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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

specific concessions. These concessions can include a commitment by the utility to spend a fixed amount of money on promoting energy efficiency, a transfer of monies to an independent entity to administer conservation programs, and agreement by the utility to lower its authorized earnings because of reduced risk. 8

• As a tracker, RD meets the minimum criteria applied in the past by state commissions in other areas of a utility’s operation with approved trackers. Historically, “trackers” such as RD are justified in accordance with a three-prong threshold test: (1) the designated activity largely lies outside the control of a utility; (2) variations in the outcome of the activity have a non-trivial effect on a utility’s earnings; and (3) the actual outcome inevitably deviates from the baseline projections ( i.e., projections are always wrong). When applying this test to the activity “sales,” it seems defensible to apply a tracker on sales. Indisputably, sales are largely external to a utility’s control and inescapable sales fluctuations significantly can affect a utility’s earnings.

For some state commissions, the legality of RD as well as its compatibility with policy precedent may be an issue. In Minnesota, the state’s Department of Commerce argued that the RD proposal by Xcel violates state statutes, which in its opinion do not provide a statutory exception for a true-up mechanism that adjusts rates based on the level of gas use per customer. In North Carolina, two commissioners dissented from a commission order approving an RD mechanism for Piedmont Natural Gas by arguing, among other things, that the mechanism violates North Carolina law by reflecting retroactive rate-making. 9 The dissenters also argued that as a matter of policy, state commissions have approved true-up mechanisms only under “extraordinary circumstances,” which they contend did not apply in the case of declining gas use per customer. In first considering an RD proposal, a state commission should review its legal authority in addition to policy precedent in allowing for an earnings “true-up” between rate cases based on actual sales departing from “baseline” sales.

• Applying generally applied standards for rate-making (for example, Bonbright’s eight criteria 10 for setting rates), RD has four salient features: (1) increased opportunity for a utility to earn its authorized rate of return (but no guarantee since costs can inflate beyond test-year levels); 11 (2) more revenue stability; (3) removal of disincentives for a utility to promote socially desirable energy efficiency initiatives; and (4) elimination of a major contentious aspect of a general rate case.

On the other side, RD potentially has some negative attributes: (1) creation of a public-acceptability problem (for example, consumers complaining that a utility can increase rates simply because its sales have fallen); (2) the occurrence of more volatile and unpredictable rates; 12 (3) less incentive for a utility to offer innovative service options and rates and, generally, to promote gas sales when economical; (4) introduction of another tracker mechanism to rate-making that can shift risks to consumers; and (5) the reduction of economic efficiency. 13

• The limited ex-post evidence on RD for gas utilities points