Consumers scream when their gas bills spike, and the typical utility response is to say that commodity costs are just a pass-through; the utility doesn't make any money on the gas it delivers. That's true, but it doesn't mean utilities don't feel the pinch of higher gas prices, too.

While higher commodity costs are generally absorbed by consumers, they take a bite out of utility shareholders, too. Higher commodity prices aren't a moneymaker for utilities, nor are they the benign pass-through some believe they are. A report just out from the Energy Information Administration (EIA) looks at the effect of higher prices on local distribution companies (LDC) and residential customers. It finds that utilities and their regulators are struggling to balance the interests of ratepayers and shareholders, in some cases with innovative ratemaking practices.

The average wellhead price for gas in the U.S. was $6.23/Mcf in 2006, second only to the year prior when the average wellhead price was $7.55/Mcf, according to EIA. "In the early and mid 1990s, prices generally ranged between $1.89 and $2.73/Mcf," EIA said in the report. "Since 1999, however, when the average wellhead price was $2.60/Mcf, wellhead prices have roughly tripled.

"Natural gas prices increased in all end-use consuming sectors of the natural gas market between 1999 and 2006, reflecting the large increase in wellhead prices."

Higher prices have inspired conservation among gas consumers. This, combined with the effect of greater gas appliance efficiency, means consumers are burning less gas in their homes. According to EIA data, the average volume of gas delivered per residential customer in 2005 was 10.9% less than in 1990. Declines were seen in all census divisions except the Mid-Atlantic between 1990 and 2005, EIA said.

To counter the impact of declining consumption on LDC throughput-based revenue, companies and their regulators have embraced tracking mechanisms known under a variety of names as weather normalization adjustment, normal temperature adjustment, customer utilization tracker, revenue normalization adjustment and others.

"There are 33 alternative rate design programs with tracking mechanisms that have been adopted or proposed in 17 states," EIA said, noting that some LDCs have multiple programs.

With a tracking mechanism, LDC revenue collection becomes more volume-neutral as it is less affected by whether system throughput reaches or exceeds certain levels. Of the 33 programs with tracking mechanisms, 12 are weather tracking programs based on temperatures. Another 11 programs track revenues directly and make rate adjustments when receipts differ from target levels by more than an allowed threshold.

"There are nine programs that focus on the LDC returns or 'margins,' where the margin is a form of net revenue, and one program (Laclede Gas in Missouri) that rewards customers when they reduce their natural gas usage by at least 10% from a prior period," the agency said.

In its report EIA predicted that such revenue decoupling programs will grow in the near future. It cited recent action by the Senate Energy and Natural Resources Committee in May that included language to encourage state regulators to allow utilities to decouple revenues from gas volumes (see NGI, April 30).

While some consumers choose to conserve more to combat high gas prices, others fail to pay their gas bills. "[T]he average percentage of accounts past due for LDCs increased from 16.5% in 2001 to 21% in 2006," EIA said. At the same time, the average amount of past due accounts rose 26.7% from $263 in 2001 to $333.61 in 2006.

"In one instance, according to representatives from a trade association representing publicly owned natural gas utilities, Philadelphia Gas Works billed $42 million more than it collected from the beginning of the 2005-2006 heating season (Nov. 1) through February 2006."

Sometimes, write-offs like that get passed on to shareholders due to the costliness and time-consuming nature of rate cases. "Recently, however, some state PUCs [public utility commissions] have allowed adoption of alternative rate structures that LDCs can implement to recover bad debt without having to go to a new rate case," EIA said.

"States that allow alternative rate designs for the purpose of lowering the impact of uncollectibles to the LDC differ in how much may be recovered through these mechanisms," EIA said. "Some states allow full recovery, while others allow only partial recovery."

The report, "Impact of Higher Natural Gas Prices on Local Distribution Companies and Residential Customers," is available on the EIA website, www.eia.doe.gov, under "What's New" on the right-hand side of the home page.

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