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Natural-Gas Revenue Decoupling: Good for the Utility, or for Consumers?

Among a host of arguments for and against RD is the question of upside for consumers.

Fortnightly Magazine - April 2007

Thus, the utility would have a disincentive, as under standard rate-making, to foster energy efficiency.

• In considering RD, a state commission might want to first consider whether a gas utility should be in the business of selling natural gas and delivery service or, more broadly, of selling energy services, which include energy conservation. If the latter is preferred, then RD becomes a more tenable rate-making tool. 18 If not, then a commission should assess RD solely in the basis of the “declining gas use per customer” phenomenon.

Regulators should not expect a utility to support energy-efficiency initiatives when shareholder interests deteriorate. A collision course leading to unintended consequences is inevitable under standard rate-making from requiring a utility, whose earnings directly relate to the level of sales, to initiate sales-reducing actions.

• A state commission needs to address several issues in implementing RD. These include: (1) scope of the mechanism in terms of factors (for example, weather and price elasticity) 19 to be included in determining sales adjustments; (2) rate classes affected; (3) frequency of rate adjustments; (4) the need for a rate-adjustment cap (for example, limit annual rate adjustment to 5 percent of the base charge); (5) treatment of revenues from new customers; (6) treatment of any cost-of-capital effect; (7) pilot or permanent status; 20 (8) accounting for overall utility earnings by considering cost changes over time; (9) proper forum for consideration (rate-case filing, special docket); (10) accounting for quality-of-service effects; and (11) adjustment to specific rate components (for example, the volumetric charge or the customer charge).

Concerns

State commissions and consumer groups rightly have raised concerns about some of the negative features of RD. One generally expressed misgiving with RD is that, while necessarily beneficial to the utility in reducing its risk, it might be inimical to consumers. RD certainly helps to preserve the financial integrity of utilities and motivate them to be less opposed to promoting energy efficiency. Whether RD benefits consumers is less certain. It is partially for this reason that the debate over RD mechanisms at the state level, to date, has centered on conceptual and theoretical issues, specifically on whether RD offers consumers any advantages over standard ratemaking and is compatible with prevailing regulatory objectives.

Many skeptics view RD as akin to taxing consumers for the benefit of protecting utilities from financial harm when revenues fall short of some predetermined level. Although this perception arguably is a misrepresentation, it may be the heart of the equivocation by state commissions and consumer groups to RD. At the least, the concern with RD may require a utility to appease the doubters by committing to energy efficiency or by agreeing to a downward adjustment of its authorized rate of return as compensation.

Overall, the jury is still out on how state commissions will rule on RD proposals in the future. If commissions view gas utilities as purveyors of energy efficiency services, they will be more receptive to a mechanism that would protect utility shareholders from lost sales in addition to removing any disincentive for a utility to support those