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The Auction the SSO

What are we auctioning, anyway?. Auction probably not the best nameNOT about selling the company, or assets or customersWe won't make moneyMarketers bid on the right to supply Columbia Gas of Ohio with the gas it needs to serve its sales customersLowest bidders win. What is the SSO?. The Standar

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The Auction the SSO

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    1. The Auction & the SSO What It Means for Columbia and Its Customers Ken Stammen April 13, 2010

    2. What are we auctioning, anyway? Auction probably not the best name NOT about selling the company, or assets or customers We won’t make money Marketers bid on the right to supply Columbia Gas of Ohio with the gas it needs to serve its sales customers Lowest bidders win A wholesale gas supply auction is a different way for COH to purchase gas for its sales customers. Instead of buying it on a daily and monthly basis over the course of a year, we’ll have a single competitive auction where suppliers will bid for the volumes COH needs to buy. Those willing to bid the lowest price will be the winners.A wholesale gas supply auction is a different way for COH to purchase gas for its sales customers. Instead of buying it on a daily and monthly basis over the course of a year, we’ll have a single competitive auction where suppliers will bid for the volumes COH needs to buy. Those willing to bid the lowest price will be the winners.

    3. What is the SSO? The Standard Service Offer Replaced Gas Cost Recovery (GCR) charge It’s the price COH charges its sales customers for natural gas Adjusted monthly, based on market price Just like the GCR, it’s a dollar-for-dollar pass through of gas costs at zero profit to COH Gas is a commodity that is traded like oil, gold, cotton or pork bellies. The New York Mercantile Exchange (NYMEX) is the flagship market for natural gas. Near the end of the month, the NYMEX establishes a “closing price” for gas delivered the following month. The SSO will be the NYMEX close, plus the retail adder determined in the auction. If gas closes at 50 cents per Ccf, and the retail adder is 15 cents, the SSO the following month would be 65 cents. The retail price adjustment will remain the same for 12 months.Gas is a commodity that is traded like oil, gold, cotton or pork bellies. The New York Mercantile Exchange (NYMEX) is the flagship market for natural gas. Near the end of the month, the NYMEX establishes a “closing price” for gas delivered the following month. The SSO will be the NYMEX close, plus the retail adder determined in the auction. If gas closes at 50 cents per Ccf, and the retail adder is 15 cents, the SSO the following month would be 65 cents. The retail price adjustment will remain the same for 12 months.

    4. What changes for customers? Very little If you’re a sales customer, you’ll automatically become an SSO customer If you have a contract with a CHOICE® marketer, you’re not affected If you’re part of your community’s aggregation pool, you’re not affected If you’re already a sales customer and you’re happy, you won’t have to do a thing – no shopping, no signing up, no opting out. Under the SSO, you’ll still be buying your gas from Columbia, not a marketer. The SSO price will not include any profit to Columbia.If you’re already a sales customer and you’re happy, you won’t have to do a thing – no shopping, no signing up, no opting out. Under the SSO, you’ll still be buying your gas from Columbia, not a marketer. The SSO price will not include any profit to Columbia.

    5. SSO Price = Market Price + Retail Price Adjustment Market Price Changes monthly Covers cost of the gas commodity Based on New York Mercantile Exchange monthly closing price Retail Price Adjustment Set once a year by the auction Covers marketer’s non-gas costs Interstate pipeline transmission & storage Administrative costs Marketer profit

    6. Will the bill look different? If you’re a sales customer, the term Standard Service Offer (SSO) will appear on bill The bill will still come from Columbia Customer won’t see a marketer’s name on the bill

    7. Are customers still free to choose? YES. All options remain for customers SSO customers may choose to sign up for a CHOICE® plan with a marketer CHOICE® customers may switch to the SSO Aggregation customers may opt out of their community’s plan and become SSO customers, or sign up for a CHOICE® plan

    8. What will this mean for prices? April SSO Rate = $0.58 per 100 cubic feet (Ccf) SSO = market rate ($0.384) + Retail Price Adjustment ($0.193) Comparisons with GCR are not apples-to-apples Recent GCRs (Jan-Feb-Mar) historically low July 2005-December 2008: 35 of 42 GCRs were over $1 per Ccf April 2009 -- $0.77; April 2008 -- $1.21; April 2006 -- $1.08 Recent GCRs (low 40s) are not a good comparison. Because we’ve been transitioning from the GCR to the SSO, we’ve changed accounting for our interstate transmission & storage costs, and this has resulted in lower-than-usual costs to the customer. Also, customers have been receiving a large credit for past over-collections. The SSO will reflect market prices plus a retail adder, and won’t include any adjustments. (April ’07 GCR was ~89 cents). Recent GCRs (low 40s) are not a good comparison. Because we’ve been transitioning from the GCR to the SSO, we’ve changed accounting for our interstate transmission & storage costs, and this has resulted in lower-than-usual costs to the customer. Also, customers have been receiving a large credit for past over-collections. The SSO will reflect market prices plus a retail adder, and won’t include any adjustments. (April ’07 GCR was ~89 cents).

