp. 3-4. OSBA asserts it has long believed this change

to be appropriate, because PGC assets must be sized to meet design day demands. OSBA points

out this proposed change was generally uncontested in this proceeding, and is implicitly adopted

in the Settlement. OSBA Statement in Support, p. 4.

As OSBA’s issues of principal concern were resolved through the Settlement, and

in order to conserve its resources and avoid the uncertainties inherent in fully litigating the case,

OSBA requests that the Commission approve the Settlement without modification.

5. XTO Energy’s Position

XTO indicates that its interest in this proceeding is that it is the largest supplier of

Pennsylvania-produced natural gas on the Peoples TWP system and also is a retail customer of

Peoples TWP. XTO notes that in 2011, XTO, through its parent ExxonMobil Corp., purchased

the production assets of Peoples TWP’s former production company affiliates, including

substantial conventional and unconventional natural gas reserves located in the Peoples TWP

service territory. Since 2011, XTO asserts it has developed additional production wells,

including conventional wells and unconventional Marcellus Shale wells. XTO Statement in

Support, p. 1.

40

XTO explains that certain of the production wells acquired by XTO from Peoples

TWP’s former production company affiliates were and remain under contract with Peoples TWP,

and certain of those contracts contain provisions dedicating the production to Peoples TWP’s

system. XTO asserts that in 2000, in recognition of the fact that many of Peoples TWP’s

customers, particularly larger volume customers whose needs suited the profile of base load

production, elected transportation service instead of sales service, the Commission authorized

Peoples TWP to release dedicated local production to serve the needs of transportation

customers. Since that time, according to XTO, Peoples TWP has released, on an annual basis,

substantially all of XTO’s (or its predecessors’) dedicated supply in order to serve Peoples TWP

transportation customers. XTO markets the gas to Peoples TWP’s transportation customers

through Commission-licensed natural gas suppliers. XTO asserts Peoples TWP does not

purchase significant volumes of either XTO’s dedicated production or its non-dedicated

production for Peoples TWP’s system supply. XTO Statement in Support, pp. 1-2.

XTO has indicated that it desires a market for its natural gas, both dedicated and

non-dedicated, and that Peoples TWP desires the ability to call on XTO production to the extent

needed. According to XTO, both XTO and Peoples TWP seek the planning flexibility that could

be achieved absent the need for month-by-month or year-by-year dedicated production release

provisions. XTO asserts that the Settlement, at Paragraph 27, achieves all of these goals, and

resolves disputes related to them that otherwise could be litigated before the Commission in this

or other proceedings, through: (1) a permanent release of that portion of XTO’s production that

is dedicated to Peoples TWP; (2) a unilateral monthly and daily option given by XTO to Peoples

TWP, with no obligation on the part of Peoples TWP, to purchase any of XTO’s production

(including production that has never been the subject of dedication provisions) that is not

purchased by an NGS on the Peoples TWP system; and (3) a strike price for the natural gas

subject to the option that is identical to the price at which Peoples TWP purchases any other

local production. XTO Statement in Support, p. 2.

XTO believes that this aspect of the overall Settlement is in the public interest and

that the Settlement as an integrated whole should be approved. XTO stresses that Paragraph 27

of the Settlement accomplishes a number of interrelated goals: (1) it provides, through the option

extended to Peoples TWP, that Peoples TWP will have supplies of local production available to

41

it if needed on a monthly or daily basis at a price the Commission has already deemed compliant

with a least cost fuel procurement policy; (2) it provides certainty of supplies for Peoples TWP’s

transportation customers through elimination of month-by-month and year-by-year release

requirements, and eliminates the administrative burden associated with arranging such releases;

(3) it encourages the continued development of conventional Pennsylvania production as well as

Marcellus production by allowing XTO to seek outlets for its production to the extent that

Peoples TWP, its transportation customers, or the NGSs on its system are not in a position to

utilize it; (4) it puts in place a seven-year arrangement, with an agreement to negotiate in good

faith at the end of the term, that provides certainty for Peoples TWP, Peoples TWP’s

transportation customers, Peoples TWP’s systems supply customers, XTO, and all other affected

parties; and (5) it promotes administrative efficiency and conserves resources by avoiding

potential disputes between Peoples TWP and XTO that otherwise could have been litigated in

this or another proceeding before the Commission. XTO Statement in Support, pp. 2-3.

XTO also asserts that these and the other provisions of the Settlement, taken as a

whole, are in the public interest, and XTO urges the Commission to approve the Settlement

expeditiously and without modification. XTO Statement in Support, p. 3.

