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Virginia Natural Gas Files to Extend Rate Freeze Under Incentive Rate Plan

Virginia Natural Gas (VNG) -- a wholly owned subsidiary of AGL Resources Inc. -- recently filed a proposal with the Virginia State Corporation Commission (VSCC) to freeze its base rates for five years under a Performance-Based Regulation (PBR) plan. The company, however, also filed an alternative traditional rate case, responding to a VSCC directive to file a new rate case by July 1, 2005.

Under the PBR plan VNG's base rates for natural gas distribution would be frozen at their 1996 level through 2010. The additional five years of rate stability, added to the company's previous performance, would mean a total of 14 years without a rate increase.

"Inflation has increased by more than 22% since 1996, while VNG has kept rates flat the entire time," said Hank Linginfelter, president of VNG. "Not seeking a rate change since 1996 is the equivalent of a rate reduction for customers of over 22% on an inflation-adjusted basis." He pointed out that "not seeking any rate increases for another five years will similarly act as a further reduction in rates for customers when adjusted for inflation."

Under the frozen rate PBR plan the company benefits if it keeps costs under revenues and loses if costs exceed revenues. The company also benefits from frozen rates by being able to plan its investments into capacity additions and its borrowings long term.

The traditional rate case alternative filed by the company would increase rates by $19.2 million a year. But Linginfelter said the company is willing to forgo a rate increase for at least another five years in order to operate within a PBR rate plan.

He said the company preferred not to get involved in "lengthy and possibly contentious rate proceedings. We face the immediate challenge of adding capacity to serve VNG's growing customer demand and are committed to making these costly investments without raising rates."

Part of the threat of "contentious" proceedings has to do with a VSCC order on April 29, 2005, that the Commission and the company address in a general rate case the issues raised by a March 2, 2005 commission staff report that alleged VNG was overearning by $15.2 million. The report was issued in connection with the company's request to extend a weather normalization program that was installed two years previously in connection with a rate freeze.

In view of the overearning that it found, the commission staff had proposed declaring VNG's rates interim and subject to refund while the case was converted to a general rate case and set for hearing. The commission declined to take that action, but said the company must file a rate case sooner (July 1, 2005), rather than later (previously scheduled deadline of Dec. 31, 2005).

"We are not earning in excess of our authorized returns as the commission staff has contended," said Linginfelter. "The schedules we filed today [Friday] show that an annual increase of $19.2 million is justified for VNG."

Since VNG was acquired by AGL in 2000, Linginfelter said, the company has improved customer service, increased pipeline safety and reliability, managed costs through efficiencies and the implementation of technology solutions, and kept rates at competitive levels. In addition, an asset management agreement approved by the VSCC has saved VNG consumers almost $12 million on gas commodity costs, in addition to the savings from frozen base rates.

If the VSCC approves the company's frozen rate plan, VNG will become the first Virginia natural gas utility to operate under a 1996 state law that authorized PBR for natural gas utilities. Under a PBR rate plan, rates can be frozen as an incentive for utilities to promote cost containment, productivity and rate stability without traditional rate proceedings that set rates based on investment, return and cost of service. Electric utilities in the state currently operate under a separate but similar program.

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