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LDC Rate Discounts Reveal Growing Competition

Fortnightly Magazine - May 15 1995

As evidence of a continuing trend toward competition in the retail market for natural gas, state regulators point to the continued popularity of special discount rates. Designed to allow local distribution companies (LDCs) to retain existing customers, these rates are often approved despite concerns about the costs and their effect on other customers.

The Delaware Public Service Commission (PSC), for one, recently approved a proposal from Delmarva Power & Light Co. to market firm gas service to a large industrial facility at a rate comparable to its rate for interruptible service. The service will permit the industrial customer to meet clean air regulations during the summer months at rates based on short-run marginal cost. In approving the unique contract, the PSC expressed a hesitation to "discourage the LDC's good faith efforts" to adapt to an increasingly competitive gas market. Finding that the new rate would generate positive margin contributions for the first year of the contract, the PSC nevertheless retained the authority to order the LDC to terminate the contract after March 31, 1996. It also rejected a proposal to retain the revenues from the contract pending a full review of the utility's cost of service in an upcoming rate redesign case. It further dismissed concerns that providing firm service at lower rates might constitute discrimination, finding that curtailments during the summer months were unheard of even for nonfirm customers. Re Delmarva Power & Light Co., PSC Dkt. No. 94-141, Feb. 14, 1995 (Del.P.S.C.).

Putting aside initial concerns about the cost of serving natural gas special-contract customers, the economic feasibility of the customer's bypass option, and the implications of negotiated arrangements for other customers, the Michigan Public Service Commission (PSC) has authorized Conumers Power Inc. to enter a special contract for discounted gas transportation service to an industrial customer.

The PSC found the bypass threat real and the special contract rates necessary to induce the customer to remain on the LDC's system. Moreover, it found adequate evidentiary basis for concluding that the rates in the special contract would cover the variable costs of serving the industrial customer and contribute to the fixed costs of the LDC system.

The PSC assigned shareholders the responsibility for any revenue shortfall created by the difference between the special contract rate and the otherwise applicable tariffed rate floor. The potential revenue shortfall resulting from the difference between the tariff rate floor and the transportation class cost of service will be addressed in a pending general rate case. The PSC rejected a challenge to the legality of a contract provision exempting the industrial customer from future surcharges during the five-year term of the contract. Re Consumers Power Co., Case No.

U-10651, Feb. 23, 1995 (Mich.P.S.C.). (For prior order directing further study of the proposal, see Re Consumers Power Co., 159 PUR4th 162 (Mich.P.S.C.1995)).

The Florida Public Service Commission (PSC) has permitted Peoples Gas System, Inc. to expand its discounts to customers who use more gas during offpeak months. The LDC had offered a 15-percent discount to customers that use 75 percent of their load during the summer months.