QUESTAR GAS SEEKS RATE RELIEF TO MAINTAIN SERVICE AT CURRENT LEVELS

SALT LAKE CITY -- Questar Gas today asked the Utah Public Service Commission (PSC) to approve a 5.7 percent increase in its rates effective Jan. 1, 2003, to reflect the rising costs of keeping pace with record customer growth and to maintain existing service levels.

In documents filed with the PSC, company officials state that despite aggressive cost cutting and improved efficiency over the past decade, Questar Gas is experiencing significant revenue deficiencies due to the rising costs of meeting record customer growth and a continuing 20-year trend in declining gas usage per customer. The revenue deficiencies are projected to become severe by 2003, requiring a rate increase at that time.

The company said the increase is needed to maintain its ability to continue providing service at current levels while earning a fair return on shareholders' investment in an expanding customer base.

If approved, the company's request would raise the average monthly bill for the typical residential customer using 115 decatherms per year about $3, from $57 to $60. The total annual amount of the company's request is $23 million.

"By any measure you choose, Questar Gas is one of the most efficient utilities in the country, and that's reflected in the fact that our customers enjoy some of the lowest rates in the nation," said Nick Rose, Questar Gas president and CEO. "Over the last decade, through increased technology, early retirements and by consolidating and streamlining operations, we have increased efficiency and improved productivity. Today our operating expense per customer is at an all-time low, and we are serving more customers with fewer employees.

While the company continues to incur the rising costs of meeting a customer-growth rate twice the industry average, newer, more efficient appliances and better insulated homes have resulted in customers using less and less gas. This means less revenue to cover rising costs of service."

The company contends that in addition to higher costs and lower usage per customer, the PSC's practice of setting future rates based on historical costs, rather than known current or projected costs, also will hamper Questar Gas's ability to fully recover legitimate operating expenses. According to the company, this practice results in "regulatory lag," a condition that causes rates to be out of step with actual costs when the rates take effect. To avoid this mismatch, the company is asking the PSC when setting future rates to consider costs and events that are known or reasonably expected to occur when rates become effective. The company believes this approach will provide it with a better opportunity to earn the revenues needed to cover the rising costs of serving new customers, provide ongoing service at levels customers desire, recover legitimate business costs and provide shareholders with a fair and reasonable return on their investment.

Since 1985, Questar Gas has added about 300,000 new customers, a 64 percent increase. During the same period, average usage per customer dropped from 154.1 to 118.6 decatherms per year, or 23 percent.  Forecasts show this trend continuing.

To accommodate customer growth, Questar Gas invested $379 million in new equipment, facilities and system expansion between 1986 and 2001, an increase of 135 percent. That reflects a per-customer capital investment increase of 42 percent. At the same time, due to declining per-customer usage, revenues have remained relatively flat, lagging the rate of customer growth and the company's level of investment to meet this growth.

To keep earnings at sufficient levels, the company has taken steps to lower operating costs and improve efficiency. Since 1991, the company has increased the number of customers served per employee from 362 to 705, or 95 percent. Since 1985, the company has reduced operating costs per customer by 11 percent.

"We have no choice but to seek rate relief," Rose said. "Our employees are committed to serving customers effectively and efficiently, but I fear they are reaching the breaking point. We simply can't continue to reduce our workforce and still provide the level of service our customers expect. We will not compromise safety or reliability, but we are running out of areas to reduce or eliminate without seriously compromising our ability to provide good basic service.

"Without rate relief, our projected levels of return also will make it difficult to attract investors," Rose added, "and without investors, we can't raise the capital we need to keep up with growth, make necessary improvements, or serve our existing customers at today's level."

Questar Gas's rates are divided into three parts: the costs of natural gas; the costs of moving the gas to market; and, finally, the costs of providing service to retail customers, which include the new investment necessary to serve a growing number of customers. It is this last part in which the company is seeking an increase. The fluctuating costs of the natural gas itself and moving it to market are passed along to customers after separate rate proceedings usually held twice a year. These "pass-through" increases and decreases have no impact on the company's earnings.

Questar Gas is a subsidiary of Questar Corp. (NYSE:STR), a $3.1 billion diversified natural gas company headquartered in Salt Lake City. Through subsidiaries, it engages in gas and oil development and production; gas gathering, processing and marketing; interstate gas transmission and storage; retail gas distribution; retail energy services; and information systems and technologies.

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