Revenue decoupling, which seeks to separate a local distribution company’s (LDC) revenues from the volume of gas it distributes, is only available to gas utilities in nine states, but it’s gaining in popularity and is on the minds of many executives.
Indeed, when asked where the opportunities are for LDCs in the coming year, three out of five panelists at a Houston conference Monday named revenue decoupling. One of them was Paul Wilkinson, vice president of policy analysis for the American Gas Association (AGA).
“I think there’s an opportunity for LDCs to move into new types of rate structures…Decoupling has moved forward in nine states now,” Wilkinson told attendees at Pipeline & Gas Journal magazine’s Pipeline Opportunities Conference.
Revenue decoupling is often billed as a ratemaking mechanism that removes the disincentive to utilities to encourage conservation and efficiency measures among their customers (see Daily GPI, June 14, 2006). When a utility receives all or most of its revenues based on charges not linked to throughput, the less reason it has to want its customers to burn more gas. Hence, it makes more sense for the utility to want to encourage customers to conserve, or so the thinking goes.
Environmentalists generally like revenue decoupling mechanisms while at least some consumer advocates are skeptical, saying it shifts risks from the utility to its customers. Where it has been adopted, revenue decoupling usually is part of a rate case that specifies utility-led conservation/efficiency measures.
LDCs have other reasons for seeking revenue decoupling, though. Namely, residential consumers are buying and burning less and less of the product their systems deliver. Appliance efficiency gains, better insulation and the like for years have contributed to declining gas burn in the nation’s homes. From 1980 to 2000, gas use per residential customer has declined by 1% per year on a weather-adjusted basis. In the last seven years the decline has been 2.2% per year, Wilkinson said.
Don’t like conservation? Blame high prices. Scott Prochazka, divisional vice president for customer service at CenterPoint Energy, said at the conference the run-up in gas commodity costs over the last several years has “brought to top of mind in consumers the size of their gas bill.”
Additionally, in recent years the summers and winters have seen more severe weather, making for larger swings in gas demand. That may be good for gas storage operators, but for an LDC it only serves to further exacerbate the risk of bad debt expenses piling up as customers can’t/won’t pay their bills. Also, it’s hard to go to regulators and ask for a transmission and distribution rate increase when consumers are smarting so from the commodity charge on their bills, he said.
Kim Cocklin, senior vice president for utility operations at Atmos Energy, said LDCs need to work harder to strengthen their relationships with state regulators and lawmakers, citing a “dire need for conservation [revenue decoupling] tariffs.”
William Cantrell, president of Peoples Gas System, was not so willing to accept declining throughputs as inevitable. He cited the experience of Florida during the Arab oil embargo of the 1970s. The state created incentives to increase natural gas use and in so doing obviated the need for additional electric power generation. In an era when the nation is more focused than ever on reducing greenhouse gas (GHG) emissions, pushing gas heating, cooling, dehumidification, etc. makes sense, Cantrell said.
Prochazka said the gas industry can also grow market share by pushing gas for “niche” applications. As Houston and other cities continue to build up rather than out in their downtown areas, gas proponents need to push developers to install individual gas meters in high-rise housing units, he said, adding that affluent consumers in the Gulf Coast who don’t like losing power during tropical storms could be encouraged to pony up for gas-powered backup generators.
Also on the minds of the LDC executives:
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