Natural gas cash and prompt-month prices have been reasonably stable for the past month (about $3.50 per MMBtu). While analysts debate market expectations for the summer, what seems to be agreed upon by many are stubbornly solid domestic production, a strong underground storage position and an uptick in LNG imports on the supply-side along with an economy that is not yet ready to support a surge in large volume customer demand.
What makes the current situation more interesting is that it comes at a time when Congress is beginning the debate on energy policy and climate change - and what a debate. Whether you are reading the paper or listening to the radio, you can’t escape the energy discussions that point out the seemingly boundless wind and renewable opportunities. However, where is natural gas in the debate?
Expanding natural gas in home and business direct use applications, in transportation and even in power generation would significantly reduce the nation’s carbon footprint. Technologies for producing, delivering and using the fuel efficiently are here today - and are here now - with no heroic assumptions necessary. So where is reliable and secure natural gas in the national debate?
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As energy efficiency begins to take center stage in federal legislation (the premier example being the Waxman-Markey draft bill currently under consideration in the House), it’s easy to forget that on matters of climate and energy states have long been the leaders in implementing energy efficiency solutions, and utilities have been at the forefront in partnering with regulators and customers to deliver energy efficiency gains. These efforts are really ramping up - even prior to the infusion they stand to receive from the stimulus funds.
A great example of state-level energy efficiency activity was recently announced by the New York State Public Service Commission (NYPSC). As part of its Energy Efficiency Portfolio Standard (EEPS) proceeding, the Commission has approved a natural gas efficiency equipment program for its nearly 4.3 million residential gas customers. Under this action, more than $24 million will be made available for rebates promoting the purchase and installation of efficient, cost-effective, furnaces, boilers and other equipment. This is great news for consumers, as it will provide a direct financial incentive to improve energy efficiency in their homes - savings that come in addition to the money they will save over time in reduced energy costs.
The action taken by the NYPSC recognizes the important role local utilities will continue to serve in delivering energy savings to residential customers.
The utilities participating in this initiative include Central Hudson Gas and Electric Corporation, Consolidated Edison Company of New York, Inc., Corning Natural Gas Corporation, KeySpan Energy of Long Island, KeySpan Energy of New York, New York State Electric and Gas Corporation, National Grid, Orange and Rockland Utilities, Inc., Rochester Gas and Electric Corporation, and St. Lawrence Gas Company.
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.