Fixed costs moved to separate charges

Courtesy of Utility Regulatory News #3998: Emphasizing the importance of separating system costs from commodity costs, the Indiana Utility Regulatory Commission has adopted a settlement agreement under which a natural gas local distribution company, Northern Indiana Public Service Co. (NIPSCO), is authorized to restructure its rate schedules in conjunction with a decrease in base rates. The settlement provides for an overall reduction in rates of $14.8 million and a 7% inflation-adjusted return on equity (ROE).

The commission explained that NIPSCO’s new rate design moves the recovery of all fixed costs to non-volumetric charges, such as the customer charge and the distribution charge. Describing the redesign as a “wholesale cultural change,” the commission said that the modified structure should motivate the company to expand its energy efficiency and conservation efforts. Additionally, the commission found that collecting fixed costs and commodity costs through separate charges will reduce the company’s operational risk, thus justifying the somewhat lower level of ROE than previously granted. For the full story, subscribe to URN.

Posted: December 23rd, 2010 under efficiency, regulation, revenue decoupling.
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Gas LDC’s proposal deemed insufficient incentive for conservation.

Weekly update courtesy of URN #3976: Following the trend seen in several other states recently, the Tennessee Regulatory Authority (TRA) has become the latest governing body to deny a utility’s petition to institute a revenue decoupling mechanism.

In the case before the TRA, a natural gas local distribution company (LDC), Piedmont Natural Gas Co., had requested permission to implement a decoupling program, claiming that absent the ability to break the link between actual sales and revenues, it would have no impetus for promoting conservation, energy efficiency, and other usage reduction measures. According to the LDC, decoupling would provide it with the means for aligning its own financial objectives with the best interests of its customers.

Piedmont’s proposal was premised on a decoupling program with a true-up mechanism that would allow full recovery of the average per-customer margin. However, in looking at the LDC’s earnings statistics that underlie its plan, the TRA observed that such earnings were based on a benchmark from the company’s last rate case, which had been in 2003. Using a reference point from that long ago could translate into a disincentive for customers to lower their consumption levels, the TRA said.

The TRA explained that Piedmont had structured its decoupling mechanism in such a way that a consumer could reduce usage but not see any decrease in the amount billed. To address its concerns that the LDC’s outdated rate-making data could skew customers’ bills, regardless of their conservation efforts, the TRA ruled that it would be imprudent to authorize a decoupling program in a stand-alone proceeding. Instead, it determined that decoupling should be considered within the context of a full-blown rate case. Subscribe to Utility Regulatory News for the full story.

Posted: June 30th, 2010 under efficiency, natural gas, regulation, revenue decoupling.
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Rejects Other Special Rate Mechanism Proposals

Weekly Update Courtesy of URN #3973: In the course of a natural gas base rate proceeding, the Michigan Public Service Commission has authorized the utility, Consumers Energy Co., to institute a revenue decoupling program on a trial basis. However, several other special cost recovery proposals were not greeted with similar favor.

The company had requested the revenue decoupling mechanism (RDM), alleging that ongoing conservation and energy-efficiency initiatives were exerting downward pressure on the utility’s sales, and hence its revenues. To assure that successful usage reduction campaigns would not adversely affect actual revenues even if the company experiences lower sales, Consumers Energy suggested tracking its sales and revenues separately through the RDM. It proposed modeling the decoupling program on the RDM that had already been approved for its electric operations, which was premised on a consumption-per-customer algorithm. Although agreeing that a gas RDM was appropriate, the commission noted that electric and natural gas consumption can have very different characteristics, especially during Michigan’s sometimes harsh winters. The commission therefore ruled that the gas RDM should be based on a straight revenue algorithm rather than a consumption-per-customer algorithm and also should employ a 15-year weather-normalized sales approach. To not incorporate normalization would risk extreme billing volatility for customers if the state had a colder-than-normal winter, the commission said.

Turning to Consumers Energy’s other proposals, the commission denied the utility’s uncollectible expense tracker mechanism (UETM), its pension expense mechanism (PEM), and its other post-employment benefits (OPEB) mechanism. The company had asserted that the UETM, PEM, and OPEB tracker all followed costs that are closely linked with market performance and the economy in general. Citing the fact that Michigan’s economy is in even worse shape than the rest of the country, the utility argued that the separate cost recovery mechanisms were imperative. The commission, however, observed that newly streamlined rate case procedures would prevent much of the regulatory lag that had inhibited timely recovery of such costs in the past.

Given signs that the economy was finally improving as well as its new expedited rate case schedules, the commission deemed the UETM, PEM, and OPEB mechanism unnecessary. -Subscribe to Utility Regulatory News for the full story.

Posted: June 18th, 2010 under Uncategorized, efficiency, natural gas, regulation, revenue decoupling.
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