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Another Side to Decoupling: Share the Gain, Not the Pain

The New Jersey Board of Public Utilities finds incentive programs may be a better way.

Fortnightly Magazine - August 2007

earnings. These latter arguments historically have been used to promote the idea that a mechanism is required to offset earnings attrition.

The arguments in opposition to decoupling are familiar. One set of arguments centers around the concept that extraordinary conditions must be shown before a “true-up” mechanism should be approved. A corollary argument is that it is inappropriate to single out revenues for true-up adjustments. Another argument is that, with a decoupling mechanism, it is less likely that other rate design issues will be addressed. Opponents also stress that the benefits to the utility are much more apparent than the benefits to the customer. Decoupling opponents further argue that the mechanism is overly broad and that other incremental options should be considered. Legal issues also have been raised about retroactive ratemaking and, more broadly, the potential for setting precedents that may work to the detriment of customers.

Proponents and opponents of decoupling have raised the traditional arguments many times in past controversies dealing with other rate issues in the utility industry. 10 What appears to be missing in the present controversy is the idea of using incentive regulation to bridge the gap between the opposing views. It is necessary to step back and realize that, at the present time, gas-utility delivery charges may represent no more than 30 percent of the typical residential customer’s bill. 11 The gas utilities’ profit margins are included in the delivery portion of the bill. The other 70 percent of the bill consists of gas-supply-related charges that are typically passed through to customers, with no profit margins included. Also, the twin issues of load loss and the need to promote conservation arise largely because of the significant increases in gas-supply costs. The judicious use of incentive regulation could provide the gas utilities with revenue stability; remove the barriers to focused conservation efforts; and provide customers with demonstrable benefits in terms of reduced gas-utility charges.

Unregulated Costs

During the process of deregulation and restructuring, gas utilities’ gas-supply costs and delivery costs were disaggregated. Gas-supply costs at the wellhead (and gas imports) no longer are regulated at any level; they are set in the competitive market place. FERC regulates the transportation charges of interstate pipelines that serve gas utilities. While FERC has rate jurisdiction over interstate facilities, it has begun to deregulate the storage charges for new or expanded storage facilities. The bundling of gas supply, transportation, and storage charges to the gas utility usually is included in the utility’s gas-supply charge. Those charges typically are set out separately from the utility’s delivery charge. In most cases, the gas-supply costs incurred by the gas utility are considered pass-through costs over which the utility has little or no control. While state regulatory agencies generally do have the power to disallow gas-supply costs, it is done relatively rarely and usually only when egregious behavior on the part of the utility has been shown.

FERC’s restructuring orders in the 1990s recognized the effect of its mandated changes and the changing patterns of demand that were emerging by requiring pipelines to include provisions