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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

low-use months, and (2) disproportionately impact low-income/low-usage customers. A straight fixed-variable rate design for gas distribution service is rare in the United States. At the time of this writing, Xcel in North Dakota and Atlanta Gas Light are the only gas utilities currently having this rate design. In the case of Xcel, the company originally proposed a partial decoupling rider but was withdrawn as the parties to a settlement agreement concurred in shifting the fixed-distribution costs to a monthly basic service charge. (See North Dakota Public Service Commission, Northern States Power Co. Natural Gas Rate Increase Application, Order Adopting Settlement, Case No. PU-04-578, June 1, 2005.)

17. As an illustration, if the sharing arrangement is 50-50 (with no “dead band”) and assuming a decline in sales of one percent attributable to the response of consumers to higher prices, a resulting reduction in the rate of return on equity of 100 basis points would be split evenly between consumers and utility shareholders. Thus, the utility absorbs a loss of 50 basis points. Earnings-sharing mechanisms, labeled alternatively as “revenue (or return) stabilization mechanisms,” are currently in place for some gas utilities in the United States, including utilities located in Alabama, Louisiana, Mississippi, and South Carolina.

18. In theory, utility involvement in energy conservation requires the existence of market or regulatory failures. Specifically, (1) the incorrect pricing of natural gas and its delivery exists because of regulation or market-power conditions, (2) the failure of natural gas prices to reflect environmental damages and other external costs, or (3) the availability of inadequate information to consumers reducing their demand for energy efficiency. Proponents of utility funded energy efficiency initiatives argue that some or all of these conditions hold.

19. With the dramatic increase in natural-gas prices over the last few years, and even with only a small price-elasticity response by consumers, the effect on a utility’s earnings can be non-trivial.

20. A pilot has the benefit of allowing for refinements of the mechanism periodically and of terminating a mechanism that exhibits undesirable outcomes.