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Rate Discounts Pave the Way for Restructuring

Fortnightly Magazine - January 15 1995

gas local distribution company (LDC), to use special contracts to sell gas at discounted prices to customers who could easily switch fuels. In its approval order, the DPU had authorized the LDC to use incremental pricing to negotiate rate contracts with customers who could demonstrate a bona fide energy alternative to purchasing service from the LDC. To protect core customers, the DPU required the negotiated rate contracts to provide a minimum contribution of 10 percent above long-run marginal costs. Under the new tariff, negotiated contracts go into effect on an expedited basis without prior substantive DPU review for those customers whose energy alternative is an unregulated fuel. The contracts would, however, be subject to post hoc prudence review in base rate cases. The DPU said that the LDC had failed to show that the negotiated rates were required to compete with regulated electricity providers. It ruled that the LDC was free to enter special contracts with such customers, provided that the contracts are submitted for substantive DPU review prior to taking effect. Re Boston Gas Co., 142 PUR4th 241 (Mass.D.P.U. 1993). On appeal, the Council argued that state law requires utilities to keep to filed rate schedules in determining prices for individual customers. It argued further that the DPU exceeded its authority in relinquishing regulation of gas sales to noncore customers, thereby "subjecting the public to unlawful abuses of monopoly." According to the Council, state law requires all gas and electric companies to file rate tariffs for all services, and to file new schedules before changing prices.

The court ruled that the state's public utility law gives the DPU broad discretion to authorize special contracting by utilities and to set requirements for contract approval. It said that the DPU's tariff plan set sufficient standards for negotiating contract rates, and that a rule restricting all rate negotiations was not in the public interest. The court also rejected allegations that the special contracts were discriminatory, finding that regulatory law clearly permitted different charges when based on reasonable classifications, such as the ability to switch fuels in a competitive energy market. The court pointed out that the rate discount tariff approved by the DPU required qualifying customers to have annual energy requirements of at least 30,000 million British thermal units (BTUs) and a bona fide energy alternative to purchasing service from Boston Gas that would foreclose service under the ordinary tariff.

The Problem of Lost Revenues

The most contentious issue in the discount cases is who should pay for the reduced revenues. One popular solution is to split the losses between the utility and its ratepayers. Other solutions range from requiring shareholders to absorb the entire loss to permitting rate increases for all remaining customers on the system (see box). Utilities have been permitted to go ahead with discounts pending later review of the results in a full rate case. In some instances, regulators have warned that a future increase in residential rates will not be allowed without a full review of the company's earnings. Such a review is found necessary to allay fears that