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Expanding Access to Natural Gas:Principles and Experiences

2015 NASUCA Mid-Year ConferenceJoseph A. Rosenthal

Conn. Office of Consumer CounselJoseph.Rosenthal@ct.gov

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Why Encourage Gas Access?

• Lower heating costs for potential new customers (even at today’s prices)

• Reduce harmful emissions (CO2, SO2, NOX, PM) as compared to heating oil

• Potential to lower costs for existing gas customers by spreading fixed costs of the gas company across a larger base

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Why is Gov’t involvement necessary?

• Overcome customer inertia. – Economic—Cost of conversion• “Irrationally” high discounting by potential customers

of future benefits• Limited access to up-front capital

– Informational/Educational– Similar to arguments for efficiency programs

• Environmental externalities

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Potential Regulatory Barriers

• Hurdle Rate/Contributions in Aid of Construction– Measured customer-by-customer instead of by neighborhood– Punishes first mover– Length of payback period

• Need to establish a separate rate for new customers to spread the costs

• Subsidization by existing customers?

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Source of Funds

• New Customers– Up front (CIAC) or in the distribution rate

• Existing Customers• Government subsidy (e.g., tax abatement, municipal

support, boiler replacement program)• Utility Excess Infrastructure Revenues (“Non-Firm

Margin”)– Capacity Release– Off-system sales– Interruptible sales

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Connecticut’s approach

• Laws and Policies, fleshed out at our P.U.C. (PURA)

• Major use of non-firm margin that had been flowing through the PGA to firm customers (up to $15M per year);

• New customers pay extra in distribution rate• Reconciliation mechanism for unrecovered

cost/excess benefits, paid by existing customers

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Theoretical Aside

• Who does OCC represent?– Only existing customers? Or existing and potential

new customers? If in theory a program will bring large benefits to new customers at a small cost to existing customers, can we support it?

• What interests can OCC represent or promote?– Environmental? Economic development?

Employment? Can OCC promote adoption of a utility heating fuel over a non-utility heating fuel?

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Problems that Developed After Initial Approval

• Transition issues between the new paradigm and the old paradigm– Customers who had considered gas but didn’t have a contract

given new messaging about new rates• Accuracy of Marketing

information/communications/website• Worst case: Customers removing oil furnaces too quickly • Reluctance of some large customers to make firm,

enforceable, long-term commitments• Generally, division of risk unclear

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Joint Solutions Needed

• Gas expansion creates a unique blend of problems (theoretical and practical) and opportunities, with the need for complex balancing of interests.

• We were able to work with our utilities, the policy wing of Connecticut DEEP, the AG’s office, and others to overcome obstacles through settlement.

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Balancing of Interests

• OCC focus: Robust plan, but limit rate increase on existing customers and long-term risk; accurate customer communications

• Utility focus: Increase rate base, respond to customer pleas for gas, keep regulators/pols happy, clear rules, limit long-term risk

• DEEP focus: Implement policy without delay, try to meet ambitious plan goals, reduce emissions, as well as sharing OCC goals

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Balancing of Interests, Part II

• Pre-Construction commitment of 60% of breakeven revenues in hand for most projects.

• Earmarking of non-firm margin funds in support of projects as earned—not as projected.– avoids going too far, too fast based on mere

projections of future margin.• Rate cap on increase caused by the plan (3% by

the end of 2015, 5% by the end of 2016).

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Coordination with Municipalities

• Some municipalities have aggressively embraced expansion and responded positively to the program by:– Coordinating with water and sewer replacements;– Bonding CIACs;– Switching their own heating sources to natural

gas, leading to large savings and lower taxes;– “Marketing” the effort and creating trust.

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Suggested Reference

Feb. 2013 NRRI Policy Paper “Line Extensions for Natural Gas: Regulatory Considerations”By Ken Costello, available at:https://www.michigan.gov/documents/energy/Ken_Costello-_NRRI.pdf_natural_gas_418345_7.pdf