Subject: CNG Settlement Provision re: Base Gas sales
From: [email-masked]
To: [email-masked]
Cc: [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked]
Date: Thu, 21 Jun 2001 18:45:00 -0700 (PDT)

Miguel,

To further clarify the CNG settlement provision with regard to Base Gas sales please see the following.

"CNG will credit to its customers through the TCRA any net proceeds from such sales above net book value up to a cumulative level of the costs that CNG has recovered from its customers through the stranded cost surcharge under Section 18.2.A of the General Terms and Conditions of its Tariff.  In addition, CNG will credit to its rate base one half of any cumulative net proceeds from such sales that are in excess of the cumulative amount collected under Section 18.2.A, and CNG will retain the other half."

Section 18.2.A of CNG's tariff provides for the recovery of Stranded Costs (as a result of Order 636 or its progeny).  Examples of stranded costs that are potentially eligible for recovery under this section are storage facilities, production facilities, product extraction facilities and transmission facilities that have been rendered no longer used or useful as a result of the pipeline's compliance with Order 636.

Basically, the level of gains to be retained by CNG is dependent upon the level of stranded costs (facility costs -  e.g. losses on sale of gathering facilities) incurred by CNG and collected from its customers.  It is simply a netting mechanism (losses and gains) to address customer concerns that the pipeline could potentially recover its losses on the sale of assets as stranded costs, and also retain the gains on the sale of assets, including base gas.

The TCRA (Transition Cost Rate Adjustment) account is a convenient surcharge mechanism used by the pipeline to, among other things, flow-through such gains covered by the stipulation and applicable tariff provisions. 

Requiring clarification with CNG, the following is how I think this mechanism would work.

If CNG incurred and collected cumulative stranded costs of $100 and experienced a gain of $50 on the sale of base gas, CNG would credit the entire $50 to its customers through the TCRA.  

If the gain were $150 on the sale of base gas, CNG would credit $100 to the TCRA, credit its Rate Base with $25 and retain $25.  

In the best case scenario (i.e. past cumulative gains are equal are greater than cumulative stranded costs) CNG would be able to keep all the cash from the future sales of base gas, but would be required to credit rate base in the amount of 50% of the gain and recognize the other 50% as extraordinary income.  While there are probably some reports CNG has filed detailing the cumulative level of stranded costs recovered under 18.2.A and the gains realized on the sale of assets offsetting such stranded costs, this would be something the regulatory folks at CNG could verify.

Hope this helps.  If you further questions please let me know.