FOR IMMEDIATE RELEASE For Further Information Contact:
December 1, 1993 Stanley D. Green
Executive Vice President - Finance
and Corporate Development
(501) 521-1141
ARKANSAS COMMISSION ISSUES ORDER IN GAS COST CASE,
SCHEDULES ADDITIONAL HEARINGS
FAYETTEVILLE, ARKANSAS--Southwestern Energy Company (NYSE:SWN)
today announced that the Arkansas Public Service Commission (APSC
or the Commission) issued an order in a three-year old gas cost
case involving purchases by Arkansas Western Gas Company (AWG), the
Company's utility subsidiary, under a contract with one of
Southwestern's gas producing subsidiaries. The order was the
result of a hearing conducted by the Commission in January, 1993.
The order found AWG's purchases under the contract in question
to be in violation of Arkansas' so-called "least cost purchasing"
statute. The order found that the price paid by AWG to its
affiliate was too high, determined that purchases under the
contract should be indexed to an "appropriate market price", but
stated that "additional evidence is necessary in order to determine
the most equitable pricing methodology" and that "the parties
should provide testimony on any premium that should be attached to
the published price to reflect AWG's gas requirements." The
Commission scheduled a hearing on these matters for January 18,
1994.
"The Commission's order is, at best, contradictory and
confusing, and we strongly disagree with the Commission's
determination that the evidence establishes that AWG is paying too
high a price," said Charles E. Scharlau, Chairman and Chief
Executive Officer of Southwestern. "After three years of examining
these issues, we are surprised that the Commission was able to
determine that the price charged under the subject contract was too
high, yet was not able to determine what the price should be.
After reviewing the Commission's order, we believe that it is
unsupported by the extensive record which has been developed in
this proceeding. While we will comply with the Commission's order
to file additional testimony, we will at the same time aggressively
pursue every legal avenue available to us for an appeal."
Southwestern strongly disagreed with the Commission's
conclusions as to the record evidence. "AWG's gas supply
arrangements are unique and not comparable to those of most other
local distribution companies," said Scharlau. "AWG and its gas
production affiliate both presented a substantial amount of
evidence, including the testimony of industry expert witnesses,
which clearly showed the benefits provided by the contract in
question and showed that the costs of alternative supplies would be
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more expensive. The Commission apparently chose to ignore this
evidence, just as it chose to ignore the testimony of the
Commission Staff's consultant which earlier found AWG's gas costs
to be reasonable and justified. The Commission also ignored the
fact that AWG has contracts with unaffiliated suppliers which
provide similar services and require the payment of prices which
are equal to or higher than the price paid under the contract in
question.
In its order, the Commission focused largely on the
relationship between AWG and its affiliated supplier, SEECO, Inc.
(SEECO). The purchases questioned by the Commission take place
under a long-term contract, designated as "Contract 59", which was
approved by the Commission in connection with a corporate
reorganization in 1979. The Commission said that it "is not of the
opinion that affiliate transactions are inherently improper," but
that "based on the evidence in this Docket, the Commission finds
that the affiliate relationship between Seeco and AWG is fraught
with conflicts of interest that are the root of the issues in this
Docket." In describing its remedy, the Commission went on to say:
"In light of AWG's inability to negotiate in an arms-length manner,
or an approximation thereof with Seeco, the Commission finds that
the price of gas sold pursuant to Contract 59 should be determined
by the market."
In addressing the evidence in the record, the Commission said
that "the evidence presented by the AG and Staff is persuasive that
the benefits of Contract 59 do not justify the excessive price...
AWG did not provide any studies or other quantitative evidence to
show that any non-price benefits of Contract 59 justify the higher
contract price. The Company also did not provide evidence to
refute the AG's (Attorney General) and Staff's conclusion that the
flexible take provisions of Contract 59 are not unique and the
Contract 59 premium is in excess of average industry premiums."
While in disagreement with the price under Contract 59, the
Commission said in its order that it "does not believe that its
findings necessitate the abrogation of Contract 59...It is the
Commission's intent that AWG continue to rely on Contract 59 for a
portion of its gas supply."
"While the Commission does not want the contract abrogated, it
once again failed to explain how it could overcome a contract
provision which it specifically approved," said Scharlau. Scharlau
explained that Contract 59 includes a "regulatory out" provision
which allows SEECO to terminate the contract in the event any
portion of the contract price is disallowed by a regulatory
authority. The gas would then be available for sale by SEECO to
other markets, explained Scharlau. "Contrary to the claims of
Attorney General Winston Bryant, such a development would be
detrimental to northwest Arkansas ratepayers, because it would
subject those customers to higher costs than they pay today," said
Scharlau. "AWG has consistently delivered gas to its customers at
costs which are among the lower third in the country. Contract 59
has been a key part of AWG's ability to provide low-cost service."
In addressing the possibility of refunds, the Commission said
it "will not rule on the retroactive pricing issues addressed by
the parties as refunds are not an issue in this Docket. As stated
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in Order No. 1 of this Docket, AWG's gas purchasing practices,
affiliate transactions, gas costs and gas cost allocation issues
with regard to both the AWG and ANG divisions are being addressed
on a prospective basis only."
AWG also purchases gas from SEECO under a more recent contract
for its Associated Natural Gas Company division. That division
serves northeast Arkansas and southeast Missouri. In its order,
the Commission ruled that purchases under that contract are
currently in compliance with Arkansas' least cost purchasing
statute.
The gas cost issues addressed in the order were first raised
by the Commission in December, 1990, in connection with the APSC's
approval of an AWG rate increase. During the rate case, the
Commission Staff hired its own consultant to review AWG's gas
costs, including the purchases from its affiliate. That consultant
recommended that no adjustment be made to AWG's gas costs and
recognized the value to AWG of the long-term commitment and
services provided by the contract with its affiliate. In spite of
the testimony filed by its Staff in connection with the rate case,
the Commission expressed concern about AWG's purchases from its
affiliate and proposed a number of changes to the regulatory
mechanisms by which AWG recovers its gas costs. The effect of
those changes would have been to lower the price paid by AWG under
the contract with its affiliate. The parties to the proceeding,
including the APSC Staff and the Office of the Attorney General of
the State of Arkansas, attempted to reach a mutually agreeable
resolution of the issues raised by the Commission, but were unable
to do so. The Commission subsequently established a procedural
schedule for the filing of testimony. That procedural schedule
culminated in the January, 1993, hearing.
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