To better understand the evolving outlook for LNG and its role in the U.S. gas market, Fortnightly assembled a group of LNG specialists with various perspectives on the issues.
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.
(4) year-to-year revenue stability; (5) rate stability; (6) fairness among customer classes; (7) avoidance of undue price discrimination; and (8) economically efficient in giving customers proper price signals, for example, in not over-consuming a utility’s service. These criteria can conflict, with no rules of ranking offered. It is often difficult, if not impossible, to satisfy all of these criteria (for example, public acceptability and efficient pricing); almost all real-world ratemaking outcomes reflect compromises among the different regulatory objectives. Bonbright also identified the four primary functions of public utility rates as capital attraction, efficiency, demand rationing, and income distribution. (See James C. Bonbright et al., Principles of Public Utility Rates, 2nd Edition, Public Utilities Reports, Inc., 1988; the first edition, authored solely by Bonbright, was published in 1961.)
11. On the other hand, RD also would reduce the opportunity of a utility to over-earn, which may explain why some gas utilities do not support RD.
12. The monthly or yearly rate adjustments subject to RD likely would be small relative to the total delivered price of natural gas and to other factors affecting price (such as fluctuations in purchased gas costs).
13. One source of economic inefficiency stems from the expectation that RD would cause a utility to shift farther away from the minimum point of its short-run average cost curve, assuming that the mechanism will result in lower sales than otherwise. Since gas distribution is essentially a fixed-cost operation, higher average cost would result from reduced sales, since by definition average cost equals total cost divided by sales.
RD also makes the utility indifferent to increasing sales even when economical. For example, if the base rate is 50 cents per therm and the short-run marginal cost for gas distribution service is zero, under an RD mechanism the utility would have no incentive to increase sales even though it clearly would be economical to do so. This outcome is contrary to the universal corporate objective of spreading fixed costs over additional sales to produce greater operational efficiencies.
Another conceivable source of economic inefficiency derives from the presumption that a utility with an RD would have little or no incentive to modify its rate design by removing more of its fixed costs from the volumetric charge, which if nothing else would remove what some analysts consider a major source of prevailing price inefficiency in the utility sector. With RD protecting a utility’s financial condition from sales volatility, there would be little payoff to the utility from initiating any subsequent change in rate design that removes fixed costs from the volumetric charge.
14. See Calvin Timmerman, “Monthly Rate or Revenue Adjustments: Regulatory Perspective,” presentation at the Platts Rate Case and Pricing Symposium, Oct. 25, 2004, and Calvin Timmerman, “LDC/EDC Revenue Decoupling,” presentation to the 2006 MACRUC Commissioner Only Strategic Planning Session, April 3, 2006.
15. See Christensen Associates, A Review of Distribution Margin Normalization as Approved by the Oregon Public Utility Commission for Northwest Natural, March 31, 2005.
16. For example, higher customer charges could (1) lead to customer complaints about “minimum” bills during the