What's the fairest way to collect $1.37 billion from gas utility customers if those customers can just cancel their service?
It's a big question being weighed now by the Oklahoma Corporation Commission, which is considering whether to approve a 25-year plan to let Oklahoma Natural Gas recoup costs associated with the brutal February winter storms.
But if a customer can avoid their individual costs by switching, for example, to an all-electric household, someone else would have to pay their share.
To prevent that scenario, ONG plans to charge customers up to $1,320 if they switch to another fuel source.
This proposal is triggering debate among regulators, and outright criticism from consumer advocate groups.
Oklahoma's corporation commissioners expressed hesitation about the fee during a hearing last month. Commissioner Todd Hiett likened it to "tripping over dollars to save a dime."
AARP Oklahoma, an advocate for senior citizens living in the state, came out strongly against not just the termination fee, but also against the cost recovery plan. Sean Voskuhl, AARP Oklahoma state director, said ONG is attempting to collect the exorbitant price they paid for natural gas in the worst possible way.
"ONG is not only charging everyone the same flat fee whether they live in a mansion or a studio apartment, but they are also trying to lock them into a lifetime agreement of which the only way out is to pay a ransom. This is no way to treat customers," Voskuhl said.
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Recovering winter storm costs
During the winter storm, ONG was forced to buy from a wildly reactive market to meet customer demand. Comparatively, ONG spent just $222 million buying natural gas during all of 2020.
As one regulator put it, "decisions were being made during that storm to literally keep people alive."
That comment was made during a recent Oklahoma Corporation Commission hearing where OCC Public Utilities Division Director Brandy Wreath presented details of the agreement. Final approval is now up to Oklahoma's three elected corporation commissioners.
According to the plan, ONG would pay its immediate debt by issuing bonds to investors. Customers would be on the hook to gradually repay those bonds over the next 25 years. To make the investment more attractive, the plan's designers created an "exit fee" to ensure the entire amount due would be paid, even if a customer switches their home's fuel source.
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What is the exit fee?
When state lawmakers wrote the framework for utilities to recover costs by issuing bonds, they included a requirement that customers can't switch fuel sources to avoid paying what they owe. An exit fee helps secure those funds, Wreath said.
"This is not a utopian situation where because you're no longer a customer, your debt just disappears. Somebody has to pay this. This was legally and prudently incurred expenses on behalf of the ratepayers, based on their usage and extremely increased market costs," he said at a recent OCC hearing.
The exit fee charges customers up to $1,320 if they choose to switch to another fuel source. The amount is reduced over time as customers pay the monthly charge.
The exit fee, or termination fee as it's sometimes described, will only be charged to customers who cancel ONG service for the expressed purpose of fuel switching.
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All ONG customers, except for certain low-income households, are responsible for monthly charges of less than $10 over the next 25 years or until the $1.37 billion bond is paid off.
The exit fee won't be charged to customers who physically move out of the system, but new ONG customers will have to pay the monthly charge even if they weren't around during the storm.
If you move out of state, or to another residence without ONG service, you won't be charged the termination fee.
"The assumption is that somebody else will move into where they lived and would pay the securitization charge," said Corey Slaughter, ONG rates and regulatory director.
You would also be exempt if, for example, your house is destroyed by fire or severe weather.
"It's only going to be charged in the case where a customer notifies us that they are terminating service in order to switch to an alternative fuel source," Slaughter said. "When you fuel switch, it goes away and it's gone forever from that address, and that's where the termination fee comes into play."
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Story continues below.
Why is an exit fee needed?
Technically, it's a termination fee that adheres to state law adopted this year specifically for the February 2021 winter storm.
After consulting with debt securitization experts, the Oklahoma Legislature required that utilities' cost recovery plans include a "nonbypassable mechanism" to ensure that a customer's obligation is paid if they switch providers, switch fuel sources or materially change their usage.
It's meant to equalize the playing field, so that customers who can afford to switch to a completely new source of fuel and shut off their account don't leave their neighbors paying their debt.
ONG said Wednesday it doesn't track the number of customers who leave for another fuel source.
"The termination fee is one small part of the securitization process designed to minimize the impact to all our customers as a funds recovery mechanism and not as a hindrance for customers who would seek to leave the natural gas system," spokeswoman Liza Steger said.
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Steger also said ONG expects this fee to be a rare occurrence.
But fuel switching is something ONG's parent company, ONE Gas, warns all its investors is among the risks of being a shareholder, said Mike Bartolotta, co-head of public finance at Hilltop Securities, the firm that helped write the securitization plan.
Without a termination fee, other costs associated with servicing the bond could rise, Bartolotta said. If the OCC rejects the termination fee, ONG might have to hold more cash in reserve to ensure their bonds receive a better credit rating.
At a hearing last month to review the plan, Bartolotta addressed a question about why ONG needs an exit fee while Oklahoma Gas & Electric, which is also pushing for a securitization plan, does not.
"Everybody uses electricity," he said. "Not everybody uses gas, and so the ability for fuel switching could be a potential issue."
Regulators warned that without a guaranteed cost recovery system, any bonds they market to investors could be less attractive and more expensive to sell.
A riskier investment means ONG and their customers will have to pay higher interest rates to lure investors.
"The happier an investor is with a lower risk, that means they're willing to take a lower interest rate, which means consumers pay less, which means (consumers) save more money," Wreath testified.
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Is it legal?
So far, no one has gone to court challenging the legislature's nonbypassable mechanism or ONG's proposed exit fee. It is, however, a possibility.
During public comments at a recent OCC hearing, constitutional law professor Gary Allison said he is considering a challenge based on the Commerce Clause, a provision in the U.S. Constitution that prohibits government interference with interstate business.
"Oklahoma, in its history, has had many cases where the U.S. Supreme Court found that it has erected various barriers to the ability of people to make decisions on where they want to be in the market with respect to particular products," Allison said. "And either the Oklahoma legislature or the regulatory agencies have imposed barriers to the free flow of decisions that might cause them to change one product for another or one supplier to another."
AARP would rather not even need the legality tested. The organization wants corporation commissioners to reject ONG's request and instead "adopt a fair and reasonable process that includes shared sacrifice between the utility and those profiting from the winter weather event."
Staff writer Dale Denwalt covers Oklahoma's economy and business news for The Oklahoman. Have a story idea for Dale? He can be reached at email@example.com or on Twitter at @denwalt. Support Dale's work and that of other Oklahoman journalists by purchasing a digital subscription today at subscribe.oklahoman.com.
This article originally appeared on Oklahoman: Why ONG is charging customers 'exit fees' to cover winter storm costs