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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

presumably socially desirable services. After all, if RD at worst results only in slightly higher rates (which seems likely), but achieves large benefits—or at least the perception of large benefits to consumers from utility-funded energy efficiency activities—the public will look more favorably upon the commission and utility in their endorsement of this emerging ratemaking mechanism.



1. Gas utilities have assigned different names to their RD proposals: Conservation Margin Tracker, Conservation-Enabling Tariff, Conservation Tariff, Conservation Rider, Conservation and Usage Adjustment Tariff, Conservation Tracker Allowance, Margin per Customer Balancing Provision, Delivery Margin Normalization, Usage per Customer Tracker, Customer Utilization Tracker.

2. The financial community also has looked favorably upon revenue decoupling in reducing a utility’s risk and improving its financial stability.

3. The Baltimore Electric and Gas mechanism (Rider 8) measures test-year base-rate revenues after adjusting for any change in the number of customers from the test-year level. The mechanism adjusts test-year revenues by accounting for the net number of customers added since the test year. The difference between actual revenues collected and the recalibrated test-year revenues determines the rate adjustment. In effect, the mechanism is a “true-up” that accounts for customer growth as this element could offset lower per-customer gas usage that the mechanism is intended to capture.

4. In August 2005, the Oregon Public Utility Commission extended Northwest Natural’s RD mechanism to four years and modified the mechanism by allowing for 100 percent decoupling (previously it was 90 percent), excluding weather effects.

5. In Minnesota, the state’s Department of Commerce and Office of Attorney General challenged an RD mechanisms proposal by Xcel. The utility subsequently withdrew the proposal as part of a rate-case settlement. In 2005, the Nevada Public Utilities Commission rejected an RD proposal by Southwest Gas, arguing in part that the proposal would constitute a major change from current ratemaking practices and before it can be justified “more recognized alternatives” (such as changes in rate design and more frequent rate filings) should be applied to the perceived problem ( i.e., reduced earnings from less-than-expected gas sales) (Nevada Public Utilities Commission, Opinion, Docket No. 04-3011).

6. Southwest Gas proposed a “Conservation Margin Tracker” in anticipation of a continuation of the past trend of declining gas use per customer.

7. Arizona Corporation Commission, Opinion and Order (Decision No. 68487), Feb. 23, 2006.

8. In Oregon, the upgrading of Northwest Natural’s Standard & Poor bond rating occurred shortly after the commission approval of an RD mechanism.

9. The majority, however, argued that the RD proposal does not violate state statute against retroactive ratemaking since it represents an approved formula as part of a utility’s rate structure used to true-up an estimated rate. (See North Carolina Utilities Commission, Order Approving Partial Rate Increase and Requiring Conservation Initiative, Docket Nos. G-9, Sub 499, G-21, Sub 461 and G-44, Sub 15, Nov. 3, 2005, at 21.)

10. The eight criteria for a desirable rate design are: (1) simplicity, understandability, public acceptability, and feasibility of implementation; (2) uncontroversial as to proper interpretation; (3) effectiveness in providing the utility with adequate revenues to recover costs;