C. Summary

In approving a proceeding pursuant to 66 Pa.C.S § 1307(f), the Company must

establish the following requirements:

1. That it is pursuing a least cost fuel procurement policy during the relevant

time period consistent with its obligation to provide safe, adequate and reliable service to its

customers in compliance with Section 1318 of the Public Utility Code, 66 Pa.C.S. § 1318.

2. That its rates for purchased gas costs, as the parties have agreed upon in

this proceeding, during the relevant time period, are just and reasonable and in compliance with

Section 1318 of the Public Utility Code, 66 Pa.C.S. § 1318.

42

3. That it has fully and vigorously represented the interests of its ratepayers

in proceedings before the FERC and other relevant non-PUC proceedings during the relevant

time period in compliance with Section 1318(a)(1) of the Public Utility Code, 66 Pa.C.S.

§ 1318(a)(1).

4. That it has taken all prudent steps necessary to negotiate favorable gas

supply contracts and to relieve itself from terms in existing contracts with its gas suppliers,

which are or may be adverse to the interests of its ratepayers, during the relevant time period in

compliance with Section 1318(a)(2) of the Public Utility Code, 66 Pa.C.S. § 1318(a)(2).

5. That the Company has taken all prudent steps necessary during the

relevant time period to obtain lower cost gas supplies on both short-term and long-term bases

both within and outside the Commonwealth, including the use of gas transportation arrangements

with pipelines and other distribution companies in compliance with Section 1318(a)(3) of the

Public Utility Code, 66 Pa.C.S. § 1318(a)(3).

6. That it has not withheld from the market or caused to be withheld from the

market during the relevant time period any gas supplies, which should have been used as part of

a least cost fuel procurement policy in compliance with Section 1318(a)(4) of the Public Utility

Code, 66 Pa.C.S. § 1318(a)(4).

7. That it has fully and vigorously attempted to obtain less costly gas

supplies on both short-term and long-term bases from nonaffiliated interests during the relevant

time period in compliance with Section 1318(b)(1) of the Public Utility Code, 66 Pa.C.S.

§ 1318(b)(1).

8. That its contracts, if any, for the purchase of gas from any affiliated

interest during the relevant time period are consistent with a least cost fuel procurement policy in

compliance with Section1318(b)(b) of the Public Utility Code, 66 Pa. C.S. § 1318(b)(2).

43

9. That neither the Company nor any affiliated interest during the relevant

time period has withheld from the market any gas supplies, which should have been used as part

of a least cost fuel procurement policy in compliance with Section 1318(b)(3) of the Public

Utility Code, 66 Pa. C.S. § 1318(b)(3).

The Parties, through the evidence submitted and their Joint Petition and

Statements in Support of Settlement have satisfied these statutory requirements for approval of

the tariff supplement proposing changes in rates for recovery of purchased gas costs and gas

procurement practices, and accordingly, the Commission should approve the Joint Petition for

Settlement of All Issues of the Rate Investigation Pursuant to 66 Pa.C.S. § 1307(f) that Peoples

TWP, I&E, OCA, and OSBA have submitted at this docket as in the public interest.

Peoples TWP, I&E, OCA, OSBA and XTO agree that the Settlement is in the

public interest because Peoples TWP’s projected gas costs appear consistent with a least cost fuel

procurement policy. In addition, PIOGA, an intervenor and the only other party in this

proceeding, has indicated that it does not oppose the Settlement. Under the Settlement and as set

forth in the above Findings of Fact, Peoples TWP’s projected gas purchases, gas purchasing

policies and practices as well as the basis for projections of the cost of purchased gas costs meet

the requirements of Section 1318 of the Public Utility Code. 66 Pa.C.S. § 1318. Accordingly,

upon due consideration of the evidence, terms and conditions of the Settlement Petition,

including the supporting statements of the respective Settling Parties, this Settlement constitutes

a fair, just and reasonable resolution of the Commission’s investigation, is in the public interest

and should be approved without modification by the Commission.

It is also recommended that the associated Complaints filed by OCA at Docket

No. C-2014-2402983 and OSBA at Docket No. C-2014-2405372 be deemed satisfied.

V. CONCLUSIONS OF LAW

1. The Commission has jurisdiction over the subject matter and the parties to

this proceeding. 66 Pa.C.S. §§ 501, et seq.

44

2. There is sufficient evidence in the record to make the findings required by

Section 1318 of the Public Utility Code. 66 Pa.C.S. § 1318.

3. Peoples TWP is a “public utility” and a “natural gas distribution

company” as those terms are defined in Sections 102 and 2202 of the Public Utility Code, 66

Pa.C.S. §§ 102, 2202.

4. Peoples TWP’s annual operating revenues, derived from providing gas

service to customers in Pennsylvania, exceed $40 million, and therefore are governed by Section

1307(f) of the Public Utility Code, 66 Pa.C.S. § 1307(f), and the Commission’s regulations at 52

Pa.Code §§ 53.61-53.65 and 53.68.

