Against the wishes of the state's attorney general, the Illinois Commerce Commission (ICC) last week approved rate increases for Peoples Gas and North Shore Gas and allowed the utilities to institute a decoupling mechanism to recover fixed costs through nonvolumetric charges.

"After 12 years of no delivery charge increases, we believe these rate changes are reasonable and will allow the companies to meet their obligation of delivering safe and reliable energy to one million customers," said Desiree Rogers, president of both of the Integrys Energy Group utilities.

The utilities call their decoupling mechanism a volume balancing adjustment (VBA). It is intended to separate utility earnings from customer energy consumption, preserving revenue during times of low consumption.

"Decoupling does not shelter the utility from the impact of increased costs or guarantee the company's profits," the utilities said. "In most cases, the program would provide a credit to customers in months that are colder than normal while allowing allocating a charge when weather is warmer than normal. Overall, customers pay no more and no less than what the utility is authorized to recover by state regulators."

However, Illinois Attorney General Lisa Madigan had urged the ICC to reject the "controversial proposal...that would impose surcharges on customers for the delivery of gas they do not use." Madigan claimed that the VBA guarantees the utilities "would earn extra profits especially when customers use less gas."

In oral arguments before the ICC on Jan. 23, the attorney general's office and consumer groups urged commissioners to deny the utilities' VBA request, claiming that the plan is contrary to the law and could result in hundreds of millions of dollars in extra charges for residential and small business customers.

The attorney general claims that expert analysis filed by her office last year showed that customers would be charged "an extra fee to protect utility revenues when customers conserve more than expected or when warm weather results in lower gas delivery sales, even if the company was earning the profits authorized by the ICC."

"It is clearly unfair to allow utilities to charge customers for the delivery of gas they do not use," Madigan said.

Over the last couple of years decoupling mechanisms have gained traction among utilities and their regulators. Residential gas consumption has been in decline for a number of reasons, including improved appliance efficiency and increased conservation efforts by consumers in response to higher commodity prices, and utilities have responded by seeking to reduce the amount of fixed costs they recover through volumetric charges (see NGI, April 2, 2007; June 19, 2006). The National Association of Regulatory Utility Commissioners supports states' ability to use decoupling (see NGI, April 30, 2007). The Energy Information Administration has predicted that the use of decoupling mechanisms will grow (see NGI, Aug. 20, 2007). Decoupling mechanisms have recently been approved in New York (see NGI, Sept. 24, 2007) and Virginia (see NGI, Aug. 6, 2007).

As for the Illinois rate increases, Peoples Gas received an increase in its base rates of $71 million as estimated by the ICC. The new delivery rates will mean that the typical residential heating customer in Chicago will see an increase of about $7 per month. Based on the return on equity approved in the rate case, the delivery rates for North Shore Gas customers would actually remain about the same. The new rates will be reflected on customers' bills beginning in mid-February. The delivery charge makes up about 20% of a customer's bill; the cost of gas accounts for about 70%, and taxes make up the rest.

Rogers said the companies will use the increased revenues in part to replace cast iron mains with newer materials, complete an automated meter reading program and implement energy efficiency programs.

The ICC also approved funding for enhanced programs to encourage energy efficiency and conservation. The programs will be administered by a governing board that is to include government, consumer advocacy groups and the company.

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