Citizens Gas Has Strayed from Its Mission

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Citizens Gas is a charitable trust. Its “stockholders” are the citizens of Indianapolis. It was created to protect ratepayers from price gouging practices of private utility companies decades ago and keep rates as low as possible. But you wouldn’t know that from its recent request for a 35% rate increase. The company also proposes schemes that benefit it and its executives, does not propose any detailed plan to arrive at reasonable costs for ratepayers, and proposes to push its management responsibilities onto ratepayers’ backs.

The following are excerpts from the Testimony of CAC’s executive director, Grant Smith, in the Citizens Gas rate case:

Q. What are the benefits of implementing comprehensive energy efficiency programs for Citizens Gas customers in particular?
A. Citizens Gas customers would see similar benefits to those of a state-level program. Most importantly, energy efficiency helps reduce customer bills in two ways. First, it produces significant savings for customers that receive energy efficiency measures. Second, by lowering overall demand for natural gas, it would help soften the increases in the commodity cost of gas, thus making bills more affordable for all customers.

Furthermore, by reducing total natural gas imports, it would help retain dollars in the local economy that would otherwise flow out of state, thereby improving the local economy for all citizens and businesses. Finally, an additional benefit to customers would be deferred investments in natural gas networks.1

Q. How much gas DSM (Demand Side Management or energy efficiency) potential is there in Indiana?
A. As far as I know, there is no available study of gas DSM potential for Indiana. Given the inexperience Indiana gas utilities have with efficiency programs that go beyond low-income weatherization, such a study would be necessary to guide comprehensive DSM program design. In addition, the independent DSM potential study being developed as part of the collaborative coming out of the Vectren North gas rate case has been extremely informative.

Even without a Citizens Gas specific study, however, I believe that there is a significant potential in gas energy efficiency improvements through gas DSM activities in Indiana. This is particularly true because Indiana has historically had almost no utility energy efficiency programs beyond the low-income customer sector. For example, a recent study by ACEEE that examined successful experiences in gas DSM programs across the U.S., and two other studies by KEMA-XENERGY, Inc., on significant gas DSM potentials in California, shed light on the likely potential in Indiana from two different perspectives. But having an Indiana specific study would be instrumental to determining the gas DSM potential for Citizens Gas and for proper implementation of a comprehensive long term program.

Q. How could Citizens Gas’ energy efficiency efforts and service be improved?
A. Given its mission and standing as a charitable trust, I believe Citizens Gas is obligated to embrace energy efficiency as a policy to be employed across-the-board. However, Citizens Gas, in its testimony, has not proposed a detailed comprehensive program and no details to adequately implement one. Moreover, it’s proposed funding levels are not up to snuff with other utility companies.

Q. How was the Citizens Gas conservation portfolio developed?
A. According to the Navigant summary attached to Greg Sawyers testimony, the portfolio was developed based on Citizens Gas’ experience working with low-income programs, a review of the potential for conservation identified in five studies looking at the Midwest, West-Coast, and Utah, and utility programs identified in those five studies.

Q. How should Citizens Gas efficiency programs be designed?
A. While there are certain readily identifiable programs that are “no brainers” which, if properly implemented, could provide immediate and fairly predictable and reliable benefits, a serious and comprehensive study of what would work best for Citizens Gas customers needs to be performed. With the exception of Web Advisor, the list of general programs identified by Citizens Gas are a decent start at a list of program options to be explored.

However, a serious proposal for gas DSM would start with a thorough market potential study to examine the characteristics of the housing and building stock, appliances, etc., and compare that with surveys of actual customer usage. After determining how customers are actually using gas in Citizens Gas service territory, an action plan should be developed which looks at best practices in other states and actual data from the utility’ service territory to target those measures which will generate the most energy savings or other benefits – such as reducing disconnections and bad debt. Citizens has not presented any such detail analysis or cost-benefit data.

Q. Has a study and action plan as you propose been conducted in Indiana?
A. Such a study is being conducted right now as part of the collaborative effort with Vectren resulting from the settlement in cause No. 42598. That effort has proven so far to be immensely valuable and should serve as a model for what Citizens Gas should be doing.

