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LDCs: That Giant Sucking Sound

The consequences of short-sighted rate making.
Fortnightly Magazine - July 2005
Figure 8 - Texas Gas Service south Jefferson County, Texas Estimated Annual Normalized Residential Usage Per Customer

adversely affected and customers will benefit through savings in the cost of gas portion of their bills through reduced usage.

Third, the premise that low-use customers are low-income customers is not a sound basis for retaining a regulatory policy of recovering a substantial portion of an LDC's required delivery revenue from volumetric charges. Many low-income customers who live in old, poorly insulated structures use more gas than higher-income customers. And certain relatively low-use customers are middle- or high-income customers who, for example, heat their homes with electric heat pumps, using gas only for water heating and, perhaps, back-up central furnaces. As a result, a volumetric-driven rate design is a clumsy and ineffective vehicle to assist low-income customers. Some non-low-income customers unnecessarily will be assisted through the subsidy, and other deserving customers will go unaided. The low-income problem is more effectively addressed through special low-income rates, commission-approved weatherization programs, or expanded federal and state assistance grants rather than through rate design.

Fourth, concern about "rate shock" on low-use customers should not prevent a movement toward collection of a much greater portion of LDC required delivery-service revenue through fixed rather than variable charges. 15 Rather, addressing this concern may require that the rate design changes be implemented gradually over time. 16

Other regulatory mechanisms also can be implemented to address the impact of declining usage patterns. For example, a rate adjustment mechanism could be introduced that provides for periodic rate adjustments to true-up the dollar consequences of differences between customer usage actually experienced and usage levels for designing volumetric rates in the most recent rate case. Over time, if base-rate design changes ultimately are implemented that result in delivery revenue recovered largely through fixed-rate elements, such an adjustment mechanism could be phased out.

By effectively addressing declining residential and small commercial usage trends in an LDC rate case, the LDC and state commission can work together to improve the LDC's opportunity to achieve its authorized rate of return and the stability of its earnings and cash flow, encourage LDC involvement in conservation initiatives, and lower future customer bills through fewer rate cases, associated lower expenses and reduced gas usage resulting from conservation initiatives. Experience gained through implementation of weather normalization clauses suggests that regulatory solutions to LDC earnings problems can be beneficial to both LDCs and their customers. The same opportunity exists today in developing regulatory solutions to LDC earnings shortfalls resulting from declining residential and small commercial usage trends with traditional base rate structures.


  1. Those customers who secure their own gas supplies, directly or through the services of a gas marketer, pay the LDC only for delivery service. Customers who rely on the LDC for the commodity as well as delivery service also pay the LDC for the cost of gas that it incurs in securing supplies. LDCs typically recover gas-related costs through state commission-approved cost of gas clauses outside of general rate cases. While some LDC rate structures include a portion of gas costs in base rates, I use the term "base rates" as if these rates are designed to recover