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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

in their tariffs for what it termed “capacity release.” Before restructuring, capacity contracted for by gas utilities but not used by them on any given day could be sold on an interruptible basis by the pipelines. The pipelines’ rates included a “credit” for such sales that either was embedded in the base rate or included as an adjustment to the stated rates. FERC’s restructuring orders provided for capacity release. This allowed the gas utility to release capacity it had contracted for but did not need every day of the year. 12 The revenues obtained by the gas utility were, in effect, credited to its cost of pipeline capacity. While originally envisioned as a sale of capacity only, some gas utilities began bundling the capacity release with sales of the gas itself. These off-system sales could be used to reduce the cost of gas supply to the utility, because although capacity releases are capped at the pipeline’s maximum FERC-regulated rate, off-system sales that bundle the commodity with the capacity essentially are priced at market levels constituting what has been called a “grey market.”

FERC’s capacity release and off-system sales provisions were meant to improve economic efficiencies by encouraging the efficient use of the utility’s gas-supply assets and by, hopefully, lowering costs. FERC, however, had no authority to require that such savings be passed through to the ultimate consumer. Since the program was voluntary, it could not require gas utilities to participate. State utility commissions also were limited in their actual if not theoretical powers. Many regulatory agencies were promoting customer-choice programs that allowed customers to choose a third-party supplier instead of purchasing the gas commodity from the utility. In many states, policies were developed that encouraged gas utilities to vigorously pursue capacity release and off-system sale programs by allowing the gas utility to keep part of the revenues from such sales or releases. The remaining savings would be flowed through to customers usually as offsets to charges fully passed through to retail customers.

This type of incentive regulation typically has worked to the benefit of all parties. The customers’ rates are lower than they would be otherwise. Gas utilities have the opportunity to enhance their bottom lines, and economic efficiencies are encouraged. In New Jersey, incentive regulation for gas utilities has been expanded to include storage activities, hedging activities, and capacity turn-back activities. Each incentive program is designed to get the gas utility to devote resources to activities that will reduce gas-supply prices to the customer. In return, the gas utilities receive the opportunity (not the guarantee) to improve their net earnings. The need for such programs became more apparent when it became clear that the customer-choice programs were not reaching as much of the market as originally envisioned. 13 For the foreseeable future, gas utilities in most states likely will be required to provide gas supplies to a significant portion of their delivery markets.

Two Goals

New Jersey is unique in deciding that incentive regulation also can be used to address the issue of decoupling. The two goals that needed to be