Q. What are your specific concerns regarding the Citizens Gas conservation portfolio?
A. To be honest, the Citizens Gas testimony is rather short of specifics and any analysis of actual utility and customer specific data. It offers nothing new with respect to addressing low income needs, double counts its Energy Advisor website, and offer no specifics on how their other programs will be operated. As such, it provides no basis on which a conclusion can be made about its effectiveness or benefits other than it generally parrots the general measures that other utilities have included in their programs. Furthermore, without more detail regarding the implementation of the program measures, it is impossible to predict program energy savings or bill impacts.

Q. Why do you believe that Citizens Gas offers nothing new for low-income customers?
A. The low-income programs and budget Citizens Gas proposes are already being done through the Universal Service program and GCA-50 settlements. No incremental programs or funding of substance has been proposed.

Citizens Gas “working poor” program is part of a so-called “ joint-utility DSM program” which has not been approved and for which no cost-benefit analysis has been supplied. Nor does Citizens Gas supply the basis of its assumptions, analysis of measure costs, or analysis of energy savings based on actual data. Finally, although Citizens Gas wants the right to unilaterally tinker with programs and measures, it does not provide any process for evaluating program efficacy and making changes with stakeholder and Commission input during the program.

Q. Do you have other concerns regarding the low-income program?
A. Yes, there needs to be an ongoing assessment of whether the program is achieving its goals in an efficient manner. The settlement in Cause No. 42590 goes some way to doing that. But, as part of an ongoing program, there needs to be adequate reporting requirements and availability of data for review. Finally, given the need of Indianapolis families, the budget should be significantly increased. Without a genuine assessment of the need it is hard to know what the budget number should be, but doubling the total budget and extending the weatherization portion of the program to include families earning up to 200% of poverty would seem to be in order.

Q. What are your concerns with the Energy Advisor Website?
A. First, it is worth noting that Citizens Gas already considers its Energy Advisor website among its customer service efforts (See testimony of Jean Richcreek). The Company has shown no reason to also include it for funding as an efficiency program. Although the Company claims energy savings, it provides no basis for that claim. It is also worth noting that the first stated budget goal is to increase awareness of the website – in other words, marketing.

Q. What are your concerns regarding the Citizens Gas Energy Star Appliance Promotions and Packages?
A. Citizens Gas has provided a list of what they may offer in the Energy Star Appliance Promotion. However, the efficacy of the program cannot be determined without knowing which specific types of Energy Star appliances will be offered, how much the rebates will be, which customers will be eligible, etc. In addition, Citizens has not identified how it will work with vendors, or whether they will process applications in house or through a contractor, etc. While some Energy Star Appliance programs can be shown to be cost effective, there is simply not enough information for the Commission to find that the Citizens Gas programs will be cost effective or in the public interest.

With respect to the Energy Star Appliance Package, simply offering packages of appliances with no regard for the integrity of the building shell is a recipe for disaster. For example, furnaces need to be properly sized for the building, how well it is sealed and insulated, the efficiency of the duct work, etc.

Q. What about your concerns regarding the Citizens Gas general service and schools programs?
A. The proposed general service program again provides little detail on which appliances will be offered, amount of rebates, vendors or processing centers used, customer eligibility requirements or co-commitments, etc. It is a good place to start but Citizens Gas needs to do much more homework to show how the program will work and why it chose the level of funding it did.

The schools program is equally weak on details and far short of what is needed. Funding curriculum development is nice but will it actually reduce gas consumption and reduce customer bills? The program should not only fund school energy audits but also specific measures. The commitment expected from Citizens Gas with respect to Indianapolis schools should be more than what is expected from other gas utilities because of its charter as a public charitable trust. Furthermore, absolutely no mention is made by Citizens Gas as to how the schools program can “piggy-back” on or coordinate with other state and federal school energy efficiency initiatives. Audits are nice but without follow through and measures being installed they become little more than company PR efforts.

Q. What are your concerns regarding the funding of Citizens Gas efficiency programs?
A. The $1.5 million overall budget is not enough. First, it is only proposing $1 million in new programs – the low-income programs remain essentially the same. Second, the Company has proposed total spending of less than 0.38% of its revenues on efficiency, which is not up to the level of the other gas utilities that have decoupling mechanisms similar to what Citizens Gas has proposed (such as those in California and Oregon, which spend between 0.9% and 1.5%+ of revenues on efficiency).