5. Peoples TWP is pursuing a least cost fuel procurement policy during the

relevant time period consistent with its obligation to provide safe, adequate and reliable service

to its customers in compliance with Section 1318 of the Public Utility Code, 66 Pa.C.S. § 1318.

6. Peoples TWP’s rates for purchased gas costs, as the Parties have agreed

upon in this proceeding, during the relevant time period, are just and reasonable and in

compliance with Section 1318 of the Public Utility Code, 66 Pa.C.S. § 1318.

7. Peoples TWP has caused the interests of its ratepayers to be fully and

vigorously represented in proceedings before the FERC and other relevant non-PUC proceedings

during the relevant time period in compliance with Section 1318(a)(1) of the Public Utility Code,

66 Pa.C.S. § 1318(a)(1).

8. Peoples TWP has taken all prudent steps necessary to negotiate favorable

gas supply contracts and to relieve itself from terms in existing contracts with its gas suppliers,

which are or may be adverse to the interests of its ratepayers, during the relevant time period in

compliance with Section 1318(a)(2) of the Public Utility Code, 66 Pa.C.S. § 1318(a)(2).

45

9. Peoples TWP has taken all prudent steps necessary during the relevant

time period to obtain lower cost gas supplies on both short-term and long-term bases both within

and outside the Commonwealth, including the use of gas transportation arrangements with

pipelines and other distribution companies in compliance with Section 1318(a)(3) of the Public

Utility Code, 66 Pa.C.S. § 1318(a)(3).

10. Peoples TWP has not withheld from the market or caused to be withheld

from the market during the relevant time period any gas supplies, which should have been used

as part of a least cost fuel procurement policy in compliance with Section 1318(a)(4) of the

Public Utility Code, 66 Pa.C.S. § 1318(a)(4).

11. Peoples TWP has fully and vigorously attempted to obtain less costly gas

supplies on both short-term and long-term bases from nonaffiliated interests during the relevant

time period in compliance with Section 1318(b)(1) of the Public Utility Code, 66 Pa.C.S.

§ 1318(b)(1).

12. Peoples TWP’s contracts for the purchase of gas from any affiliated

interest during the relevant time period are consistent with a least cost fuel procurement policy in

compliance with Section 1318(b)(2) of the Public Utility Code, 66 Pa.C.S. § 1318(b)(2).

13. Neither Peoples TWP nor any affiliated interest during the relevant time

period has withheld from the market any gas supplies, which should have been used as part of a

least cost fuel procurement policy in compliance with Section 1318(b)(3) of the Public Utility

Code, 66 Pa.C.S. § 1318(b)(3).

14. The Joint Settlement of All Issues of the Rate Investigation Pursuant to 66

Pa.C.S. § 1307(f) that Peoples TWP, I&E, OCA, OSBA and XTO have submitted at this docket

is in the public interest.

VI. RECOMMENDED ORDER

46

THEREFORE,

IT IS RECOMMENDED:

1. That the Joint Settlement of All Issues of the Rate Investigation Pursuant

to 66 Pa.C.S. § 1307(f) submitted by Peoples TWP LLC, the Commission’s Bureau of

Investigation and Enforcement, the Office of Consumer Advocate, the Office of Small Business

Advocate and XTO Energy Inc., at Docket No. R-2014-2399598, is hereby approved in its

entirety without modification.

2. That Peoples TWP LLC shall file a tariff supplement incorporating the

terms of the Settlement Petition and changes to its rates as set forth in Attachment A of the

Settlement Petition, for service to be rendered on or after August 1, 2014, subject to revision to

become effective on one day’s notice after entry of the Commission’s Order approving the

Settlement.

3. That the Formal Complaint of the Office of Consumer Advocate at Docket

No. C-2014-2402983 is deemed satisfied and the docket shall be marked closed.

4. That the Formal Complaint of the Office of Small Business Advocate at

Docket No. C-2014-2405372 is deemed satisfied and the docket shall be marked closed.

5. That upon the filing of a tariff supplement by Peoples TWP acceptable to

the Commission as conforming with this Recommended Order and the Settlement Petition and

the Commission’s approval thereof, the purchased gas rates established therein shall become

effective for service rendered on and after August 1, 2014.

6. That upon acceptance and approval by the Commission of the tariff

supplement and supporting data filed by Peoples TWP LLC, as being consistent with this

47

Recommended Order and the Settlement Petition, the inquiry and investigation at Docket

No. R-2014-2399598 shall be terminated and the docket marked closed.

Date: May 19, 2014 /s/ Jeffrey A. WatsonAdministrative Law Judge

48