The era of cheap natural gas is over, most would say. Talk of a 32 Tcf market by 2015 has been supplanted, in part, by a growing debate over how best to encourage efficiency and conservation among consumers.
That places local distribution companies (LDCs) and electric utilities in an odd position. If they encourage conservation through demand-side management (DSM) and other programs, they will reduce their throughput. If they cut throughput, they cut revenue. Cutting revenue cuts profits as it is impossible to reduce costs by a corresponding amount. That doesn’t sit well with Wall Street.
One solution is to decouple a utility’s revenue stream from volumetric sales. Hence, a reduction in consumer demand for natural gas, for instance, does not lead to a corresponding reduction in utility revenue, and this removes the disincentive to the utility to encourage conservation. While it’s an elegant solution it’s not a new one (see Daily GPI, Oct. 19, 2005, July 13, 2004). Environmental groups have lobbied for decoupling since the mid-1990s.
“In order to motivate utilities to consider all the options when planning and making resource decisions on how to meet their customers’ needs, the sales-revenue link in current rate design must be broken,” wrote Sheryl Carter of the Natural Resources Defense Council in a December 2001 article in The Electricity Journal.While at least some environmentalists believe decoupling can be a boon for conservation, others, including some state regulatory commissions, believe decoupling could be a bust for consumer pocketbooks, at least if not implemented correctly.
Decoupling has been more prevalent among natural gas utilities, and it still is not widespread. State regulatory commissions have approved revenue decoupling for five gas utilities: Baltimore Gas and Electric, Washington Gas Light (Maryland), Southwest Gas (California), Northwest Natural (Oregon), and Piedmont Natural Gas (North Carolina), according to an April National Regulatory Research Institute briefing paper on decoupling by Ken Costello, senior economist for the institute, which is based at Ohio State University. Rejection or withdrawal of revenue decoupling proposals has occurred in Arizona, Minnesota, and Nevada. Additionally, Costello writes that several gas utilities have filed revenue decoupling proposals with commissions in Indiana, New Jersey, Ohio, Utah, and Washington.
One proposal is from Questar Gas, now before the Public Service Commission of Utah. Questar has asked its regulator to approve a “Conservation Enabling Tariff (CET)” as a three-year pilot program. As proposed by Questar, implementation would take place in three steps. First, a figure for allowed revenue per customer per month would be established based on historical patterns. Second, allowed revenues are compared to actual and the difference is booked into a balancing account. Third, at least twice a year, possibly in conjunction with regular pass-through rate cases, Questar would file for a percentage adjustment to block rates in an amount to amortize the balance of the account.
In essence, a reduction in Questar’s sales volume as might result from conservation measures, such as demand-side management, would not reduce revenue because the revenue requirement would be collected in rates on a per-customer basis rather than a per-volume basis. Customers still would be billed on a volumetric basis, but these rates would be trued-up periodically based upon actual revenues collected per customer.
Questar made its initial filing in December 2005, and a hearing is scheduled at the commission for June 26. Last month David Dismukes, a consulting economist with Acadian Consulting Group, filed testimony on behalf of the Utah Committee of Consumer Services.
Among the typical concerns with/objections to decoupling is that it shifts to ratepayers business risk that has traditionally been borne by the utility. Dismukes’ objections to the Questar plan are illustrative of the concerns some have with decoupling in general.
He says the plan as proposed makes Questar whole for revenue declines that stem not just from conservation but from other reasons, such as warmer-than-normal winter weather and economic decline in its service territory. “As a regulatory policy mechanism, revenue decoupling is like using a steam-roller to crack a peanut: it more than over corrects for the purported DSM-disincentive and includes guaranteed recovery for revenue changes associated with a wide range of normal business risks.”
Proponents of revenue decoupling generally argue that it should not be instituted without normalizing for weather and other business risks.
For another thing, Dismukes says that Questar is putting the cart before the horse in requesting approval of a decoupling plan prior to laying out specifics on any DSM or other conservation plan. “[T]he need for such a departure from traditional regulatory approaches is not supported by any well-defined commitments by the company to pursue any level of demand side management programs or savings — which is the ostensible justification for the proposal.”
Before it approves any revenue decoupling for Questar, Dismukes says the commission should insist on a DSM plan. “A complete listing of DSM programs, estimated costs, and estimated savings and participation levels for the CET pilot period should be required,” he says. “A defined three-year set of DSM programs, which match the CET pilot period, should be provided.”
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