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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

to positive results. From the perspective of a senior staff member of the Maryland Public Service Commission, the Baltimore Gas and Electric RD mechanism (Rider 8) has achieved the intended goals since its inception around eight years ago. Specifically, it has: (1) produced more stable and predictable revenues for the utility between rate cases by accounting for revenue “attrition” from declining gas use per customer; (2) reduced the volatility of gas bills, especially under cold weather conditions; and (3) allowed for the continuation of current rate designs that provide an incentive for consumers to conserve and that are non-discriminatory to low-usage customers. The staff person also added that the RD mechanism is easy for the utility to administer and the commission to monitor. Overall, the staff member concluded that the mechanism has “[fulfilled] more regulatory objectives with fewer shortcomings than other alternatives.” 14

A 2005 study conducted for Northwest Natural concluded that: (1) by reducing revenue fluctuations, the Distribution Margin Normalization (DMN) mechanism has reduced the utility’s business and financial risks; (2) DMN margin adjustments largely can be attributed to the effect of price changes, with economic activity and the utility’s funded energy efficiency efforts having a statistically insignificant effect on use per customer; (3) the utility’s focus has shifted from marketing to promoting energy efficiency; (4) service quality did not decline; and (5) most of the risk reductions experienced by the utility were eliminated rather than shifted to customers. Making several recommendations for improving Northwest Natural’s DMN mechanism (for example, full decoupling), the study concluded, “The positive effects of DMN outweigh the negative effects.” To date, this study represents the most comprehensive and analytical ex post investigation of a RD mechanism for gas utilities. 15

• Alternatives to RD in achieving the same objectives ( e.g., revenue stability, promotion of energy efficiency) might be preferable, as RD is a more blunt approach than most alternatives. These alternatives include: (1) removal of fixed costs from the volumetric charge; (2) weather-normalization adjustments; (3) declining-block rate design; (4) a multi-year forecast horizon in setting new rates; and (5) a targeted incentive plan allowing a utility to profit from carrying out socially desirable energy efficiency initiatives. A state commission might want to assess the desirability of these alternatives to RD, recognizing their shortcomings. 16

If a state commission is concerned that a utility will not have a reasonable opportunity to earn its authorized rate of return, short of filing a rate case, it might want to consider an earnings-sharing approach. This mechanism has the attractive feature of treating symmetrically costs and revenue deviations. Under RD, it is conceivable for a utility to have concurrently both: (1) its base rate adjusted upward between rate cases in response to a decline in sales per customer; and (2) its actual rate of return exceeding the authorized level because of actual expenses reduced below the test year estimates. A shortcoming of an earnings-sharing mechanism is that the utility’s shareholders still could suffer from lower sales to the extent they absorb a portion of the realized earnings losses. 17