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A New Way to Go Green
Virginia passes a landmark natural gas conservation and ratemaking plan.
By Jim Kibler
Published in American Gas, July 2008
In March, Virginia passed a market-based natural gas conservation bill: The Natural Gas Conservation and Ratemaking Efficiency Act, or CARE (House Bill 543, 2008 session). House Republican Caucus Chairman Sam Nixon sponsored CARE, which was developed and supported by a broad coalition, including Virginia Natural Gas, Washington Gas Light, Columbia Gas of Virginia, the Virginia Chapter of the Sierra Club, the Virginia League of Conservation Voters, the Virginia Conservation Network and the Virginia Inter-Faith Center.
In the Virginia energy debate, CARE is landmark legislation for several reasons. Among them is the unprecedented agreement among the various stakeholders on the importance of natural gas as a clean, efficient fuel for direct use. The bill also implements a significant goal of Gov. Tim Kaine’s Virginia Energy Plan, which is to encourage economically viable and market-based approaches to the energy challenge. Finally, this sweeping measure passed unanimously—without a single negative vote in any subcommittee or committee, or on either floor of the General Assembly. Gov. Kaine has approved the bill, and it becomes law on July 1.
The legislation encourages natural gas utilities to decouple and promote conservation by submitting a CARE plan that contains five primary components:
- a decoupling mechanism, including straight-fixed variable rates, that is revenue-neutral to the average customer compared with traditional rates;
- a cost-effective conservation and energy efficiency program, the costs of which are 100 percent recoverable;
- margin protection for utilities that opt-in to a decoupled rate structure;
- a utility incentive of up to a 15 percent share of the initial, independently verified customer savings that accrue from conservation plans; and
- a streamlined procedure for handling of CARE plans at the State Corporation Commission, including a six-month schedule for regulatory approvals.
A Bill Is Born
CARE arose from more than a year of conversations among our companies and our coalition partners about natural gas supply and the effect of high commodity prices on customers. Our initial discussions occurred during the debate on Virginia’s legislation, also enacted with broad bipartisan support, to encourage Congress to allow natural gas exploration off Virginia’s coastline. Despite principled disagreement over the merits and provisions of the offshore natural gas legislation, our conservation partners recognized that supply constraints cause economic pain for customers who have made the right choice to use natural gas instead of more carbon-intensive and less efficient energy sources.
Our discussions gained momentum in November 2007, shortly after the Virginia legislative elections. More than 40 stakeholders attended a decoupling summit in the state capital, with keynote presentations by Elizabeth Martin-Perrera of the Natural Resources Defense Council, Cynthia Marple of AGA and Ken Costello of the National Regulatory Research Institute. Those presentations led to honest, robust dialogue.
As stakeholders, we coalesced around a set of common principles: protect customers, recognize the value of natural gas as a clean and efficient energy choice, drive efficiency and conservation through market-based approaches, preserve a utility’s ability to build and maintain infrastructure, and remove the statutory and regulatory impediments to rewarding natural gas utilities that embrace conservation as part of the new energy paradigm.
Great credit is due our environmental partners, who embraced the notion of the market as a tool to achieve greater efficiency and conservation. They worked to understand the natural gas utility business and to appreciate that it is in a utility’s interest to be aligned with its customers. These organizations also recognize that efficiency and conservation should be part of the regulatory contract and recognized as both a cost of service as well as a metric for financial performance.
CARE in Practice
Procedurally, CARE allows a utility to file a decoupling plan at any time, regardless of the timing in its rate case cycle. For those plans not filed in conjunction with a rate case, the decoupling plan must be revenue-neutral, allocating per-customer fixed costs on an intra-class basis in accordance with a revenue study or class cost-of-service study supporting the rates in effect at the time the plan is filed. Regulatory approval of the plan is required within 180 days, assuming the plan meets the statutory criteria.
Decoupling plans filed in conjunction with a traditional rate case or performance-based ratemaking plan must allocate per-customer fixed costs according to a class cost-of-service study filed with the plan and rate case, and regulatory approval is required within 270 days, assuming the plan meets the statutory criteria.
In other words, regardless of when and how a decoupling plan is filed, the allocation of fixed costs among customer classes is performed in the traditional manner.
In addition to revenue neutrality, the statute requires CARE plans to include conservation and efficiency programs that are approved by the State Corporation as cost-effective under statutory criteria, a weather-normalized determination of conservation and efficiency gains, provisions to address the needs of low-income or low-usage customers, and provisions to guard against adverse rate or service impacts to non-participating classes of customers. Large commercial and industrial customers are excluded by statute.
Natural gas utilities that opt-in under CARE are assured that they will recover their actual costs for approved conservation plans. CARE grants wide latitude in how those programs are to be administered. For example, the legislation permits utilities to partner with government entities, non-profit and for-profit vendors, other utilities and homebuilders to achieve conservation goals. The act also grants flexibility in determining how costs are recovered, and it provides that they are not to be considered an offset to other revenue requirements nor included in any revenue-sharing mechanism under a performance-based regulation plan.
All of these provisions work together to ensure that utilities are, to the degree practical, indifferent to a customer’s consumption of natural gas. However, our conservation partners were steadfast in their desire to see even more fundamental change in the way utility economics work—they wanted to ensure that conservation is more profitable than consumption for the natural gas utility, and they wanted to encourage utilities to decouple.
CARE achieves these goals by allowing a utility to earn up to 15 percent of the independently verified net economic benefits created for customers by the utility’s conservation and efficiency programs. Net economic benefits are to be calculated by subtracting program costs from customer savings, measured over the payback period for the program. For example, a conservation program that costs $200,000 to implement and saves $1 million in ratepayer funds would create $800,000 in net economic value for customers. If the payback period equaled two years, the utility would be authorized to recover up to $120,000 (15 percent of the net economic value) over those two years. In year three, the utility would earn no incentive unless it worked to create additional value for customers through other programs. Incentives earned under this provision are, like the costs of conservation programs, not to be considered an offset to other revenue requirements nor included in any revenue-sharing mechanism under a performance-based regulation plan.
CARE represents a meaningful step forward in Virginia—a step toward regulation that is more focused on aligning customers and utilities, and doing so in a way that serves our collective societal interest in a clean environment and a secure energy future.
Jim Kibler is AGL Resources vice president of governmental affairs, Mid-Atlantic region.
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