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LDCs: That Giant Sucking Sound

The consequences of short-sighted rate making.
Fortnightly Magazine - July 2005
  1. [P.S.C. of Ky. Gas No. 6, Original Sheet Nos. 71-71.4] and Baltimore Gas and Electric Co.'s Conservation Surcharge Rider [P.S.C. Md. - G-9 (Suppl. 301)].
  2. AGA, "Patterns in Residential Natural Gas Consumption Since 1980," Feb. 11, 2000, page 7; "Patterns in Residential Natural Gas Consumption, 1997-2001," June 16, 2003, p. 5; and "Forecasted Patterns in Residential Natural Gas Consumption, 2001-2020," September 21, 2004, p. 3.
  3. The per customer increase in the Northeast between 1980 and 1990 is attributed to increased space heating penetration, due mainly to conversions from fuel oil-based heating during this time period.
  4. AGA, "Trends in the Commercial Natural Gas Market," October 23, 2002, p. 6.
  5. In their discussions of the classification of costs as customer, demand, or volume-related for cost study purposes, neither the National Association of Regulatory Commissioners' Gas Rate Design Manual, June 1989 (pp. 23, 35-48) nor the AGA's Gas Rate Fundamentals, 1987 (p. 142) treat any costs other than gas supply-related costs as volume dependent.
  6. For example, in the Missouri Gas Energy cost of service study in its last rate case ( Case No. GR-2004-0209 ), I treated Account 871, Load Dispatching, an operations and maintenance account, as volume dependent. This expense amounted to less than 0.01 percent of the revenue requirement. 
  7. Joint Statement of the American Gas Association and the Natural Resources Defense Council Submitted to the National Association of Regulatory Utility Commissioners, July 2004, p. 2.
  8. Too often cursory examination of summer month average usage provides the sole basis for rejecting a rate design that substantially reduces an LDC's reliance on volumetric revenue recovery based on "rate shock" concerns. Without close examination of customer-specific data throughout the year, such conclusions may be unwarranted. For example, certain low-use customers in the summer months may be among the high-use customers in the winter months.
  9. Consider two examples of rate design changes that move gradually away from volumetric-dependent revenue recovery. First, a two-step usage rate with a break at a low usage level could be introduced. By increasing the customer charge moderately and assigning a sizable portion of the volumetric revenue to the low-use, first block, the rate design will produce reduced reliance on volumetric rate recovery while minimizing rate shock concerns. Or, if adequate data are available, the residential class can be bifurcated into low annual use customers and remaining customers. The movement toward greater revenue recovery through fixed charges can initially be moderate for small annual use customers and significant for other customers without causing rate shock concerns under this bifurcated rate design. Over time, each of these rate designs can be modified toward greater reliance on fixed rate element revenue recovery.


Case Study 1 Missouri Gas Energy Experiences $3 Million Shortfall

A study of the Midwest confirms the declining residential and commercial usage trends. 1 The study was prepared in conjunction with a Missouri Gas Energy (MGE) general rate case. MGE has more than 430,000 residential customers and more than 60,000 small commercial customers. Based on statistical analysis of MGE's residential gas usage from March 1994 through June 2003, it was determined that