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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

the cause, through a per-unit surcharge or credit.

Another form of decoupling is a rate design in which all of the gas utility’s fixed costs are reflected in a fixed rate. The so-called straight fixed-variable rate design, which the Federal Energy Regulatory Commission (FERC) developed for interstate gas pipelines, is one example of this form of decoupling. The shift to this rate design was done in order to decouple the price of the gas commodity from the cost of transportation. The straight fixed-variable rate design put all of the pipeline’s fixed costs in the demand charge, with only variable charges included in the commodity charge. 3 FERC’s intent was to provide a level playing field to suppliers and better transparency for buyers when it effectively banned bundled sales by the interstate pipelines. Similarly, Atlanta Gas Light Co.’s delivery rates were changed to a fixed rate calculated on the basis of peak-day deliveries when it opted not to compete for sales with third-party marketers but to provide a delivery only service. 4

State utility commissions find themselves facing a dilemma. Most state commissions have tended to embrace what has become known as incentive regulation, 5 moving away from more traditional regulatory structures in an attempt to promote economic efficiencies. Decoupling might be viewed as a step back to “make-whole” regulation. At the same time, many state commissions vigorously have encouraged energy efficiency and conservation programs. For these efforts to be fully successful, the active cooperation of the regulated utilities is required. Gas utilities may be less likely to pursue energy efficiency and conservation programs aggressively if these efforts result in lower sales and reduced profit margins.

Measures promoting energy efficiency and conservation have benefited from a groundswell of support in recent years. Conservation is no longer considered just a “personal virtue” but is becoming an important prong in the nation’s energy policy. State governments, rather than the federal government, have led the way in this renewed focus on energy efficiency and conservation. The states, typically through their public utility commissions, have attempted to partner with utilities to promote energy efficiency and conservation.

In some cases states have undertaken this effort without substantial help from the utilities, but it generally is preferable to take advantage of the utilities’ unique knowledge of their customers’ usage profiles and the housing stock in their territories. Conservation efforts to date have achieved some degree of success. However, gas utilities may not wholeheartedly pursue energy efficiency and conservation incentives as long as earnings are tied to delivery throughput; hence the interest in decoupling proposals.

The Big 10

Ten states 6 so far have adopted decoupling mechanisms for gas utilities in their jurisdictions. Connecticut considered decoupling mechanisms in a generic proceeding and determined that they would not be appropriate. The Arizona and Nevada commissions rejected proposals for decoupling. A decoupling proposal was withdrawn in Minnesota after the state attorney general raised both policy and legal impediments. On the other side of the coin, proposals to incorporate decoupling provisions are pending in at least 11 other jurisdictions.

Earlier decoupling experiments had