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AIC Supports Revenue Decoupling for Southwest Gas Corp



Conserving energy simply makes good sense.

Conservation allows us to stretch energy supplies in the face of growing global demand.  It also means we burn fewer fossil fuels, thus reducing air pollution and emissions of greenhouse gases, which contribute to global warming. In the case of electricity, conservation can also mitigate the amount of costly new generation infrastructure needed to serve Arizona's rapidly growing population.

The Arizona Corporation Commission has recognized the benefits that conservation brings to both the environment and consumers. The ACC has authorized and required utility providers to promote programs for customers to conserve energy and thus lower their energy bills. These measures, known as "demand side management" programs, include efforts to communicate information about ways that consumers can conserve, and to provide monetary incentives making it easier to switch to more efficient appliances. The ACC has required implementation of demand side management programs for all regulated power companies and natural gas distribution providers. The ACC has also allowed the utility companies to pass along the costs of these programs to ratepayers.

If conservation helps the environment, reduces greenhouse gases, benefits consumers, lowers the need for costly infrastructure and the utility companies are made whole for their expenditures on conservation programs, why are utility investors concerned?

The answer has to do with the way the utility companies are required to recover their costs through the rates they charge customers. Because a portion of the companies' fixed costs for infrastructure like distribution pipes and lines is recovered through charges based upon the volumes of natural gas or electricity sold, conservation measures aimed to lower consumption lead to under-recovery of some fixed costs. This has a drag on earnings and the returns that investors can hope to earn. It hurts investors and, therefore, utility companies are reluctant to engage in conservation programs.

One way to fix this cost recovery problem and to make the utility companies and investors more willing participants in conservation programs is to "decouple" volumetric sales from earnings. Decoupling would allow a utility company to adjust its rates to compensate for lower per capita consumption. So, for example, as conservation leads to lower per capita consumption of natural gas, the utility company could increase its rates slightly for all ratepayers, thus stabilizing earnings and allowing full recovery of its fixed costs. Selling more natural gas is less crucial to the company's bottom line under a decoupling mechanism, and it would be less resistant to promoting conservation.

The ACC recently completed hearings on Southwest Gas Corporation's request for a rate increase. As part of its submission, Southwest Gas has asked the ACC for a revenue decoupling mechanism. AIC intervened in the case and sponsored the testimony of economist, Dr. Daniel Hansen of Christiansen & Associates in support of the Southwest Gas revenue decoupling mechanism. Dr. Hansen's testimony also supports Southwest's additional request for a weather normalization adjustment mechanism to protect both consumers and the company from the financial effects of abnormal weather conditions.

Similarly, the Southwest Energy Efficiency Project (SWEEP), which promotes and supports energy efficiency and conservation efforts throughout the West also testified in support of SWG's revenue decoupling mechanism. SWEEP stated its belief that the decoupling mechanism proposed by SWG was crucial to move the company to embrace enhancements in its demand side management programs.

Although the ACC has previously considered and rejected revenue decoupling proposals from SWG and Unisource Energy Services, AIC believes with stronger support this time from both AIC and SWEEP the Commission will see things differently and authorize revenue decoupling.

A recommendation on the SWG case from the assigned Administrative Law Judge is expected to go before the full Commission for consideration in August or September.

Gary Yaquinto, AIC President