Maintaining the status quo in natural gas utility rate design may be costly to consumers, utilities and society, but innovative rate designs and true-up mechanisms could align the interests of all stakeholders, according to a white paper by the American Gas Foundation (AGF).

“Utilities are increasingly encouraging energy efficiency at the expense of their economic livelihood,” according to the AGF white paper, “Rethinking Natural Gas Utility Rate Design.” The white paper followed a forum in May sponsored by AGF and the National Association of Regulatory Utility Commissioners at Ohio State University, which brought together state regulatory officials, consumer advocates, financial analysts and natural gas utility executives.

The white paper examined traditional rate design, which links natural gas utility profits to the volume of gas transported, and concluded that with today’s energy-conscious environment and higher energy prices, traditional designs don’t necessarily benefit the customer or the utility.

Kenneth Costello, senior institute economist at the National Regulatory Research Institute, said achieving the right level of conservation requires a combination of consumer and utility initiatives. Rate design, he said, is a “balancing act,” and rates that fail to give utilities an opportunity to earn adequate returns could have unwanted consequences.

“If you look at a new rate design like revenue decoupling, it’s intended to address that concern as well as the concern of utilities not having the right incentives to promote conservation,” said Costello. Two examples Costello cited include the Straight Fixed-Variable (SFV) rate design by Atlanta Gas Light in Georgia and the modified service charge designed by Xcel Energy in North Dakota. More typical is a compromise rate structure, he said.

“Consumers need to see clear benefits from new rate designs,” the white paper stated. “Many customers seem to be price-sensitive, but most do not understand that natural gas utilities simply pass along the increases or decreases in gas commodity costs without any mark up.”

Also, the paper noted that a “critically important, but often under emphasized element of any ratemaking approach linked to a conservation initiative is consumer education.” The authors wrote that consumers would benefit from a better understanding of potential rate design changes and how they may serve be consumer’s best interest.

The entire paper is available for download on the AGF website at www.gasfoundation.org.

©Copyright 2006Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.