    9. What will this mean for prices? Longer-term: Very difficult to predict Prices will be tied more directly to the market Could attract more marketers to Columbia’s service territory Increased competition and options could lead to better prices PUCO will monitor the process closely, as it has with the GCR The GCR is a complex mechanism which takes into account market prices, as well as adjustments for past over- or under-collections of gas costs by Columbia. The SSO will be more reflective of current market prices. The retail adder will be set by the auction and remain the same for a year. Future auctions could produce a lower, or higher, retail price adjustment. The PUCO reserves the right to order a return to the GCR system if it doesn’t feel the SSO is producing good results for customers.The GCR is a complex mechanism which takes into account market prices, as well as adjustments for past over- or under-collections of gas costs by Columbia. The SSO will be more reflective of current market prices. The retail adder will be set by the auction and remain the same for a year. Future auctions could produce a lower, or higher, retail price adjustment. The PUCO reserves the right to order a return to the GCR system if it doesn’t feel the SSO is producing good results for customers.

    10. What’s the impact on Columbia? The process we use to acquire and price the gas we provide to our sales customers has changed Safe, reliable gas delivery remains our core business COH still builds and maintains the distribution system, responds to emergencies, reads meters, issues bills, offers payment plans and answers customer calls If you hear someone say that Columbia is “getting out of the gas business,” that’s simply not true. We’re still buying the gas and reselling it to sales customers. And if an SSO marketer were to go out of business, COH would step in and replace the supply the marketer was supposed to provide. No customer would lose service due to a marketer default.If you hear someone say that Columbia is “getting out of the gas business,” that’s simply not true. We’re still buying the gas and reselling it to sales customers. And if an SSO marketer were to go out of business, COH would step in and replace the supply the marketer was supposed to provide. No customer would lose service due to a marketer default.

    11. Why is COH making this change? We’re being responsive to the PUCO and the Ohio Consumers’ Counsel, which support it Dominion East Ohio Gas and Vectren Energy Delivery of Ohio have already done so It’s a less-complicated, easier-to-explain price which more directly reflects the market

    12. Timeline February 23 – Gas Supply Auction April 1 – Gas flows under SSO system April 1, 2010 – March 31, 2011: First SSO period February 2011 – Second Gas Supply Auction April 1, 2011 – March 31, 2012: Second SSO period This timeline assumes PUCO approval of the SSO auction results.This timeline assumes PUCO approval of the SSO auction results.

    13. What’s Next? The SCO SCO = Standard Choice Offer SCO Auction tentatively scheduled for February 2012 Similar to SSO, but winning SCO bidders are assigned to specific customers Customer will see the SCO marketer’s name on the bill All SCO customers pay the same, regulated gas price regardless of which marketer is assigned to serve them SCO customers will pay state sales tax at their county’s prevailing rate In February 2012, COH is scheduled to conduct a retail, or SCO, auction. Gas would begin flowing under the SCO system on April 1, 2012. Very similar to the SSO, but establishes a relationship between the customer and a marketer and changes the tax rate. No matter which SCO marketer the customer is assigned to, all SCO customers will pay the same SCO rate. The state’s Gross Receipts Tax is around 4.9%. If the sales tax rate is higher than that in your county, you would pay higher taxes under the SCO. The OCC is very wary of the SCO step. SSO results will likely determine if we get to this point.In February 2012, COH is scheduled to conduct a retail, or SCO, auction. Gas would begin flowing under the SCO system on April 1, 2012. Very similar to the SSO, but establishes a relationship between the customer and a marketer and changes the tax rate. No matter which SCO marketer the customer is assigned to, all SCO customers will pay the same SCO rate. The state’s Gross Receipts Tax is around 4.9%. If the sales tax rate is higher than that in your county, you would pay higher taxes under the SCO. The OCC is very wary of the SCO step. SSO results will likely determine if we get to this point.

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