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LDCs Test Supply-cost Incentive Mechanisms

Fortnightly Magazine - January 15 1996

The New York Public Service Commission (PSC) has approved its first market-indexed incentive mechanism to encourage a local distribution company (LDC) to control gas-supply costs. Brooklyn Union Gas Co.'s modified proposal for a one-year pilot incentive mechanism employs an external index as a gas-cost target (the monthly closing natural gas contract price on the New York Mercantile Exchange), rather than a series of internal cost measures based on estimated fixed and variable costs. Finding that market prices for gas were unstable, albeit declining, the PSC rejected a proposal to adopt a "hard price cap" incentive mechanism. Under the approved plan, the LDC shares the benefits and costs associated with variations between actual costs and the target. The sharing component of the incentive mechanism includes a "deadband" of plus or minus 4 percent to account for cost variation beyond the control of the utility as well as a limit of plus or minus 8.5-percent variation, beyond which all costs or savings are allocated to firm customers. Re Brooklyn Union Gas Co., Case Nos. 95-G-0050 and 95-G-0084, Sept. 29, 1995 (N.Y.P.S.C.).

The West Virginia Public Service Commission (PSC) has approved what it labels an "innovative plan" to reduce rates for services provided by Hope Gas, Inc., an LDC. The LDC's customer will enjoy a three-year reduction in purchased gas costs. In exchange, the LDC is exempted from the PSC's annual purchased-gas cost filing requirements, allowing the company to reap the benefits of any cost reductions while accepting the risk of any increases. The plan is part of a broader settlement agreement affecting a number of pending rate-related cases for the LDC. Re Hope Gas, Inc., Case Nos. 94-0655-G-30C et al., Oct. 26, 1995 (W.Va.P.S.C.).

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