RD383 - State Corporation Commission Report: Implementation of The Natural Gas Conservation and Ratemaking Efficiency Act - December 1, 2010


Executive Summary:
In 2008, the General Assembly enacted the Natural Gas Conservation and Ratemaking Efficiency Act (the "Natural Gas Conservation Act" or "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. This report is the second such report tendered by the Commission in compliance with this requirement. The first report was filed on December I, 2009.

Thus far, three natural gas utilities have received approval for conservation and ratemaking efficiency plans with the Commission. Virginia Natural Gas, Inc. ("VNG") filed an application seeking approval of its plan on July 3, 2008. 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. VNG's proposed plan was approved with modifications, and VNG was permitted to place its proposed decoupling rate adjustment mechanism into effect on January 1, 2009. Columbia's plan was approved with modifications, and Columbia was permitted to place its proposed decoupling rate adjustment mechanism into effect on December 31, 2009. WGL's proposed plan was approved with modifications, and WGL was permitted to place its proposed decoupling rate adjustment mechanism into effect on May 1, 2010.

All three natural gas utilities examined their 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, with no focus on 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 tests, it should be noted that they rely on projections that are likely to vary from actual experience. Some estimates are difficult to predict with any significant degree of accuracy. Consequently, actual cost/benefit test results will likely vary, perhaps significantly, from the utilities' estimates. Further, cost/benefit tests do not consider any increases or decreases in a utility's non-gas revenue that might arise from the implementation of decoupling mechanisms.

Generally, the utilities' estimates indicate that, for their proposed programs, cost/benefit results will show that costs exceed benefits under the RIM Test but that benefits will exceed costs under the other 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 proposed decoupling rate adjustment clauses designed to produce average non-gas revenues (*1) per customer 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 Act's definition of "allowed distribution revenue." The test years used in the filings were calendar year 2005 or earlier. These somewhat dated test years effectively provide adjustments 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 a number of factors. These factors include changing customer lifestyles, customer demographics, housing sizes, furnace and appliance efficiencies, customer price and inflation elasticities, customer awareness, and other factors unrelated to 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 the aforementioned changes as well as those changes attributable to utility-sponsored efficiency programs.

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

Sufficient evidence does not yet exist to conclude that these investments are cost-effective under either the RIM or TRC Tests. Initial estimates indicate that these investments will be beneficial from some perspectives, but the estimates also show that the utilities' efficiency plans may negatively impact non-gas rates paid by consumers and that non-participants in programs will be adversely impacted. Additionally, the cost/benefit results do not consider any revenue impact resulting from the implementation of decoupling mechanisms. Such revenue changes could significantly impact the costs and benefits of a utility's plan when viewed from a utility customer's perspective.

Further, it is likely that the decoupling mechanisms adopted pursuant to the Act will increase utilities' non-gas revenues as compared to the revenues that the utilities would otherwise have received. (*2) Such increases can be attributed to the 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, the current actual results indicate that, since its inception, VNG's decoupling mechanism has compensated the company approximately $7.7 million for forecasted energy reductions of approximately 18 million Ccfs. However, VNG's own estimates indicate that its programs have generated actual reductions of less than 491,000 Ccfs, so consumers are paying for a level of energy reductions that are not occurring. (*3) The Commission will continue to monitor results of the utilities' efficiency plans and report to the Governor and General Assembly as directed.
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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 and 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.
(*2) 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.
(*3) The results were similar for Columbia's and WGL's programs. Specifically, Columbia's decoupling mechanism enabled it to collect additional non-gas revenue of nearly $3.2 million based on assumed usage reductions of 8.4 million Ccfs. However, Columbia's engineering estimates indicate that its programs have generated actual reductions of approximately 77,000 Ccfs. WGL's decoupling mechanism enabled it to collect additional non-gas revenue of $219,275 from ratepayers during a period in which WGL had not yet implemented its conservation and energy efficiency programs.