Finally, a reward for energy conservation

Every time you turn down your thermostat, you hasten the day Avista Utilities will be back before state regulators seeking a rate increase. That’s a heck of a way to encourage conservation.

Something called decoupling could replace the stick with a carrot.

Although Avista has a good record of encouraging customers to use less gas and electricity, it’s a safe bet that most of the 13.5 percent decline in average household gas use since 1999 can be attributed to rates that have more than doubled the last seven years.

By far the bulk of the increase reflects skyrocketing gas prices at the wholesale level. A therm of gas that wholesaled for less than $3 seven years ago costs more than $10 today.

Regulators allow Avista and other utilities to pass those price increases through to customers. During the late 1980s and early 1990s, prices decreased, and rates fell as a result. Those adjustments up or down do not affect company earnings.

But a separate set of calculations does.

When regulators set rates, they allow utilities a certain percent of profit on investment made in pipelines and other infrastructure, also called fixed costs. In the most recent case, that rate of return for Avista was pegged at 9.11 percent. In theory, Avista earns that return with a $5.50 monthly service charge, plus a projected volume of gas sales.

But recent sales have consistently fallen short of those projections, which put Avista back before Washington regulators twice in the last three years seeking additional rate hikes. The Utilities and Transportation Commission granted increases, but less than those Avista had requested.

Now, Avista and other Washington utilities weary of repeated pilgrimages to Olympia have turned to decoupling as a way to avoid serial rate cases and encourage less gas and electricity use at the same time. Put simply, decoupling makes sure utilities make the approved rate of return on fixed costs even as they encourage customers to use less gas or electricity. A three-year pilot program Avista proposed to the commission two weeks ago would raise or lower gas rates a maximum 2 percent per year — excepting adjustments for wholesale gas costs — depending on how much consumption differed from projections, or how well Avista did meeting or exceeding conservation goals set by third parties, whichever resulted in the smallest rate adjustment.

“We need to be out there promoting conservation programs,” says Vice President Kelly Norwood. But without decoupling, he adds, “If we do that, we don’t recover our costs.”

The filing of Avista’s plan coincided with a commission ruling in another rate case that set forth suggested guidelines for decoupling plans. Among other things, the regulators want to know what risks, like weather, decoupling would address, how the plan might affect recovery of fixed costs, and the possible effects on low-income customers.

Simon ffitch, the assistant attorney general who represents consumers in rate cases, says decoupling is an old idea gaining new support as utilities seek ways of encouraging conservation. But with all the variables that can go into coming up with a workable plan, he says, “There are umpteen ways to do it wrong.”

Poorly designed plans might reward utilities for changes in housing mix or weather — including global warming — that have nothing to do with better conservation programs, he says.

Also, ffitch adds, the more regulators allow for adjustments for fuel costs, conservation and other factors, the greater the business risks transferred from utility to consumers. If utilities are at less risk, maybe they should earn a lower return on their fixed costs.

Jim Lazar, an independent analyst who has participated in many utility rate cases, echoes ffitch’s concerns, but adds that Avista’s proposal appears to go further addressing some issues than other decoupling plans now before the Washington commission.

Decoupling has worked in California, he says, and other states are testing variations of their own. The Washington commission’s guidelines are a good framework.

“The best way to beat the price spiral in natural gas is to buy less gas,” Lazar says.

Anything that will slow the decoupling of dollars from consumer wallets.