RD388 - State Corporation Commission Report: Implementation of The Natural Gas Conservation and Ratemaking Efficiency Act - December 1, 2009


Executive Summary:
In 2008, the General Assembly enacted the Natural Gas Conservation and Ratemaking Efficiency Act (the "Natural Gas Conservation Act") authorizing natural gas utilities (1) to file conservation and ratemaking efficiency plans that are intended to promote improved energy efficiency and increased conservation and (2) to implement ratemaking mechanisms that "decouple" the recovery of a utility's allowed distribution revenue (i.e., its "non-gas" revenue) from the level of consumption of natural gas by its customers. The Natural Gas Conservation Act also requires the Virginia State Corporation Commission ("SCC" or "Commission") to provide a report to the Governor, the Speaker of the House of Delegates, the President Pro Tempore of the Senate, and the Chairs of the House and Senate Committees on Commerce and Labor regarding the implementation of the act by December 1, 2009, and annually by such date each year thereafter until December 1, 2013.

Thus far, three natural gas utilities have filed conservation and ratemaking efficiency plans with the Commission. Virginia Natural Gas ("VNG") filed an application seeking approval of its plan on July 3, 2008, in Case No. PUE-2008-00060. Columbia Gas of Virginia, Inc. ("Columbia") and Washington Gas Light Company ("WGL") filed applications seeking approval of their plans on June 8, 2009, and September 29, 2009, respectively. Columbia's filing was assigned Case No. PUE-200900051 and WGL's request was assigned Case No. PUE-2009-00064. VNG's proposed plan was approved with modifications on December 23, 2008 and VNG was permitted to place its proposed decoupling rate adjustment mechanism into effect on January 1, 2009. The Columbia and WGL proposals are currently pending before the Commission.

All three natural gas utilities examined their respective efficiency programs utilizing the Participant, Rate Impact Measure ("RIM"), Total Resource Cost ("TRC"), and Program Administrator ("PA") Tests. The Participant Test measures the impact of the program on those customers who are direct participants in a program, i.e., the customers who actually receive the incentive or service. The RIM test measures the net impact on the utility's customers as a whole, ignoring the participants' direct benefits. The TRC test measures the overall impact on both participants and non-participants. The PA test estimates the impact on the utility in its administration of the program and its avoidance of alternative resource costs. In considering these various cost benefit tests, it should be noted that the tests rely on a number of projections that are likely to vary from actual experience. Some of these estimates are very difficult to predict with any significant degree of accuracy. Consequently, actual cost benefit results will likely vary, perhaps significantly, from the utilities' estimates. It is also important to note that the cost benefit tests do not consider any increases or decreases in the utility's non-gas revenue that might arise as a result of the implementation of decoupling mechanisms.

Generally, the utilities' estimates indicate that their proposed programs will fail the RIM test and pass the other cost benefit tests. Failure of the RIM test indicates that customers that do not participate in the proposed programs will be negatively impacted by the proposed plans. These negative impacts may be offset by benefits to participants to the extent that the programs pass the TRC test.

All three utilities propose decoupling rate adjustment clauses that are designed to produce average non-gas revenues (*1) per customer that are equal to the average non-gas revenue per customer produced by the rates and test year conditions established in earlier proceedings in accordance with the Natural Gas Conservation Act's definition of "allowed distribution revenue." The test years used in the respective filings, as also required by the Natural Gas Conservation Act, were calendar 2005 or earlier. These somewhat dated test years effectively provide adjustment for changes in average weather-normalized usage that may have occurred between then and now. Average weather-normalized usage and non-gas revenue is, in reality, impacted by any number of factors. These factors include changing customer life styles, customer demographics, housing sizes, furnace and appliance efficiencies, customer price and inflation elasticities, customer awareness, and other factors that have nothing to do with the utilities' offerings of efficiency programs. All three utilities have experienced declines in average weather normalized customer usage since 2005. As such, the decoupling rate clauses adjust for customer driven efficiency gains that have occurred since 2005 and will continue to adjust for changing conditions, including those changes actually driven by the consumer and not just changes attributable to utility sponsored efficiency programs.

In summary, the Commonwealth's three largest natural gas utilities have developed and proposed energy conservation plans that include the offering of various efficiency programs to customers. These preliminary results indicate that the Natural Gas Conservation Act has or will stimulate utility investment in energy and conservation programs.

Sufficient evidence does not yet, however, exist to conclude that these investments are cost-effective under either the RIM or TRC tests. Initial estimates generally indicate that these investments will be beneficial from some perspectives. However, these same estimates indicate that the natural gas utility efficiency plans may negatively impact the non-gas rates paid by natural gas consumers and that non-participants in the programs offered pursuant to these plans will be negatively impacted. Additionally, the cost benefit results do not consider any revenue impact that might be attributable to the implementation of decoupling mechanisms. Such revenue changes could significantly impact the costs and benefits of a utility's overall conservation plan when viewed from a utility customer's perspective.

Further, it is quite likely that the decoupling mechanisms adopted pursuant to the Natural Gas Conservation Act will increase the utilities' non-gas revenues as compared to the revenues that the utilities would otherwise have received. Such increases can be attributed to the Natural Gas Conservation Act's definition of "allowed distribution revenue" and the related requirement that this definition serve as the basis for decoupling mechanisms. To illustrate this point, at this point in time, the current actual results indicate that VNG's decoupling mechanism will compensate the Company for energy reductions of approximately 10 million Ccfs, although VNG's own estimates indicate that its programs have generated reductions of less than 116,000 Ccfs. The Commission will continue to monitor actual results and report to the Governor and General Assembly as directed. The Natural Gas Conservation Act allows gas utilities to propose plans and decoupling mechanisms outside the context of comprehensive rate proceedings, in which all revenues are reviewed for reasonableness to consumers and fairness to utilities.
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1 Non-gas revenues are those revenues that are intended to provide a return on utility investments and to recover non-purchased gas related expenses that include depreciation expenses, operating & maintenance expenses, and taxes. The recovery of costs associated with purchasing natural gas supplies for resale to customers are not considered to be non-gas revenues.