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Bay State Gas Company Distribution Rate Design “What is in the Customer’s Best Interest”. Joseph A. Ferro June 15, 2010 Presented at 2010 NASUCA Mid-Year Meeting San Francisco, CA. Distribution Rate Design - Summary. Summary of Recent Rate Order in MA D.P.U. 09-30 - PowerPoint PPT Presentation
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Joseph A. FerroJune 15, 2010Presented at 2010 NASUCA Mid-Year MeetingSan Francisco, CA
Bay State Gas CompanyDistribution Rate Design
“What is in the Customer’s Best Interest”
Distribution Rate Design - Summary
• Summary of Recent Rate Order in MA D.P.U. 09-30
• Bay State Gas Co.’s Customer Rate Classes
• Revenue Decoupling
• Rate Design – Impact on Goals / Principles and Alternatives
• Q&A
Summary of Recent Rate Filing – D.P.U. 09-30
• Filed on April 16, 2009– Bay Sate first LDC to file under DPU directive to implement Decoupling– 6-month suspension period
• Revenue Decoupling -- as directed in generic order (DPU 07-50)– All utilities must implement by 2012 in context of a rate case
• Infrastructure Replacement Tracker
• Inclining Block Rate Structure – as directed by DPU (DPU 08-35; N.E. Gas / Fall River)
Summary of Rate Order
• New Rates Effective Nov. 1, 2009
• Revenue Increase of $19.1 million or 3.6% of Total Revenue– 56% of Request– ROE – 9.95%
• PBR Plan Terminated
• Revenue Decoupling, with Bay State modifications
• Infrastructure Replacement Tracker Approved– Replacement of non-cathodically protected bare steel– File every May 1 for effect November 1
• Inclining Block Rate Structure
Bay State Rate Classes - Residential
• Residential Heating– Average Distribution Bill - $39.11 / mo– Average Base Rate - $0.47 per therm
• Residential Heating LI Discount– Based on discount realized prior to March 1, 1998– 20.9% Discount off regular R-Heating Total Bill
• Residential Non-heating– Average Distribution Bill - $17.26 / mo– Average Base Rate per therm - $1.13 per therm
• Residential Non-heating LI Discount– Based on discount realized prior to March 1, 1998– 19.0% Discount off regular R-Non-heating Total Bill
Bay State Rate Classes – Commercial & Industrial
• C&I Low Annual / High Peak Period Use (70% or greater than annual use)– Annual Use less than 5,000 therms– Avg. Mo. Dist. Bill - $58 / Avg. Base Rate - $0.48 per therm
• C&I Low Annual / Low Peak Period Use (less than 70% of annual use)– Annual Use less than 5,000 therms– Avg. Mo. Dist. Bill - $61 / Avg. Base Rate - $0.47 per therm
• C&I Medium Annual / High Peak Period Use (70% or greater than annual use)– Annual Use between 5,000 therms and 39,999 therms– Avg. Mo. Dist. Bill - $274 / Avg. Base Rate - $0.26 per therm
• C&I Medium Annual / Low Peak Period Use (less than 70% of annual use)– Annual Use between 5,000 therms and 39,999 therms– Avg. Mo. Dist. Bill - $226 / Avg. Base Rate - $0.22 per therm
Bay State Rate Classes – Commercial & Industrial, cont.
• C&I High Annual / High Peak Period Use (70% or greater than annual use)– Annual Use between 40,000 therms and 249,999 therms– Avg. Mo. Dist. Bill - $1,243 / Avg. Base Rate - $0.19 per therm
• C&I High Annual / Low Peak Period Use (less than 70% of annual use)– Annual Use between 40,000 therms and 249,999 therms– Avg. Mo. Dist. Bill - $1,361 / Avg. Base Rate - $0.16 per therm
• C&I Extra High Annual / High Peak Period Use (70% or greater than annual use)
– Annual Use of 25,000 therms or more– Avg. Mo. Dist. Bill - $6,639 / Avg. Base Rate - $0.145 per therm
• C&I Extra High Annual / Low Peak Period Use (less than 70% of annual use)– Annual Use of 25,000 therms or more– Avg. Mo. Dist. Bill - $7,072 / Avg. Base Rate - $0.135 per therm
Decoupling - Public Policy Benefits
• Aligns LDC and customer interests by removing financial disincentive for utility to aggressively promote energy efficiency and conservation
• Contributes to lower total energy bills for customers
• Promotes stronger partnership between the LDC and policy makers on conservation issues
• Benefits the environment and future generations through reduced emissions
• Promotes investment community confidence in utility by ensuring that declines in customer usage do not dampen financial performance
• Throughput reductions not a contributing factor for LDC to file a base rate case
• Supported by broad array of stakeholders including environmental advocates, gas industry groups, consumer representatives and policymakers
REVENUE DECOUPLINGSevering the Link Between Revenue and Customer Use
Drivers or Intended Results – Utility Perspective
• Removes LDC disincentive to promote energy efficiency
• Stabilizes base revenue – unaffected by volume
• Preserves incentive to add new customers and retain existing customers
• Revenue tied to number of customers at benchmark revenue per customer• New customers excluded from Decoupling mechanism
DECOUPLING – A Reconciling Recovery Mechanism
• Revenue Requirement or Target equals:
Test Year (2008) or Benchmark base revenue per customer (“BRPC”) times the current number of customers taking service as of 2008 --- Plus revenue realized from new customers
Per Order - Exclude new customers added since December 31, 2008
• Revenue Decoupling Adjustment =
[Benchmark BRPC – Actual BRPC] x Current No. of Customers
Revenue Decoupling Illustrative Example
