The R.I. Public Utilities Commission (PUC) is examining an innovative but complicated proposal from National Grid that would transform the way the utility makes money for distributing natural gas to Rhode Island customers.
The proposal, which has the support of environmentalists but also has a bevy of critics, is known as “decoupling.” It is part of a mammoth 1,500-page docket, which also includes a request for a rate increase, that the RIPUC is hearing this month. The commission will return to decoupling on Friday, continuing where it left off after an initial hearing on Sept. 12.
Decoupling involves a change to the distribution rate, which is the utility’s charge to ratepayers for transporting and delivering natural gas into their homes and businesses. The distribution rate makes up about 30 percent of a ratepayer’s gas bill.
The other 70 percent of a gas bill is the cost of the gas itself. Under state law, National Grid can earn a profit only for distributing gas, not for procuring it. Thus, the utility is required to pass along the cost of gas without any markup. The decoupling proposal thus would not have an impact on the rate charged for the gas itself, which is set by the commodities market.
Across the country, 14 states have adopted some form of decoupling, and six more are currently considering doing so, according to the American Gas Association. The National Association of Regulatory and Utility Commissions has expressed cautious support for the idea.
Under decoupling, the PUC would fix National Grid’s annual profit in advance, based on fixed costs the company would justify to the commission. Thus, National Grid would not earn more if its customers use more gas – or, conversely, earn less if they use less gas.
That contrasts with the present state of affairs, in which the utility’s profit rises and falls based on how much gas is used, because the distribution charge – rather than the utility’s final profit – is what the PUC sets in advance.
Under decoupling, National Grid and the PUC would re-set the distribution rate on a regular basis (the utility has suggested monthly revisions) in order to make sure that, at the end of the year, the company winds up with the precise amount of profit that had been originally set by the PUC.
In practice, if the amount paid over the previous month were not enough to support the profit target, the rate would go up; if the amount were too much, ratepayers would get a rebate or a credit.
However, individual ratepayers’ bills would still increase and decrease based on how much gas their households consume, because the other 70 percent of a gas bill would still be based on the cost of buying gas. The utility could also calculate different distribution rates for different classes of customers, such as individual homeowners or large businesses.
David Graves, a spokesman for National Grid, said the utility has seen its revenue decline in recent years due to increased energy efficiency, and decoupling would help the company balance conservation and its bottom line.
“In the past, it has been the more you sell, the more you make,” Graves said, “and that can’t be the model anymore, because we’re [now] in the practice of selling less, not more.”
The most recent state to switch to decoupling was neighboring Massachusetts, where, following a year-long investigation, the Department of Public Utilities in July ordered that the state’s gas and electricity rates be fully decoupled by 2012.
The main rationale cited by the department for embracing decoupling is escalating energy prices. The price of natural gas has increased significantly over the last two decades, even as residential gas consumption per capita has seen a steady decline, according to the U.S. Energy Information Administration, which predicts a further decrease in gas use over the next 20 years.
Decoupling “is needed to reduce or eliminate the current financial disincentive the electric and gas companies face” in implementing energy-efficiency programs, the Massachusetts department’s final report said.
Seth Kaplan, a senior attorney at the Conservation Law Foundation, says the same problem exists in Rhode Island, where the average customer’s natural gas consumption fell by 11.4 percent from June 2004 to December 2007, according to National Grid.
In testimony to the PUC, Kaplan said National Grid has conflicting mandates – the utility is responsible for implementing many of the state’s energy efficiency programs, yet the utility loses money if consumers reduce their energy consumption. “Decoupling eliminates this problem by aligning the utility’s pecuniary interest with the public interest in fostering efficiency and conservation, an interest that rests on both an environmental pillar … and a pure consumer-protection foundation,” he wrote.
However, others have expressed strong opposition to the decoupling proposal.
Bruce R. Oliver, a consultant who examined the proposal for the R.I. Division of Public Utilities and Carriers, does not see evidence that it would make National Grid more hospitable to conservation. “Decoupling is not necessary for utilities to encourage conservation and energy efficiency,” he wrote.
Another opponent is B. Jean Rosiello of the George Wiley Center, in Pawtucket, which fears decoupling will lead to higher distribution rates for low-income customers who can least afford it.
Kaplan responded by pointing out that the commission can still reduce National Grid’s regulated profit margin under decoupling.
Kaplan argued that most ratepayers will not care about the distribution rate going up if that allows for conservation measures which lower their bill by reducing their gas consumption.
“Customers pay bills, not rates,” he wrote.
Also opposed is John Farley, executive director of The Energy Council of Rhode Island, a nonprofit that represents large energy customers. “Under full revenue decoupling … the utility becomes indifferent to any driver of sales volume, whether this be changing economic conditions, weather, conservation or new technology,” he told the commission.
Decoupling, Farley argued, “would distort the rate-setting process” by shifting risk from National Grid’s shareholders to ratepayers. He also expressed concern about the new rate classes for large businesses that would be created under decoupling.
But James D. Simpson, an attorney for National Grid, said decoupling would streamline the rate-setting process by reducing “the expense and time associated with frequent rate case filings that are driven by the results of energy efficiency and customer conservation.”
Jeff D. Makholm, a senior vice president at National Economic Research Associates, a consultancy in Boston, has offered testimony in support of decoupling in rate cases outside Rhode Island.
He describes it as a way of modernizing a utility revenue model that dates back to the 1830s. But he also said it is important not to overstate decoupling’s potential impact.
“It’s an incremental improvement, and it’s a better way for a utility to run its business more efficiently and more cheaply,” Makholm said, because it reduces the need for the utility to resort to short-term borrowing during periods when the distribution rate does not cover fixed costs. “But it doesn’t change the major equation between the regulator and the company.” •
