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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

any recovery of revenue losses from non-weather-related reduced use. 17 This means the sales customer’s rate will not increase as a result of the CIP mechanism and actually may decrease. To ensure a net saving to the sales customer over the course of the three-year pilot program, the companies were required to flow through agreed-upon gas-supply capacity cost savings before any CIP surcharge would be applicable. These initial reductions will not be offset by future CIP surcharges. In each case the reduction in capacity-related supply costs amounts to about 10 percent of the annual fixed pipeline charges to each company. Each company has pledged to continue the initial level of capacity cost reductions for the duration of the pilot program, regardless of the CIP surcharge.

Although the program is in its earliest stages, there are some promising signs. The companies appear to be taking very seriously their pledge to refocus their efforts, on a company-wide basis, to encourage conservation and energy efficiency. The response to the mailings by the companies to its customers also has been encouraging. The companies’ sales customers already have received the benefits of the first year’s reductions in gas-supply capacity costs.

The eventual success or failure of the program will depend on whether the companies’ customers respond in such a way that long-term reductions in use occur. This will enable the companies to reduce and reshape upstream transport and storage capacity, thereby increasing efficiency and reducing costs. At a broader level, if these types of programs are successfully incorporated nationwide, gas-supply costs should fall and the need for imported supplies such as LNG would become less necessary. All in all, a win-win scenario for gas customers. Stay tuned for further developments.

 

Endnotes

1. Some gas utilities still utilize the so-called declining block-rate structure, where the per-unit rate decreases as use reaches a certain threshold level. This type of rate structure has become less common in recent years.

2. The above description of the dynamics of ratemaking is an oversimplification and is somewhat misleading since, over time, the direct nexus between throughput level and profits dissipates.

3. FERC and its predecessor agency, the FPC, traditionally had used either the Atlantic Seaboard rate-design method, which included one half of the fixed costs in the commodity charge or, during the natural-gas shortage era, the United rate-design method, which included 75 percent of the fixed costs in the commodity charge.

4. See Georgia PSC order in Docket No. 8390-U in July 1998 pursuant to Atlanta Gas Light’s election to open territory to competition pursuant to the Natural Gas Competition and Deregulation Act of 1997.

5. Incentive regulation recognizes that effective regulation from wellhead to burner tip may need to include economic incentives for utilities to achieve greater economic efficiencies. These incentives usually take the form of some type of share-the-savings mechanisms whereby ratepayers and the gas utility share in cost savings put in place by the utility.

6. The states that have adopted some form of decoupling mechanism include California, Indiana, Maryland, Missouri, New Jersey, North Carolina, Ohio, Oregon, Utah, and