PECO Energy Company (Gas Division)

PUC 1307(f) Filing

Section 8

Page 1

Current Fuel Procurement Practices

PECO Energy Company (“PECO” or the “Company”) continues its long-standing commitment to minimizing overall purchased gas costs while maintaining secure, long-term supply and deliverability to meet the demand of its firm customers, a significant portion of which is weather sensitive.

To understand PECO’s least cost gas procurement strategy, a brief overview of PECO’s supply and capacity portfolio is necessary. PECO’s capacity portfolio consists of three distinct tiers: (1) firm transportation services; (2) firm storage services (Tier I Balancing Assets); and (3) peaking capacity, which consists of PECO-owned liquefied natural gas (“LNG”) and propane-air facilities and third-party delivered peaking services (including Tier II Balancing Assets, as discussed below). In general, PECO purchases gas directly from suppliers in producing areas and has such gas transported to PECO’s city gate or to storage injection points pursuant to PECO’s contracts with interstate pipelines. PECO supplements this supply from an array of supply and storage contracts with pipelines and non-pipeline suppliers to satisfy daily demand requirements, as more fully discussed below.

FIRM TRANSPORTATION CONTRACTS

PECO has annual firm transportation contracts with two major interstate pipelines (Texas Eastern and Transcontinental (“Transco”)) and one regional pipeline (Eastern Shore Natural Gas) that provide the following maximum daily transportation capacity:

Texas Eastern / 161,982 dth/day
Transco / 154,278 dth/day
Transco (WinterPeak Transportation) / 4,554 dth/day
Transco (Market Area Capacity) / 55,000 dth/day
Eastern Shore Natural Gas / 12,000 dth/day

Under the foregoing contracts, PECO flows gas purchased under long-term, seasonal, and spot purchase agreements with its suppliers that represent about one-third of PECO’s peak day supply. PECO also has additional transportation contracts with Texas Eastern that are used primarily to flow gas from the interconnects with GSS Dominion storage to PECO’s city gate. In addition, PECO has a transportation contract with UGI Utilities Inc.

FIRM STORAGE SERVICES

PECO has storage contracts with Transco, Texas Easternand Dominion providing, in total, approximately 17.9 BCF of storage capacity. PECO’s total withdrawal capability from these storage contracts is 236,600 dth/day. These storage contracts are referred to as PECO’s “Tier I Balancing Assets.” The following table provides the associated pipeline, the applicable tariff rate, the Maximum Storage Quantity, (“MSQ”) and the Maximum Daily Withdrawal Quantity (“MDWQ”) for the Company’s five underground storage assets.

Storage Pipeline & Tariff Rate / MSQ (Dth) / MDWQ (Dth)
TETCO SS-1 / 5,512,157 / 78,114
Dominion GSS / 3,326,029 / 34,020
Transco GSS / 2,667,190 / 54,508
Transco S-2 / 2,799,327 / 31,142
Transco WSS / 3,687,492 / 38,816

PEAKING CAPACITY

The remaining third of PECO’s peak day supply comes from the operation of PECO’s LNG and propane-air peaking facilities and from delivered peaking services. PECO uses supply from Texas Eastern and Transco to fill its LNG peaking facility and purchases propane to fill its propane peaking facility. PECO supplements these peaking facilities with delivered peaking services from its suppliers in order to meet fluctuations in its peak day demand. These capacity assets are referred to as PECO’s “Tier II Balancing Assets.”

Supply Sources

PECO recognizes the need to adapt to the changing natural gas marketplace and, therefore, is always exploring new opportunities to improve the methods by whichit purchases gas, optimizes resources, and meets the needs of customers. For instance, the increasing availability of Marcellus Shale gas has increased PECO’s supply options. Through the above-mentioned resources, PECO meets its highest priority of providing safe and reliable gas supplies to the city gate at all times to meet its customers’ firm demand.

