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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

interests of the utilities to have a streamlined program given that it is shareholder monies at stake. The increased stability in earnings resulting from the program should help to stretch out the time between rate cases. The program has sufficient flexibility so that necessary revisions can be made when and where necessary. The key to New Jersey’s program is that it aligns the interest of the utilities and the consumers.

At the same time, consumers are protected from rate increases as a result of this program. There also is a requirement to consider other rate-design issues as a condition of program approval. 16 A rate of return or return-on-equity rate cap was placed on the utilities so that any adjustment that would result in earning more than a predetermined rate would be denied or deferred. The experimental nature of the program required a time limit (three years) to gauge its success in terms of conservation and impact on customer rates.

Checks and Balances

While it would be preferable that the program commence at the conclusion of a rate case where issues related to representative volumes and appropriate margins have been fully aired by the parties and agreed upon (or adjudicated), circumstances dictated the approval of the program outside of the rate-case convention. The companies are required to submit a detailed cost and revenue study before the initial adjustment will be put into effect. These checks are particularly important when the gas utility has healthy customer growth that, in some cases, can offset any net revenue loss from lower customer usage.

The key elements in the CIP can be summarized as follows:

1. The CIP calls for focused conservation efforts to achieve a long-term reduction in gas use.

2. The conservation efforts will include incentives to upgrade to more efficient equipment and to utilize automatic-setback thermostats.

3. Each company has pledged to use its entire staff as advocates for energy conservation.

4. The companies will use shareholder, as opposed to ratepayer, monies to finance and administer the CIP.

5. The companies will be recompensed for reductions in (non-weather related) usage only to the extent that those costs are offset by gas supply cost reductions that are long-term in nature and are chiefly linked to reductions in capacity costs paid to pipeline suppliers.

6. The amount of recompense is further limited by a cap on earnings for each of the utilities; if the surcharge related to lower use results in earnings in excess of the specified return-on-equity cap, the amount of pass-through is limited by the cap.

7. The program requires each company to undertake studies with respect to innovative rate-design alternatives, e.g., inverted supply rates and the potential for advanced metering or control equipment to reduce gas use.

8. The companies are required to make a “mini rate filing” prior to the initial application of a CIP surcharge so the board can be assured that the underlying distribution rates of each utility meet the just-and-reasonable standard.

The centerpiece of the CIP is its requirement that the companies reduce gas-capacity costs to receive