If regulators want to see lower gas prices and meet the public’s call for more energy conservation, gas utility rate designs must be changed, the American Gas Association (AGA) and the Natural Resources Defense Council (NRDC) said last week in an unusual joint statement.

Most local gas utilities earn a profit based on the volume of gas they deliver, but that tends to penalize them for encouraging conservation and energy efficiency.

Citing a successful “conservation tariff” installed last year by Northwest Natural Gas (NWN) in Oregon, the AGA and NRDC jointly urged regulators nationwide to adopt new approach to gas utilities rate designs that “de-couples” a utility’s recovery of its fixed costs from the volume of gas it delivers. Modest, periodic “true-ups” could adjust rates up or down as needed to ensure that utilities recover their authorized fixed costs regardless of fluctuations in energy use, they said.

“Without meaning to, traditional state rate-making discourages natural gas utilities from vigorously promoting energy efficiency because utility profits often suffer when consumers reduce their energy use,” said James DeGraffenreidt, Jr., chairman of the AGA Government Relations Policy Committee and CEO of Washington Gas.

“By adopting a ‘conservation tariff’ – such as one developed by [NWN], or the revenue adjustment adopted for utility rates by the District of Columbia Public Service Commission — states can break the link between an energy utility’s sales and its profitability. This benefits consumers, utilities and the environment,” he said. DeGraffenreidt outlined the AGA-NRDC proposal during a joint meeting last week of the National Association of Regulatory Utility Commissioners’ (NARUC) committees on gas and on energy resources and the environment. The meeting took place at NARUC’s summer meeting in Salt Lake City.

During the 2001-2002 winter, following aggressive energy-conservation efforts, customers of NWN (serving Portland) reduced their natural gas consumption by an estimated 10%. Subsequently, in 2003, the Oregon Public Utility Commission approved a conservation tariff for NWN designed to prevent the utility from suffering financial losses that result from consumer’s energy-efficiency efforts, according to testimony presented at NARUC by Mark Dodson, CEO of NWN.

Ralph Cavanaugh, energy policy director for NRDC called conservation tariffs “the fastest, cleanest and least expensive responses to natural gas price increases. By changing the way that natural gas utility rates are structured, state regulators can remove unintended obstacles to energy-efficiency progress and thus help consumers save money on their energy bills while improving environmental quality.”

Some have argued that such rate design changes should also come with lower rates of return for utilities who enjoy reduced risk in earning their profits, but AGA said profit reductions would “penalize utilities for socially beneficial advocacy and action, including efforts to create mechanisms that minimize the volatility of customer bills.”

AGA and NRDC said properly designed conservation tariffs could have significant and widespread benefits:

“In today’s climate of rapidly changing natural gas prices, such reforms make good sense for consumers, shareholders, state governments and the environment,” AGA and NRDC said in their proposal.

AGA and NRDC also recommended that state regulators encourage gas utilities to limit the use of short-term supply contracts and focus more on supply diversification. Utilities should be allowed to manage price volatility and high commodity costs through the use of hedging, fixed-priced contracts of various durations, by encouraging energy efficiency improvements, and through other measures, they said.

“Achieving these goals will sometimes require paying a premium over prevailing spot market prices,” AGA and NRDC noted. “Like diversified investment portfolios that are designed to mitigate risk, prudent hedging plans should be encouraged as a way to help stabilize gas prices and ensure long-term access to affordable natural gas services.”

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