Additionally, PECO regularly talks to and meets with representatives from pipeline and marketing companies to identify opportunities for enhancing existing services, increasing reliability and flexibility, and decreasing gas costs by entering into new contracts.

Lastly, PECO is a party to four asset management agreements (“AMAs”) and is continually analyzing other AMA opportunities. In an AMA, a third-party asset manager manages a portion of PECO’s storage and/or firm transportation contract entitlements. Asset managers work with the available resources under contract to optimize the value of these assets while, at the same time, providing reliable supply and economic benefits to PECO and its customers.

Pricing Diversity

PECO’s varied supply and capacity portfolio affords it purchasing flexibility while ensuring system reliability. The supply portfolio is diverse in its pricing options due to the following: (1) PECO’s Commission-approved hedging program; (2) the amount of storage assets (filled during the summer months); (3) use of both first-of-month index and NYMEX-based pricing mixed with daily spot purchases; and (4) multiple geographic regions to obtain supply.

Before PECO enters into a transaction for the purchase of natural gas supply from a counterparty, the counterparty is subjected to a rigorous financial analysis performed by the Company’s Risk Management Department. The Risk Management Department then sets the appropriate tenor limit for PECO’s transactions with that counterparty. In addition, PECO will not purchase supply from a counterparty unless there has been a North American Energy Standards Board or Gas Industry Standards Board base contract executed with the counterparty. The performance language in the base contracts provides PECO withan industry-standard remedy to pursue should the suppliers fail to deliver in accordance with the agreement.

Staffing and Expertise

The structure and functions of PECO’s Gas Supply and Transportation (“GS&T”)group have not changed significantly since PECO’s 1307(f) filing in 2015. However, the GS&T group underwent an organizationalchange in April 2016. That is, in order to continue the department’s commitment to providing least cost, safe and reliable natural gas for the Company’s customers, the GS&T group now is organized under the Vice President of Regulatory Policy and Strategy. Previously, theGS&T group was organized under PECO’s Vice President of Energy Acquisition. The GS&T group continues to be comprised of a highly experienced staff. The Manager of GS&T has a Bachelor’s and Master’s degree and over 30 years of experience in the natural gas industry. He manages a staff of nine employees including a Principal Regulatory Specialist, a Principal Procurement Analyst, six Senior Gas Analysts and an administrative assistant. The staff of the GS&T group averages over 20 years of energy industry experience.

The GS&T group’s core responsibilities include performing regulatory, end-user transportation, and gas-related supply functions.

The regulatory functions of the group are to monitor and actively participate in proceedings at the Federal Energy Regulatory Commission that could impact PECO’s service or cost of service to its gas customers. Additionally, through its participation in the American Gas Association and the Energy Association of Pennsylvania, the GS&T group is also actively involved in global regulatory issues that impact PECO directly or indirectly through their effect on the gas industry as a whole. Also, the GS&Tgroup’sPrincipal Regulatory Specialist is responsible for obtaining all pipeline transportation and storage capacity necessary to satisfy PECO’s retail supply plans.

The end user transportation function of the GS&T group involves the management of PECO’s High Volume Transportation Program. It is responsible for the daily nominations, confirmations, and scheduling of gas supplies from third party natural gas suppliers, and is responsible for administering all other elements of the program. This function supports the Low Volume Transportation Program by confirming gas volumesfor the program and by managing the capacity releases associated with the program.

The supply personnel in the GS&T group are responsible for long-term and short-term planning, gas purchases, capacity releases, contract administration, pipeline scheduling, and gas storage management. Theyare also responsible for the overall optimization of PECO’s gas supply assets. PECO believes that in order to properly manage the gas supply function and make the best purchase decisions, it is critical that the knowledge of, and daily interactions pertaining to, the planning, control and use of its gas supply be well coordinated. Accordingly, the GS&T group works closely with PECO’s Gas System Control and Gas Engineering Group. Finally, the GS&T group continues to be supported by other departments within the Company such as Legal, Retail Rates, Gas Operations, Finance, and Risk Management.