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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

inability to earn its authorized return from such customers.” The commission added, “The company is requesting that customers provide a guaranteed method of recovering authorized revenues, thereby virtually eliminating the company’s attendant risk. Neither the law nor public policy requires such a result nor do we decline to adopt the company’s CMT in this case.” The commission opined that the issue of declining usage per customer “should be fully explored as part of a broader investigation of usage volatility and margin recovery.” 7

The Impetus for Revenue Decoupling

Two factors explain the heightened interest in RD for gas utilities. Both relate to ongoing energy conservation resulting from the combination of high natural-gas prices and utility-funded energy efficiency initiatives. According to an AGA study, natural-gas usage per household (normalized for weather) has declined by more than 20 percent since 1980. Major reasons for this include progressive increases in energy-efficient gas appliances and home construction. The study predicts this decline will continue during the next several years, although at a lower rate than since 1980.

Many, if not most, U.S. gas utilities have encountered declining usage per household over the past several years. Some gas utilities have experienced particularly sharp declines. For example, Questar Gas in Utah estimated that, adjusting for weather, its typical residential customer currently uses about 35 percent less natural gas than in 1980. Another reason for utilities’ interest in RD is the growing intent of state commissions and other groups to have gas utilities promote energy efficiency.

Table 1 provides the fundamental arguments in support of revenue decoupling presented by gas utilities and conservationists before state commissions. As a primary argument, RD can help to promote energy efficiency by eliminating the incentive of a utility to increase sales between rate cases. One contention is that if a state commission wants a utility to “sell” energy efficiency, rate-making practices should not discourage a utility from selling less gas. It is both unfair and counterproductive to require a utility to promote energy efficiency when detrimental to its shareholders.

Another argument in favor of RD is that small changes in gas sales significantly affect a utility’s earnings. Gas sales also are largely outside the control of a utility, in addition to being highly volatile from year to year, with weather as the major factor. Since almost all of a utility’s short-run, non-gas costs are invariant to changes in sales, a mechanism such as RD that adjusts for sales fluctuations has apparent merit.

An Overview of Major Arguments

Several arguments lie on both sides of the RD debate. The discussion below summarizes my observations of the major issues surrounding RD.

• Consumer groups disfavor the risk-shifting aspect of RD and the possibility that rates will rise higher than otherwise in the short term. Some industrial groups question whether utilities should be involved at all in promoting energy efficiency; they also generally prefer new rate designs that allocate more of the fixed costs to the customer charge. Consumer groups might support RD if it becomes part of a settlement agreement where a utility agrees to