Decoupling may help utilities, consumers

An odd couple has united to support decoupling.

The Natural Resource Defense Council advocates energy conservation. The American Gas Association promotes the use of natural gas. Yet the two have teamed up to back an effort to get gas utilities and utility regulators to implement rates that encourage the use of less gas without inflicting financial harm on utility investors.

Northwest energy consumers beaten up the last few years by higher electricity and natural gas rates may not know, much less care, that seesawing rates can be tough on utility shareholders as well. But financially weak utilities pay more to borrow money, delay maintenance, and generally do not serve their communities as well as those with more resources.

But how do you assure a utility’s financial health without allowing them to charge too much, at the same time fostering conservation? Decoupling.

Utilities do not make money selling the gas itself. For the most part, regulators allow them to pass through to consumers the wholesale price of gas with little or no markup. What they do allow the utilities to earn income on is the investment made in pipelines and other infrastructure that delivers the gas to homes, factories and stores. They determine how much gas must be delivered to provide that amount of revenue, and set rates accordingly.

But if consumers buy less gas, earnings fall short. Use more gas, and the utility and its investors profit. In this equation, there’s no reason for a utility to encourage conservation.

Decoupling removes the risk to earnings posed by conservation with “true-ups” that adjust rates upward slightly to recoup income reductions, or downward if other factors like weather increase gas use. The true-ups represent a relatively small component in overall rates, perhaps one or two percent, but can have a significant effect on a utility’s bottom line.

The NRDC and AGA recently pitched the concept to state utility directors earlier this month. But Oregon, where regulators two years ago approved a Northwest Natural Gas “conservation tariff” based on decoupling, is ahead of the curve.

Northwest Senior Vice President Gregg Kantor said the tariff added less than one cent per therm to customer bills in its first year. He expects another small increase this fall, when rates will be adjusted to account for higher gas prices, as well.

Despite the rate bumps, Kantor notes, consumer representatives have supported the decoupling program.

The Public Utility Commission’s Bonnie Tatom says Northwest consumers are using less gas, but it’s unclear whether decoupling is the reason. So far, she adds, there has been one upward true-up, and a second seems likely this fall. A study will be done next year to sort out just how much of the lesser gas use is due to decoupling, weather, or consumers using less gas in response to higher prices.

Oregon’s two other gas utilities, she notes, have not approached the commission with a decoupling plan.

One of them, Avista Utilities, has financed its conservation programs with rate surcharges implemented in 1995. Ranging from one-half percent to one and one-half percent depending on state and fuel, the surcharges finance home weatherization, the purchase of efficient furnaces, and other programs that have reduced residential gas consumption around eight percent over the last four years.Washington regulators prefer the surcharge approach. A decoupling plan implemented by Puget Sound Energy in the early 1990s did not work well.

The NRDC’s Ralph Cavanaugh says Washington should give decoupling another chance.

“We’ve got to stop linking the financial health of our utilities to energy sales,” says Cavanaugh, an energy analyst and long-time advocate of decoupling. Avista’s surcharges, an innovation hailed by the NRDC and other conservation groups, do not do enough to encourage conservation, he says.

PacifiCorp has discussed inclusion of a decoupling mechanism in a rate case now before the Washington Utilities and Transportation Commission, and Cavanaugh says he plans to encourage that idea. If approved, it will give other utilities and the regulators the chance to retest the viability of the concept in this state.

For this upcoming winter anyway, neither decoupling nor much of anything else will stave off likely stiff increases in gas rates. With wholesale gas prices far above those built into existing rates, double-digit increases lie ahead. Friday, Avista asked Idaho regulators to approve a 14.2 percent gas rate increase to reflect higher gas costs.

Unfortunately, decoupling the furnace is not an option.