People often ask how the Public Service Commission determines utility rates. Ratemaking is a precise and complicated process, and most utilities have so many variables that the process is difficult to explain in this space. However, natural gas bills are fairly straightforward, so let’s use them as an example.
Residential gas bills are determined in three types of cases. The cost the company incurs for obtaining gas is set in the annual Purchased Gas Adjustment (PGA). Expedited recovery of costs related to infrastructure replacement and expansion is determined in what is known as a 390P case (named for the bill passed by the Legislature in 2015 that authorized this process). And base rate cases determine the rate of recovery for all other expenses.
The PGA component makes up roughly half of a typical residential natural gas utility bill. The PGA compensates the utility only for what it pays for gas – it does not include any profit for the company. Annual PGA proceedings are filed in late summer and adjusts rates based on a projection of costs utilities expect to pay for gas from their suppliers for November 1 through October 30 of the following year and a true-up of actual costs for the previous year. The Commission does not regulate the price of natural gas, which is determined by competitive markets, however, we do carefully examine the utilities’ purchasing practices to ensure that they do everything possible to obtain a reliable gas supply at the lowest possible market price.
The other half of a residential gas bill is made up of the 390P surcharge and the base rate. The 390P rates cover the approved projects to improve and expand the utility’s infrastructure. The base rate includes all the other costs borne by the utility to install, operate and maintain the utility’s system in order to provide natural gas service to the customer. It includes the initial investment in facilities, equipment, structures and property; all operation and maintenance costs; working capital to provide utility service; and improvements and repairs on lines, plants, vehicles and other facilities. It also includes all federal, state and local taxes; depreciation expenses; return on investment for the company; staff salaries, benefits and pensions; rents; fees and interest payments on debt.
Through these cases, the PSC strives to establish fair and reasonable rates for natural gas service and to appraise and balance the interests of current and future utility service customers with the general interest of the state’s economy and the interests of the utilities.