Among a host of arguments for and against RD is the question of upside for consumers.
Ken Costello is senior institute economist at the National Regulatory Research Institute at The Ohio State University. Contact him at firstname.lastname@example.org. The views and opinions of the author do not necessarily express or reflect the views, opinions or policies of the NRRI, NARUC, or NARUC member commissions. This paper is a shortened version of Ken Costello, Revenue Decoupling for Natural Gas Utilities, The National Regulatory Research Institute, Briefing Paper (06-06), April 2006.
Under standard rate-making, gas utilities have a strong incentive to promote gas sales between rate cases. Owing to regulatory lag, whenever sales grow, earnings increase because of the prevailing rate structure that includes most of a utility’s fixed costs in its volumetric charge. Conversely, when a utility sells less gas it recovers a smaller portion of its fixed costs. State commissions have endorsed this rate design over several decades, primarily on grounds of equity. Over the past few years, at the requests of gas utilities in rate filings, volumetric charges have included less fixed costs to reduce the utility’s risk from sales fluctuations. Still, with few exceptions, utility shareholders shoulder financial harm whenever sales decline between rate cases.