Test Year Residential Residential C&I TotalTotal Base Rev. $125 Million Actual Base Rev. $115 Million $66 Million $186 MillionTotal No. Customers 250,000 Actual No. Customers 249,000 30,000
Avg. Rev per Customer $500 Actual BRPC $462 $2,200 (Benchmark)
Benchmark BRPC $500 $2,000 Test Year C & ITotal Base Rev. $60 Million Less Actual BRPC $38 ($200)Total No. Customers 30,000 Times Actual Custs 249,000 30,000
Avg. Rev. per Customer $2,000 (Benchmark) Decoupling Revenue 9,500,000$ (6,000,000)$ 3,500,000$
Projected Therms 250,000,000 200,000,000 450,000,000 Total Target Base Rev. from TY Customers $185 Million Decoupling Rate Adj. 0.038$ (0.030)$ 0.008$
Illustrative Decoupling Benchmark Illustrative Revenue Decoupling Charge Calculation
DECOUPLING – Application of Rate Adjustment
• All rate classes charged the same volumetric decoupling charge --- Revenue Decoupling Adjustment Factor (“RDAF”)
– RDAF = Sum of decoupling revenue adjustment by rate groups / Firm sales + FT
– Uniform charge designed to limit rate impacts to any one class
– Potential shifting of revenue requirement• Temperature sensitive vs. non-temp. sensitive• Energy Efficiency participants vs. non-participants• High volume customers vs. all other customers
• Example:– TY Rev = $1,000– No. Customers = 100– ARPC = $10
• Warmer than normal year/period, EE measures installed and Company loses 5 customers– Actual Revenue = $760– Actual ARPC = $760 / 95 = $8– Decoupling Adj. = 95 x ($10 - $8) = $190– Company Revenue = $760 + $190 = $950– Revenue down by $50 => 5 lost customers at $10 ARPC
• Not $240 ($1,000 - $760)
DECOUPLING – A Reconciling Recovery Mechanism
DECOUPLING – Tracking Revenue by Rate Group and Season
• Three Decoupling Rate Groups with 6-month seasonal Benchmark ARPC– Bay State proposed variation from MA DPU Generic Order– ARPC based on revenue per Order :
• Residential Heating– Winter ARPC = $340– Summer ARPC = $130
• Residential Non-heating– Winter ARPC = $114– Summer ARPC = $ 96
• All 8 C&I classes– Winter ARPC = $1,410– Summer ARPC = $ 487
DECOUPLING – Tracking Revenue by Rate Group and by Season
• Why by Season?– Fair to separate winter/temperature sensitive ARPC and summer/non-
temperature sensitive ARPC– Consistent with Bay State base rate (and CGA) structure– More timely reconciliations as compared to annual
• Why by 3 Rate Groups combining all 8 C&I classes?– Avoids unintended revenue impact caused by C&I Rate reclassification– Example Extra High, G/T-53, reclassified to High Annual Use, G/T-52:
• G/T-53 at $64,000 ARPC (winter) and $23,000 (summer)• G/T-52 at $12,000 ARPC (winter) and $ 4,500 (summer)• Rev Loss:
$52,000 $18,500 = $70,500
RATE DESIGN
• Inclining Block Rate Structure as directed by MA DPU and in conjunction with Decoupling
• All Company proposed Customer Charge increases rejected– Maximize volumetric charges in the spirit of encouraging conservation
• Inclining rates intended to encourage customers to conserve– Tail Block price $0.02 to $0.05 per therm higher than head block price
• Do inclining rates promote conservation?– Res. Heating total rate of $1.30 per therm; commodity $0.85 / therm
• Could inclining rates disadvantage high use customers?– No applicable energy efficiency measures– Business / operation requires maintaining or increasing high use level
RATE DESIGN – Longstanding Goals / Principles
• Efficiency – promote economic use of distribution system– Unit marginal cost
• Simplicity – consumers easily understand rates / charges– Could expand to also make it easy to administer
• Continuity – gradual changes in rates to allow for consumers to adjust their usage patterns
• Fairness – rates reflect the underlying or embedded cost of providing service to each rate class– Also intra-class considerations
• Earnings Stability – company earnings should not vary significantly over a few years
Rate Design – Goals vs. Decoupling & Inclining Rates
Goals / Principles Decoupling Inclining Rates Combined and Comments
Efficiency No - Vol. Rate for last year revenue
No – Tail Block much > unit MC
Double No Redefined by EE
Simplicity No – “Use less last year, pay more this year.”
No – Why is additional use more costly?
Use less pay more and use more pay more – Huh??
Continuity No – But, by same rate to all custs, mitigate volatility
No – But, since TB moderately higher, insignificant
Esp., troublesome for high use customers
Fairness No – Undoes ACOS by uniform rate to all classes
No – Intra-class subsidy
Double No
Earnings Stability Yes – To some extent
No – But Decplng “corrects”
Better than before
Rate Design - Alternatives
• Straight Fixed Variable Rate Design– Efficient, Simple, Fair and Earnings Stability– Reasonable Continuity, thus viable for the existing homogenous classes
• Residential Heating - $39.11 / mo • Residential Non-heating - $17.26 / mo• C&I Low Annual, High Winter - $58 / mo• C&I Low Annual, Low Winter - $61 / mo
– For other High Annual C&I classes, either create additional classes or base on customer design day demand
– For Extra High Annual, currently partially based on monthly MDQ
• “Modified” Fixed Variable Rate Design– Based on ACOS, 80% - 90% of revenue from fixed Distribution Charge– Remaining revenue from volumetric rate close to unit MC– More Efficient, Simple, More Fair and reasonable Earning Stability
Bay State Gas – Distribution Rate Design
Q & A ?