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Revenue Decoupling

What is it & how did we get here?

Background

Two recent policy decisions by the Arizona Corporation Commission (ACC) have set the stage for utilities in Arizona to pursue revenue decoupling:

First: A 2010 energy efficiency standard that requires Southwest Gas to achieve energy savings equivalent to a reduction in retail sales of 6% by 2020. Read it here.

Second: A 2010 policy statement that directs Southwest Gas to propose revenue decoupling or another alternative for removing utility financial disincentives in order for the company to achieve the 6% energy savings goal. Read it here.

Why decoupling?

In the current rate model, the Company’s ability to recover its costs associated with running the gas system - otherwise known as fixed costs - is contingent upon selling a set volume of gas. If sales are higher than expected, Southwest Gas recovers more revenue than it needs to pay for its fixed costs. If sales are lower than expected, Southwest Gas recovers less revenue than is required to pay for those costs. Such a model creates an obvious financial incentive for Southwest Gas to have its customers use more natural gas and a strong financial disincentive to have customers use less natural gas.

What is decoupling?

Decoupling eliminates the link between utility sales and recovery of fixed costs. By changing the methodology for how Southwest Gas recovers these costs, it eliminates the financial incentives and disincentives associated with increasing and decreasing sales volumes. With decoupling, the ACC establishes a fixed revenue per customer and adjusts the rate per therm to ensure Southwest Gas never retains more or less revenue than what the ACC approved in its last rate case.

How much can my bill fluctuate due to Southwest Gas' proposed decoupling mechanism?

Customers, on average, can expect annual adjustments that range anywhere from a refund to a maximum monthly charge of approximately $1.50. Southwest Gas anticipates most decoupling adjustments will be less than $1.50. This belief is supported by industry studies that have found decoupling adjustments to be very modest. Read more here.

Why is it possible for me to receive a refund with decoupling?

If Southwest Gas collects more revenue than the amount authorized by the ACC, the rate paid by customers will be adjusted to provide a refund.

If I reduce my natural gas usage, will I still pay for natural gas I did not use?

No. If a customer reduces their natural gas consumption, they save money. For every unit of natural gas a customer saves, they will not pay for the natural gas they did not consume. The following example further illustrates this point.

Example: If Mr. and Mrs. Smith consume the system average amount of natural gas and reduce their usage by 10 therms, they will not pay the associated $1.00/therm cost of natural gas, which means they save $10.00. Even if the annual maximum decoupling adjustment of approximately $1.50 is applied to their bill, Mr. and Mrs. Smith still realize net savings of $8.50.

Why does Southwest Gas believe decoupling is good for its customers?

By modernizing the current ratemaking model and eliminating the link between sales and recovery of fixed costs, decoupling allows Southwest Gas and its customers to work together through company-sponsored energy efficiency programs to assist customers in reducing their energy consumption and lowering their bills.

Decoupling also protects customers by preventing Southwest Gas from increasing profits through increased sales. By implementing decoupling, the ACC will be effectively placing Southwest Gas on a fixed income. Regardless of how much natural gas the Company sells it will only be allowed to retain the ACC-approved revenue per customer that was approved in the last rate case - any over collection will be refunded to customers.

What other states have approved decoupling?

Due to the increased national focus on energy efficiency and conservation, decoupling is a growing trend in the United States. Nearly half the public utility commissions in the United States have approved revenue decoupling mechanisms. Click here for a map showing which states have adopted decoupling.

Myths about decoupling?

There are a number of misconceptions regarding decoupling.

Click here to read the myths and facts about decoupling.

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