You asked the following questions regarding Yankee Gas’ most recent rate case: (1) what accounts for the changes in rates for certain rate classes, (2) when did Yankee last have a rate increase, (3) how much of the new rate goes for financial assistance to those who cannot pay, (4) is there any legislative review of rates, and (5) why are there separate merchant (consumption) and delivery charges on gas bills?

SUMMARY

In April 2003, the Department of Public Utility Control (DPUC) allowed Yankee to increase its rates for residential customers who use gas for purposes other than heating by 20. 6%. Rates for medium-size commercial and industrial customers were decreased by 7. 5% and rates for other classes (including residential heating customers) were unchanged. DPUC authorized these rate changes to better reflect the company’s costs in serving each class. It is a basic principle of utility rate setting that the rates charged each class should provide enough revenues to cover the costs the company incurs in serving that class. The department’s goal was to reduce subsidies between and within rate classes.

Yankee’s last general rate increase was approximately 10 years ago, although rates have periodically gone up and down in the intervening years as a result of the purchased gas adjustment (PGA). The PGA adjusts rates to reflect changes in the wholesale cost of gas. In the past several years wholesale costs have increased significantly. The companies are allowed to recover the costs they incur in purchasing gas but not to make a return (profit) on these costs.

Less than 1% of Yankee’s total revenues goes to cover the costs of the state-mandated program that provides financial assistance to customers who are unable to pay their entire bills. Under the program, the company forgives part of the customer’s arrearage if he enters into a payment program to pay of the rest of his arrearage and sticks to it. Another 3% of the company’s revenues goes to covers the company’s cost of bad debt, i. e. , customers’ unpaid bills. The law does not provide for a legislative review of rates, but the legislature can change the rules that govern how DPUC regulates rates.

DPUC required Yankee and the state’s other gas companies to split their bills for their firm (non-interruptible sales) customers into two components, reflecting the cost of the gas itself and the costs of delivering it to the customer. The rationale for this move was to promote a more competitive gas industry. This provision is primarily relevant to commercial, industrial, and multi-family residential customers, who can buy gas from a party other than the gas company.

YANKEE GAS RATE CASES

General Provisions

In 2000, DPUC ordered Yankee Gas to undergo a rate case. It also ordered Yankee and the other two gas companies (Connecticut Natural Gas and Southern Connecticut Gas) to revise their cost of service studies. These studies are detailed engineering analyses of how much it costs to serve each rate class.

As part of this mandate, DPUC ordered the companies to separate their rates for their firm (non-interruptible sales) customers into two components as part of their upcoming rate cases. The merchant component reflects the cost of the gas itself. The delivery component reflects the costs related to shipping the gas to the customer. The underlying rationale for this order was to promote a more competitive natural gas industry in the state. The decision stated that a two-part sales tariff would better convey competitive pricing signals than a one-part tariff. This provision is primarily relevant to commercial, industrial, and multi-family residential customers, who are allowed to buy the gas itself from a party other than the utility (they still have to pay the utility for delivery). These orders are contained in Docket 99-03-28.

Rate Changes for Specific Classes

DPUC granted Yankee’s request to split its rate case into two parts. In the first part, decided in January 2002, DPUC determined the total amount of revenue the company needed to serve its customers. The revenue requirement, divided by the amount of gas that DPUC anticipated that the company would sell, resulted in an overall 1. 25% rate decrease.

In the second part of the case, decided in April 2003, DPUC revised how it classifies Yankee’s customer classes. It established three types of residential customer; heating, non-heating, and multi-family. Previously heating and non-heating single-family customers formed one class. It established three types of commercial and industrial customers - small, medium, and large. Previously it had four sales rates for these customers plus three separate delivery rates.

DPUC also determined how to allocate the company’s costs among its rate classes. It found that while Yankee’s 31,000 residential non-heating customers were paying more than their share of the company’s gas costs, they were paying substantially less than their share of the company’s costs in delivering the gas to them. It approved Yankee’s request to increase its revenues from this class by $ 2. 5 million per year, to $ 14. 8 million. It noted that the customers had not experienced a rate increase in over 10 years, and stated that a 20% increase (the equivalent of 2% per year) was not unduly burdensome.

Yankee originally proposed to decrease slightly the rates for its 134,000 residential heating customers, arguing that this was necessary for the company to compete with heating oil and other fuels. On the other hand, it proposed to increase its monthly customer service charge from $ 8. 75 to $ 14. 52. DPUC held that the rate decrease would be inconsistent with its desire to move towards cost-based rates, and also rejected the proposal to increase the customer service charge.

Yankee proposed to slightly increase the overall rates for small commercial and industrial customers. DPUC found that return that the company made in serving these customers was close to its overall rate of return, and rejected this proposal.

Yankee proposed to reduce the rates charged to medium-sized commercial and industrial customers by about 5%. DPUC found that these customers were paying substantially more than their share of the company’s costs, resulting in a rate of return for this class of 18. 8%, compared to a company-wide average of 8. 9%. DPUC therefore ordered an overall rate decrease for this class of 7. 5%.

Yankee proposed to decrease the merchant component of its rates for its large commercial and industrial customers but increase the monthly customer service charge. DPUC modified these components, leaving overall rates essentially unchanged.

KEM: eh