Without customers, natural gas utilities – like most businesses – would not survive. But the same is true of shareholders – without them utilities would not survive either, so utilities, and the public utility commissions that regulate them, need to find a balance between keeping costs as low as possible for the customer, while at the same time ensuring a fair return for the shareholders that provide the capital that allows utilities to expand and grow.
In normal times, this is a delicate balancing act, but today it is a high-wire act because in addition to our uncertain economy, fighting global climate change has become a national priority and the energy industry is at the forefront of that battle. Because using energy, even energy as clean as natural gas, results in significant CO2 emissions – a primary greenhouse gas – Americans are looking for ways to conserve energy and use it more efficiently, and they expect their local utility to help them in this effort.
Which natural gas utilities certainly are doing; in 2007 they spent $329 million on energy efficiency and conservation programs across the country. But from a business standpoint, helping customers use less energy poses challenges because utilities historically make their money based on the volumes of natural gas that flow through their pipes to the customer. The less gas that flows, the less money utilities make under the traditional regulatory rate structure in which most utilities have operated. That may be good for the customer, but not utility shareholders, many of which are senior citizens and retirees who depend on the security of a regular, predictable utility dividend check.
One solution to this dilemma is what our industry calls “decoupling”, or non-volumetric rate designs. By working with their public utility commissions to establish rate designs in which their earnings are separated from the volume of gas they deliver, utilities can align the interests of their customers and their shareholders, while at the same time furthering our national goals of reducing energy consumption and greenhouse gas emissions.
Once a utility’s ability to earn a fair return is no longer linked to the amount of gas it delivers, it can do even more to help customers conserve and use energy more efficiently because the utility will no longer be financially penalized. The customers are happy because their energy bill is smaller, while the shareholders are happy because their dividend check is not.
At present, 28 companies in 16 states have adopted some form of decoupling, while 11 companies in six other states are in the process of approving one.
Of course, there is no one-size-fits-all approach to regulatory innovation, including decoupling. Each utility must work with its state commissioners to determine which approach works best given its own circumstances. But it is a trend that should be encouraged because it is good for the customer, good for the shareholder and good for the country.