F. Jay Cummings is an executive consultant with R.J. Covington Consulting LLC in Austin, Texas. Contact him at jcummings@rjcovington.com.
Natural gas local distribution companies (LDCs) charge customers for delivery service through what are commonly referred to as base rates.1 An LDC's base rates are set by its state regulatory commission in a general rate case and are intended to provide the LDC with a reasonable opportunity to recover its revenue requirement, or its operating expenses (including depreciation and taxes) and a reasonable return on the capital invested to provide gas distribution service.
Commissions set LDC base rates for each customer class. These typically contain a fixed monthly charge, generally called a customer charge or a facility charge, and a volumetric charge for each unit of gas delivered.2 The portions of the delivery revenue stream derived from customer charges and from volumetric charges differ from one LDC to the next, but LDCs typically depend on volumetric charges for a substantial portion of their base revenue recovery. For example, several recent LDC rate-case filings show that between 46 and 57 percent of current residential delivery revenue is accounted for by volumetric charges, and 72 to 77 percent of current commercial delivery revenue is volumetrically dependent.3