..Case Studies

Kentucky’s Five Largest Local Distribution Companies (LDCs)

For the Kentucky Public Service Commission, Liberty recently completed a simultaneous management audit of the gas supply management policies and practices of the five largest gas distribution companies (local distribution companies, or LDCs) operating in that state. The LDCs included Columbia Gas of Kentucky, Inc. (Columbia), Delta Natural Gas Company, Inc. (Delta), Louisville Gas and Electric Company (LG&E), The Union Light, Heat, and Power Company (ULH&P), and Western Kentucky Gas Company (Western).

There were two equally important primary objectives in this audit. The first primary objective was to examine and evaluate each of the major Kentucky LDCs’ gas planning, procurement, and supply management processes and strategies, and make recommendations on an on-going basis. The Commission was especially concerned about the increased volatility being experienced in wholesale gas markets and how that had been translated to retail markets. The focus of the audit was therefore on determining whether the LDCs’ planning, procurement, and supply management organizations were designed to produce a gas supply portfolio that adequately addressed the issues of minimizing cost to retail customers, reasonably mitigating price volatility, and maintaining a reasonable level of reliability.

The second equally important objective was to provide training to select Commission Staff during the course of the audit in order to help the Staff understand, review and evaluate LDC gas procurement, gas portfolio management, and gas supply management related issues in the future. This training included both  “classroom” sessions, as well as hands-on type of instruction. 

The audit covered the following task areas for each of the five companies:

• Gas requirements forecasting and supply planning

• Organization, staffing and controls

• Gas supply management

• Gas transportation programs

• Gas balancing policies and procedures, including lost-and-unaccounted-for gas

• Response to regulatory change

• Affiliate relationships

Areas of concern were identified for each of the companies, and suggestions for improvements were made for all five. Liberty provided detailed recommendations for the resolution of identified areas of concern and provided detailed advice to the Commission regarding strategies for implementing these recommendations.

Liberty also recommended that the companies and the Commission work together on certain areas, including hedging strategies, and the companies’ problem with uncollectible accounts. The companies had reported to Liberty during the course of the audit that higher prices for natural gas were making their uncollectible accounts problem much worse.

Draft reports were completed for each of the five companies in only six months. Liberty’s Final Report was also noteworthy because it contained a comprehensive introductory section not normally contained in audit reports.  The purpose of this introductory section was to serve as a primer on the important elements of natural gas planning and procurement and establish a common frame of reference for the readers of the report having different levels of understanding and representing many different perspectives.  The content of this introductory section of the report included background and analysis of the following areas related to natural gas procurement in Kentucky:

• Background on Kentucky Natural Gas Price Issues;
• Principles of Hedging, and Impacts of Hedging on the Kentucky Natural Gas Market;
• Analysis of the GCA Mechanism, Impacts of Budget Billing, and the Uncollectibles Issue;
• Background on Natural Gas Forecasting Principles;
• Analysis of the Impact of Affiliate Relationships on the Kentucky Gas Market.

The Final Report contained both detailed recommendations for the resolution of identified areas of concern for each of the five Kentucky LDCs and also detailed advice to the Commission regarding strategies for implementing these recommendations.            The Report continues to serve as a framework for ongoing discussion between the LDCs and the Commission on the important issues of natural gas hedging, forecasting strategies, and the resolution of uncollectibles isues.