In addition, budgets for programs such as the "energy star appliance promotion", the appliance rebate program and the schools program must include sufficient funds for engaging in a serious program that could realistically be expected to influence customers and the local market. This would require staff and/or contractors to perform functions such as: working directly with local "trade allies" (i.e., retailers, contractors, suppliers); setting up "point of purchase" displays and materials; communicating with consumers through many channels; providing rebates and other incentives to customers; etc. As we have seen in the Vectren DSM discussion, a budget of $100,000 to $150,000 for an entire program seems simply inadequate to do these various important tasks.

For example, the funding for the "Energy Star Appliance Promotion" of only $150,000 seems like very little amount to support a program to actively engage the important trade allies involved in the targeted appliances (i.e., distributors, retailers, contractors, etc.) and also provide meaningful customer incentives. As for the funding for General Service Appliance Rebates of $100,000, that would seem entirely too small to be the only program offering for the entire C&I sectors in the territory. The funding for the school program maybe okay for the limited audits and educational materials for kids, but as discussed above this program really needs to be augmented by providing some significant financial incentives for schools to improve the energy efficiency of their facilities. The proposed budget simply does not allow this.

Conversely, there is one program that I think should have a lower budget. It's hard for me to see how the "Energy Advisor web tools" program could need $150,000 when it is already a well established Company program and should be simple and inexpensive to continue. Having the same budget for this as for the whole new "Energy Star appliance promotion" seems way out of proportion. Also, it's very hard for me to see how this fairly "weak" program (web information) could produce savings nearly identical to the entire Energy Star appliance promotion program.

Q. Do you have an overall recommendation regarding the company's Energy Efficiency obligation?
A. Yes. I recommend that the Commission find that, as a public utility, Citizens Gas has an inherent obligation to provide least cost service, that to do so it is essential to acquire cost effective efficiency resources and to treat them on a "level playing field" with purchasing, transmission and distribution resources both in planning and in the funding and implementation of resource plans. In addition, I recommend that the Commission find that, as a public charitable trust, Citizens Gas has an obligation to the citizens of Indianapolis to provide the lowest gas bills reasonably achievable.

As discussed above, I also recommend that the Commission direct Citizens Gas to continue its low-income programs with expanded funding and to make weatherization available to families earning up to 200% of the poverty level.

Finally, I recommend that the Commission direct Citizens Gas to participate in a stakeholder collaborative and fund and independent market potential study and action plan with proposed programs and budgets. Participation of the Commission staff in such a process would, of course, be welcome.

DECOUPLING

Q. What is your understanding of decoupling and the VVCA (Volume Variance and Conservation Adjustment)?
A. Decoupling is a rate mechanism designed to reduce a local gas company's reliance on gas usage (or volume) to sustain revenue. Typically there are some costs not related to the gas commodity which are recovered through the usage sensitive component of retail rates. There are several policy reasons for doing this. Decoupling breaks the link between recovery of non-gas-commodity costs through volumetric charges. The volume variance and conservation adjustment, or VVCA, is Citizens Gas’ version of such a mechanism.

Citizens Gas claims three reasons for proposing the VVCA:

  1. It will enable Citizens Gas to promote more energy efficiency and weatherization for its customers;
  2. It will minimize the impact of weather on the financial condition of the Utility and on customer bills; and,
  3. It represents a fundamental change to ratemaking necessary to recognize that Citizens Gas cannot reasonably predict the level of base rates required in future periods to recover appropriate operating costs.

Citizens Gas claims that without the VVCA, it will continue to “live or die” financially by the sales level it achieves during any 12 month period relative to the test year.

Q. What is the Coalition’s view of the VVCA and the policy of decoupling?
A. First, the decoupling has many benefits for the Company, especially with warmer weather trends and higher prices reducing consumption. Given the trend of warmer weather and the ability of decoupling to increase per therm rates as customers reduce consumption, there is no benefit for customers.

In addition, the Coalition views decoupling generally as being another form of lost margin or lost revenue recovery tracking. It is meant to recover revenues that are allegedly not collected due to reductions in usage. Of course, revenues are just one side of the equation, there are also costs. As a policy matter the Coalition believes that tracking revenues and not tracking reductions in the costs upon which those revenues are based is neither just nor reasonable.

