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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

reconciled are the utility’s need for protection against potential load losses from decreased customer usage and consumers’ desires for reductions (or at least no increases) in their gas bills. New Jersey has created an incentive program designed to meet these criteria.

Gas utilities have more control over their gas-supply costs than is commonly thought. While it is true that no single gas utility, or group of gas utilities for that matter, can dictate the price of natural-gas futures on NYMEX, or the benchmark spot price at Henry Hub, gas utilities do have flexibility in terms of how they use the capacity they have contracted for with interstate pipelines. They also have flexibility with respect to where they purchase supplies and how they use storage. Unless constrained by state regulatory agencies, gas utilities also have the ability to enter into hedging agreements and use price arbitrage to lower prices. Many gas utilities have non-jurisdictional affiliates that engage in sales, transportation, and trading activities.

Contracting for pipeline capacity is far more dynamic than it has been in years past. The potential for capacity swaps and exchanges has increased significantly. The incentive for gas utilities to devote resources to these activities is directly related to the likelihood of earnings enhancement. New Jersey’s incentive programs recognize this and attempt to strike a balance between achieving lower costs to consumers while providing appropriate incentives to the gas utilities.

The New Jersey Board of Public Utilities (BPU) approved a pilot program for two of the state’s gas utilities last fall. 14 The Conservation Incentive Program (CIP) reflects the goals discussed above. New Jersey Natural Gas Co. (NJNG) and South Jersey Natural Gas Co. (SJG) separately had filed proposed programs that might be considered generic “plain vanilla” decoupling mechanisms. The companies did pledge to aggressively focus their efforts on promoting conservation and energy efficiency in return for incorporating a decoupling mechanism in their rates. The proposal was deemed unacceptable in its filed form by both the board’s staff and the rate counsel. 15 After a series of discussions, an agreement was reached that incorporated the elements that would truly make the program incentive based, but without a guaranteed recovery of revenue lost because of lower sales.

New Jersey’s program is a carefully developed incentive program that addresses each of the issues raised by proponents and opponents of decoupling. It allows gas utilities to adjust their delivery rates to account for load loss and conservation efforts; however, the adjustment is capped at the amount of verifiable supply cost reductions achieved by the gas utility. Gas utilities’ gas-cost reductions, if vigorously pursued, should exceed any cost increases from load losses. Further, the load-loss adjustment should provide sufficient incentive for the gas utility to undertake a focused conservation effort. The gas utility has an added incentive to promote conservation since reductions in load because of conservation should lead to further gas-supply cost reductions.

Once the basic parameters are set by the regulatory authority, the administration and costs of this program are left in the hands of the utility. It is in the