June 2018, Vol. 245, No. 6
Features
Liberty Utilities Sees Potential Benefit in Decoupling
Spotlight on Utilities
By Michael Reed, Managing Editor
Whenever the topic of "decoupling" is mentioned concerning natural gas distribution utilities, confusion, along with a fair amount of debate, is bound to follow.
That’s because, traditionally, rates for business and residential customers are decided based on a particular company’s revenues and profits. Decoupling, by definition, would eliminate this process, replacing it with another approach such as "revenue-per-customer" formula that requires occasional adjustments, based on sales.
In New Hampshire, the state Public Utilities Commission (PUC) ruled in late April it would allow monthly adjustments to Liberty Utilities’ gas rates for the first time in state history.
The move was hailed by consumer Advocate Don Kreis as "a decisive step forward into the 21st century," while some in the industry viewed the change warily. Currently, only four states offer decoupling to gas utilities, five states and the District of Columbia offer it to electric utilities, and 14 states provide for decoupling for both their electric and gas utilities.
Liberty Utilities, which has about 90,000 gas customers in central and southern New Hampshire, told P&GJ the company is "pleased" to have reached an agreement with state regulators to allow de-coupling.
"We requested this because we feel it will benefit the company as well as customers," said John Shore, Liberty Utilities senior communications manager. "We are reviewing the ruling closely and have not made a decision regarding appeal, but we are most certainly happy that we have reached this agreement."
The PUC ruling resulted from Liberty Utilities’ application for new rates that took place about a year ago. EnergyNorth, which was bought by Liberty Utilities in 2012, proposed decoupling several years ago, but the effort was rejected at that time by the PUC.
"Our [new] model is real time, meaning that customer bills will be adjusted monthly rather than having an annual or seasonal true up," Shore said. "This means basically the same thing for customers and the company – predictability and stability."
Using the new model Liberty Utilities can better predict revenues, and customers can better predict their utility costs. This will help level out spikes due to extreme weather.
With customer interest in energy efficiency on the rise, gas providers have started taking greater interest in methods used on the electric side to manage demand. National Grid, for example, has proposed demand response programs to reduce peak demand, similar to those used by electric companies.
Decoupling works fundamentally the same way for both gas and electric utilities, since both have cost structures that are dominated by high fixed costs. However, while the gas industry tends to face decreasing average revenues per customer over time, the electric industry experiences increased average revenues per customer. As a result, gas utilities tend to face revenue and profit loss between rate cases, while electric utilities garner increasing revenue and profits between rate cases.
Critics of conventional rate formulas point out traditional models provide little incentive for utilities to take part in customer energy-efficiency programs, because to do so would reduce energy sales through improving efficiency, thereby lowering revenues and associated profits. Part of the motivation behind decoupling, according to the New Hampshire PUC, is the belief that utilities should be rewarded for doing a better job of meeting their customers’ energy service needs.
Shore said Liberty Utilities agrees, adding, however, the company already maintains a "very robust energy efficiency program," which has won EPA awards six years in a row.
"This is much more fair because the utilities have to actually prove what effect efficiency is having on their revenue – and the rate can be adjusted either up or down," Kreis told New Hampshire’s Concord Monitor.
According to the National Association of Regulatory Utility Commissioners (NARUC), decoupling does not change the traditional rate case process pursued by utilities, but "in its simplest form, adds an automatic ‘true-up"’ mechanism that adjusts rates between rate cases, based upon the over- or under-recovery of target revenues."
As in the traditional rate case, a rate is set by determining the revenue requirement and dividing it by expected sales. Then, on a regular basis, prices are re-computed to collect a target revenue based on actual sales volumes. Decoupling mechanisms can be designed for adjustment on a monthly or quarterly basis, or at some other regular interval.
Under New Hampshire’s current system a lost revenue adjustment mechanism (LRAM) is used to adjust for assumed lost revenues, based on calculations of fallout from energy efficiency programs. The resulting payments occur even when no drop in customer use takes place – for example, during especially cold winters.
As of Nov.1, though, the new PUC ruling will replace the state’s LRAM appartus with monthly adjustments based on customer use, established separately for commercial and residential accounts. It will also make an adjustment for weather changes that affect usage.
"If decoupling is implemented successfully, customers should see enhanced opportunities for cost-effective, energy-efficiency measures to reduce consumption and lower their energy costs," PUC said in its ruling.
The ruling also cuts the fixed charges, regularly applied to every bill.
"Spotlight on Utilities" highlights innovations and achievements of those in the business of providing natural gas to homes and businesses. If you have a suggestion for inclusion in the column, email michael.reed@pgjonline.com.
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