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GRI: Utilities Trim Costs in Competitive Era

GRI: Utilities Trim Costs in Competitive Era

Recent declines in natural gas bills would have been even greater if it hadn't been for one-time LDC restructuring charges, according to a Gas Research Institute study. Still LDCs have cut non-gas costs substantially.

The study, "Historical Cost Trends and Regulatory Initiatives in the Local Gas Distribution Industry" (GRI-99/0031), concludes that commission-approved utility restructuring costs mask actual declines in a utility's main costs of doing business-delivering and storing gas. The study, compiled by GRI and Energy and Environmental Analysis Inc. of Arlington, VA, based its findings on a detailed analysis of cost data from 1981 to 1995.

"Local distribution companies have been undergoing a sea-change in the way they do business," said Marie Lihn, GRI project manager. "This study underscores just how sweeping those changes have been and confirms that utilities have been successful in aggressively reducing and controlling their costs in the new, competitive environment. The data also suggest that gas consumers might expect a decline in burnertip prices once utilities complete the restructuring transition."

The study found:

All components of non-gas operations and maintenance expenses (distribution, storage, customer accounts, sales, and other expenses) declined on per-customer basis, except for administrative and general expenses, which increased slightly;

Most of the increases in administrative and general expenses occurred near the end of the 15-year period and were largely attributable to one-time events, such as restructuring and other non-recurring costs-especially salaries and benefits associated with work force-reduction packages;

The growth in administrative and general expenses largely offset the across-the-board declines in all other areas of operations and maintenance costs;

Even with the restructuring costs, the distribution charge to customers was relatively stable during the 15-year period;

The distribution-charge component of retail prices contributes to lower burnertip prices, but it plays a much smaller role than does the decline in transmission rates;

Increased revenue from the residential and commercial sectors have offset declining revenues from the industrial and electric-generation sectors;

Traditional cost-of-service remains the dominant method of cost recovery for local distribution companies; and

Most incentive- and performance-based ratemaking programs and price-cap regulations are modifications rather than replacements of the cost-of-service ratemaking concept.

In its analysis, GRI examined the components of burnertip prices by industry segment and end-use sector, local distribution company cost and revenue data from 1980 to 1995, detailed cost data from 55 gas utilities between 1990 to 1995, and state-regulated cost-recovery mechanisms, including traditional cost-of-services ratemaking and alternative regulatory models.

For information on the report or to order a copy, call Kelly Murray at the GRI Baseline Center, (703) 526-7832.

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