Also, utilities generally do not “live or die” based on 12 months, and the utility that is now Citizens Gas in particular has weathered many changes, including the gas boom and bust of the late 1800's, radical changes in source and cost of commodity, direct competition, hostile takeovers, legislative changes, court decisions, and decades of winters colder or warmer that usual. Reducing the peril even more is the fact Citizens Gas does not have to worry about short term returns to profit minded shareholders.

Q. But won’t the VVCA better align the interests of the utility and its customers?
A. Citizens Gas is a public charitable trust – by definition its interests are supposed to be the same as its customers. The fact that Citizens Gas management takes the position that its interests are not currently aligned does not lead to the conclusion that it needs a radical change in ratemaking like the VVCA but perhaps a shakeup of management to “realign” interests with consumers.

Q. But doesn’t the Coalition support policies to mitigate the impact of weather and commodity price volatility?
A. The Coalition actively promotes policies to mitigate commodity price and weather volatility – it is called energy efficiency and demand-side management. Levelizing utility revenues does not help customers, but reducing monthly energy bills does.

Q. Have other consumer or energy efficiency minded groups supported decoupling in other states?
A. Although it is true that some energy efficiency advocates recently supported specific “decoupling” mechanisms, they have only done so in the context of promoting substantial well designed and funded comprehensive energy efficiency measures. The theory is that there is a disincentive to invest in helping customers reduce consumption if a utility’s revenues fall with reductions in consumption.

However, simply breaking the link between utilities' commodity sales and revenues is not sufficient. For example, decoupling schemes may often include price caps to protect consumers. In addition, reductions in demand can reduce the need for new construction or delay the need for upgrades, and therefore can lower costs to the utility. Those cost reductions need to be considered in any decoupling scheme.

And, as discussed above, Citizens Gas has not proposed an efficiency program similar in scope to that of other utilities that have decoupling. Finally, Citizens Gas is a public charitable trust whose purpose is not to generate returns for shareholders but reduce gas bills for consumers.

BAD DEBT TRACKING AND INCENTIVE COMPENSATION

Q. What is the Coalition’s position on the policy of “tracking” uncollectibles?
A. The Coalition believes that trackers and single issue ratemaking in general are bad policy except, perhaps, in special situations where there are highly volatile costs that are outside the control of management. And then there needs to be balance and reciprocity.

Therefore the Coalition generally opposes the policy of allowing bad debt trackers. Bad debt is under the control of management to the extent management determines collection policies, controls the costs of operations, implements truly helpful customer service options, and chooses to invest in programs that reduce customers bills and helps customers stay connected.

I think it is worth noting that Citizens Gas calls it an “Unrecovered Revenue Adjustment” (“URA”) – which would seem to imply they are only concerned with collecting revenue. Instead of focusing on collecting revenues, Citizens Gas should be focusing on reducing customer bills, reducing the affordability gap, and reducing the number of people disconnected. In other words, the Company should have a policy focused on reducing the amount of revenue it fails to recover.

In addition, under-recovery of bad debt can be a financial incentive for initiating policies to reduce bad debt. Tracking that bad debt through the URA would remove that incentive and shift the risk from the utility – and management – to other, paying customers.

Q. IN CONCLUSION THEN, WHAT IS YOUR RECOMMENDATION TO THE COMMISSION?
A. I recommend the following. The Commission should make findings that as a public utility and a public charitable trust, Citizens Gas should be engaged in a comprehensive energy efficiency or demand-side management program. The Commission should also direct Citizens Gas to fund an independent assessment of the market potential for gas energy efficiency and to develop and action plan for Citizens to Implement. It is also important that an assessment and action plan should be developed in a stakeholder collaborative process, and not controlled by Citizens Gas.

In the meanwhile, Citizens should double its low-income assistance and weatherization programs, which should be expanded to include families earning up to 200% of poverty level. In addition, Citizens Gas should fund an independent third party assessment of the effectiveness of the program.

With respect to rates, the Commission should reject the amount of increase requested by Citizens Gas as excessive and burdensome to ratepayers. Furthermore, the Commission should reject the VVCA and URA altogether.

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