By

Philip L. Jones, Sr. Counsel
Consolidated Natural Gas Company

June 30, 1998

My name is Philip L. Jones. I am Senior Counsel for Consolidated Natural Gas Company.

CNG and its wholly owned subsidiary, CNG Retail Company, appreciate the opportunity to comment on the subject of stranded and transition cost determination.

Let me state at the outset that CNG believes utilities should be afforded the opportunity to recover 100% of all reasonable, verifiable and unmitigable stranded and transition costs through a non-bypassable "competitive transition charge" or CTC. But this is the easy part. The difficulties begin in deciding which costs should be included and how they should be recovered through rates and over what period.

Speculative future costs, such as capital additions, must be closely analyzed to ensure that they pass a market test. In other words and as an example, if the cost of capital improvements which would not be made in a competitive environment are prospectively included in stranded cost recoveries, utility generators will continue to have unfair competitive advantages over new entrants.

Also, regulators must carefully consider what new revenue streams might replace revenues lost as a result of retail customers choosing alternate suppliers. For example, a utility whose retail energy obligations are reduced might be able to make additional wholesale sales.

Simply stated, stranded costs are very difficult to estimate and very easy to overstate. Typically, when stranded cost surcharges are too large, default service rates (that is, the rate for service to customers that won't or don't switch to an alternate supplier or customers that, for whatever reason, lose their alternate supply) tend to be set below market, and competitive markets do not develop. To marketers or other new entrants to the generation market, this fact is the most critical in the stranded cost quantification process.

Given all the difficulties and uncertainties of estimating future market prices and stranded costs, CNG and other marketers have typically advocated continuing regulatory oversight and some sort of true-up process.

In Pennsylvania, the devilish cross-effects among the CTC, the regulated default service rate against which all marketers must compete and arbitrary across the board rate reductions became known as the "iron triangle".

The marketers' arguments initially fell on deaf ears. However, in the course of the second round of settlement negotiations, the marketers were able to persuade key stakeholders, including consumers' counsel, that properly structured competitive markets will deliver additional savings to all classes of customers, and further that competitive markets cannot develop if rate reductions and stranded cost surcharges are allowed to reduce default service rates below market.

Recent market failures in California, New York and Massachusetts lend further credence to the arguments made in Pennsylvania. The Pennsylvania experience is contrasted with the California experience in excellent fashion in the Philadelphia Inquirer article attached to the printed version of my remarks.

In light of the experiences of other states, CNG would strongly recommend that any restructuring legislation enacted in Virginia include a clear statement of policy to the effect that the development of robust competitive markets is the primary goal of the legislation and guidance to the SCC as to how stranded cost, rate reductions and other policy tradeoffs might be resolved in ways that ensure the development of competitive markets.

This concludes my remarks. Thank you for your time and attention.