Asset Management Agreements and the Gas Utility Industry

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Asset Management Agreements and the Gas Utility
Industry

• Patrick W. Carr, CPA
• patrick.carr_at_scc.virginia.gov
• Virginia State Corporation Commission
• www.scc.virginia.gov
• November 13, 2006 NASUCA Annual Meeting

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DISCLAIMER

• I am employed on the Staff of the Virginia State
  Corporation Commission. The views expressed in
  this presentation are mine and do not necessarily
  reflect the views of the Commission.

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What assets are being managed?

• LDCs Assets - Elements of the Supply Chain
• Commodity
• Pipeline Capacity
• Storage Capacity
• Peaking Plants

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Why are they being managed?

• Due to weather and other variables, these assets
  can be under-utilized at times.
• Strategic management of the assets optimizes
  their utilization and value.
• Sometimes a third-party is best qualified to do
  this.

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Key Parameters in any AMA

• Legal Rights To Utility Assets
• Gas Supply Pricing
• Use of LDCs Capacity
• Agreement Duration
• Asset Manager (AM) Compensation
• Affiliated v. Non-Affiliated AM

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Legal Rights to Utility Assets

• Assignment v. Agency Relationship
• Assignment may limit the LDCs legal rights to
  the assets.
• Assets remain in the LDCs name in an agency
  relationship.
• Agency is generally preferable from the LDCs and
  regulators perspective.

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Gas Supply Pricing

• Actual v. Index Prices
• Agreement must be crystal-clear on pricing.
• Index pricing can provide AM with incentive to
  acquire least-cost gas and create value.
• Index pricing can also create artificial value
  would the LDC have beaten the index on its own
  anyway?
• Actual prices may provide maximum benefit to the
  LDC or maybe not.

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Use of LDCs Capacity

• Off-System Sales v. Native Load
• Need to ensure needs of firm native load are
  served first.
• Aggressive optimization can cause non-firm load
  to be interrupted more often.
• Interruptible customers need to be treated
  fairly, but in accordance with the nature of
  their tariff.

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Agreement Duration

• How Long is Too Long?
• Two to five years is typical.
• Shorter durations allow more flexibility for the
  LDC.
• Contract should contain standard out clauses
  such as bankruptcy or failure to perform.

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Asset Manager Compensation

• Incentives drive decision-making.
• Fixed Fee v. Margin Sharing
• Fixed fees provide LDC with price certainty, but
  may sacrifice an important incentive for the AM
  to maximize value.
• Margin sharing is a powerful incentive for the
  AM, and must be designed with care.

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Affiliated v. Non-Affiliated AM

• Has a big impact on incentives and behavior.
• An affiliate shares a common corporate parent,
  and therefore the LDC and its affiliate share the
  parents goals.
• Potential for conflict-of-interest.

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The LDC Perspective

• AMAs are just another form of outsourcing.
• Potential LDC Benefits
• Operational cost savings may be realized.
• AM can bring core competencies and added value.

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Regulator/Consumer Counsel Perspective

• Impact of AMA on the LDC and Customers
• Where is the value going?
• Audit Requirements
• Pricing of gas supply to the LDC
• Calculation of the margin sharing pool
• The LDCs share of the pool
• Internal controls
• The Bottom Line Is the LDC Better Off?

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Recordkeeping and Access

• Access to Information from AM
• Affiliated Asset Manager
• Varies by State
• Virginia Code Section 56-79
• Commission Order Granting Approval
• Non-Affiliated Asset Manager
• Limited access - similar to other outside service
  providers.
• The AMA contract may provide for LDC access to
  certain of the AMs records.

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Conclusion

• There may be latent value in LDC assets.
• An AM can add value for the LDC and its
  customers.
• An AMA has many parts and pieces that need to
  work together to ensure
• Proper incentives for the AM and LDC.
• Proper value for the LDC and its customers.