By Hil Anderson

12-07-04

The natural gas industry and a major environmental organization proposed a new philosophy for setting natural gas rates that they contend would allow utility companies to urge customers to conserve without cutting into their revenues. A joint statement by the American Gas Association and the Natural Resources Defence Council called on state regulators to begin allowing utilities to set new rates that would recover their fixed overhead costs -- even if the amount of gas they sell declines due to an aggressive conservation program.

"It breaks the connection between the utilities' recovery of their fixed costs and the amount of gas they move," Peggy Laramie, spokeswoman for the AGA in Washington, told.

The proposal, which was presented at the National Association of Regulatory Utility Commissioners annual meeting in Salt Lake City, would remove the conundrum most utility companies currently have of encouraging customers to conserve and then, when successful, seeing their income fall as a result of selling less gas. While the impact on residential rates from such a regulatory change would vary from case to case, the proposal would eliminate the oxymoron of a company that sells natural gas aggressively urging its consumers to use less gas.

"This joint statement sets the stage for unleashing the fastest, cleanest and least expensive responses to natural gas price increases," said Ralph Cavanaugh, energy policy director for the NRDC. "By changing the way that natural gas utility rates are structured, state regulators can remove unintended obstacles to energy-efficiency progress."

Natural gas has become the fuel of choice in the United States for home heating and is also widely used year-round for cooking and water heating. Aside from being one of the cleanest fossil fuels around, it is also relatively cheap and in abundant supply. That abundance, however, is not considered to be a situation that will last forever. Absent some kind of surge in the use of solar and other renewable energy resources, the US Energy Information Administration expects natural gas demand in the United States to grow 15-23 % over the next 20 years.

A sizable portion of that demand will likely be met through a variety of strategies, including:
-- increasing pipeline capacity to into Canada and Mexico;
-- a sizable increase in imports of LNG from overseas;
-- more drilling in the deeper waters of the Gulf of Mexico and
-- through the controversial strategy of opening news tracts of protected federal lands to oil and gas exploration.

Increasing supplies carries with it not only political controversies that will have to be ironed out, but also tremendous financial commitments for the construction of new pipelines, LNG terminals and ships, not to mention the costs of developing new gas wells.

The one thing that regulators, politicians, greens and energy executives agree upon is that the best way to address short-term supply concerns is to encourage consumers to use less energy. Virtually ever utility in the United States has programs to encourage conservation of gas, electricity and/or water through steps ranging from simply not doing laundry during peak demand hours to having the most energy-efficient appliances installed in their homes.

"It's good for the customer but it puts the utility in the position of reducing its cost recovery," Laramie told.

While the AGA and NRDC's proposal was not aimed at implying that utilities were holding back on urging conservation, it was based on the idea that many state-rate structures penalize companies if their conservation campaigns pay off in the form of less gas being sold.

"Without meaning to, traditional state rate-making discourages natural gas utilities from vigorously promoting energy efficiency because utility profits often suffer when consumers reduce their energy use," James DeGraffenreidt, chairman of Washington Gas and the AGA's Government Relations Policy Committee, said.

Residential utility bills are usually divided into two parts -- with the first being the cost of gas, which is passed on to the consumer without being marked up; the retail price rises and falls based on the cost of gas, which is generally higher in the winter when heating demand drives the wholesale market.
The second component is the ratepayers' share of their utility's fixed costs, which includes its overhead of pipeline fees, labour, insurance, maintenance and supplies. Public utility regulators generally base the rates they permit utilities to charge for the recovery of those costs on the amount of gas the customer has used in the past. In other words, customers who use less gas are charged less for cost recovery.

The proposal didn't get into the specific numbers that must be crunched nor did it offer a particular model that every state should adopt. It was instead primarily aimed at urging state regulators to use more flexibility in setting rates that better reflect conservation.

One basic proposal would be periodic "true-up" rate adjustments that would reward conservation efforts in the winter with lower bills at a time when gas prices are higher. In exchange for promoting conservation, the utility companies would be able to charge more for their fixed costs during the summer when gas consumption is lower. Consumers probably should not expect to see their annual gas bills drop significantly through any changes in this new proposed rate regulation. Any savings will likely come only from their own individual efforts to conserve, which would be encouraged by gas companies that would no longer have to worry about being monetarily penalized for encouraging the practice.

Source: United Press International