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LDCs: That Giant Sucking Sound

The consequences of short-sighted rate making.
Fortnightly Magazine - July 2005
Figure 2 - Weather Normalized Use (in Mcf) Per Residential Customer

weather. 6

The second cause of delivery volume shortfalls relates to a continuing pattern of declining residential and commercial usage per customer. Weather-normalized delivery volumes used is setting base rates are based on a 12-month period. Depending on regulatory practice in a state, this period may be a recent historical year, a partially forecasted year ( e.g., six-months historical and six months forecasted), or a fully-forecasted year ( e.g., the first year when new rates are in effect). If usage per residential or commercial customer falls after the period used to set base rates, the LDC cannot achieve the expected delivery volumes, and earnings shortfalls result. With substantial dependence on volumetric revenue recovery, resulting earnings shortfalls can be significant, especially because it is not uncommon for an LDC to derive 90 percent or more of its delivery charge revenue from residential and small commercial customers whose usage is declining. 7 Faced with these usage patterns, an LDC's only choice is to file new and frequent rate cases to update the volumes on which its rates are set.

While state commissions throughout the country have addressed weather-related causes of delivery volume shortfalls through adoption of weather normalization clauses, regulatory recognition of declining usage patterns is much less prevalent. 8 LDCs must demonstrate the significance of these usage patterns on their earnings and provide their commissions with reasonable regulatory tools to address them. Properly constructed, regulatory responses to these usage patterns can be designed to benefit both LDCs and their customers, much like weather normalization clauses have been mutually beneficial.

The Significance of Declining Usage

Figure 3 - Missouri Gas Energy–Base Load & Weather Sensitivity

The declining pattern of residential and commercial usage per customer is well documented. For example, in three studies, the American Gas Association (AGA) found that weather-normalized annual residential usage per customer in the United States steadily has declined from 1980 through 2001, with further declines projected through 2020, as summarized in Figure 1. 9

These studies also demonstrate that the trend appears consistently over time in each of the four U. S. Census regions, with the exception of an increase in the Northeast between 1980 and 1990, as summarized in Figure 2. 10

The pattern of declining usage differs by region, with the sharpest continuous relative declines appearing in the Midwest and South. Between 1980 and 2001, usage per residential customer fell by 24 percent in the Midwest and 22 percent in the South.

Figure 4 - CenterPoint Energy Arkansas Residential Average Monthly Baseload Usage

In addition to its residential studies, the AGA conducted a study of commercial sector gas usage. This study showed annual weather-normalized usage per commercial customer in the United States decreased by 18 percent (from 780 Mcf to 640 Mcf) over the two decade period from 1979 through 1999. 11 Similar to its residential customer findings, AGA's regional analyses show particularly sharp commercial customer declines over this period of 27 percent and 30 percent in the Midwest and South, respectively.

The Regulatory Response

The analyses of company-specific residential and small commercial customer gas usage in the three case studies are consistent with findings of other studies in confirming the existence of continuing, declining residential