Call it the conservation conundrum.
As Kansans conserve natural gas, the dominant gas company in the state says it needs to raise rates to compensate for lower sales.
Kansas Gas Service — which serves 630,000 Kansas customers — is seeking a $30.7 million increase in the rates it charges for gas delivery, almost all of which will come from residential customers. The company also is seeking state approval of a “revenue normalization” plan, essentially an income guarantee that would automatically raise rates to ensure that the gas company reaches its revenue target, no matter how much gas it sells.
“As customers reduce their usage due to investments in energy efficiency such as improved furnaces, water heaters, insulation, those types of things, customers experience a significant reduction in their bills for these investments,” Kansas Gas president Brad Dixon said last week. “But our cost to provide this service did not decrease as a result of the declining consumption. This results in our need to spread costs over fewer units of gas delivered to the homes.”
To understand the issue, you have to understand a little bit about how gas rates work.
There are two main components to a gas bill.
The first is the cost of gas. That’s a straight pass-through cost to customers, so essentially, they pay what the gas company pays to buy gas on the open market. That cost varies from month to month and usually makes up about 55 to 60 percent of the bill.
The second major component of the bill — and the only part at issue in the Kansas Gas rate case — is the charge customers pay the company for delivering gas to them. That component of the bill is in turn divided into another two parts: a fixed monthly service charge and a delivery fee that’s based on how much gas the customer purchases.
In the Kansas Gas case, the company wants to raise its fixed residential service charge from the current $13.38 a month to $19.25 – an increase of $5.87 a month. The delivery fee based on the amount of gas purchased would stay about the same, declining between 1 and 2 cents a month for the average customer, who uses 75,000 cubic feet of gas a year.
Overall, the increase is estimated to be about 9.1 percent of the average customer bill, which includes the cost of gas, the company said.
Kansas Gas will get about a 20.5 percent increase in the revenue it collects for delivering the gas to consumers, according to the Citizens’ Utility Ratepayer Board, the state agency that represents residential consumers on utility issues.
Some customers are taking notice and questioning why they should be penalized for using less gas, the very behavior that government and utilities have tried to encourage through public service announcements and tax breaks for making homes energy efficient.
At a public hearing last week, customer Kent Rowe pleaded with the Kansas Corporation Commission, which will rule on the rate request, to consider environmental and social impacts of a rate structure that could take away much of the incentive for customers to conserve gas.
“I would implore you to look at these rates and not encourage more use but encourage less use,” Rowe said.
He wasn’t alone in that sentiment.
“I feel like if the normalization goes through, that they’ll be penalizing all the customers for … conserving a finite resource,” said Wichita resident Diana Alexander. “I think that the cost of gas should be based on usage and not some arbitrary system.”
The gas company sees it differently.
“Kansas Gas Service wants to encourage continued efforts by our customers to conserve and use energy more efficiently, while maintaining an adequate level of revenue for us and to continue to provide safe and reliable natural gas service,” Dixon said. “This (normalization) mechanism will provide the company a better opportunity to stabilize our revenues.”
Without it, he said, the company couldn’t be sure it would make as much money as the commission allows, “simply due to our expectation of continuing declines in consumption.”
Economists say that there really isn’t a good solution to the conservation dilemma from the consumer standpoint.
Jeremy Hill, director of the Wichita State University Center for Economic Development and Business Research, said running a gas utility is a costly endeavor because of the need for expensive distribution systems.
Those costs don’t go down when people use less gas, so if sales income declines, the gas company has little choice but to raise rates to meet its costs, he said.
Michael Stavy, a Chicago-based energy economist, agreed that an efficiently run gas company is probably justified to raise rates when sales go down, because of that fixed cost involved in delivering gas.
But he said that if Kansas Gas wants to encourage conservation and reassure the public it’s trying to keep rates down, it’s going about it the wrong way.
Raising fixed monthly charges will guarantee the company a steadier income stream, but “what’s the guarantee they (the company) will be operating efficiently? That’s the public interest.”
Stavy said it would make more sense for the gas company to go with a small fixed charge and raise the part of rates that’s based on usage.
That way, “those who have a more efficient furnace and those factories using gas still have an incentive to be more efficient,” Stavy said. “By keeping it on a volumetric basis, the customers have an incentive to do more.”
Hill suggested that consumers should look at the gas bill as one part of an overall household budget.
While customers could sharply cut usage and shiver through a cold winter, “there are a lot of other cuts that consumers can make” that might be easier, Hill said.
“If it’s just a matter of cost, you have to weigh that against other items,” such as dining out and entertainment, he said.
Still, even if rates do go up as usage goes down, there are real benefits to conserving gas because there is a finite supply. If people use more now, there will be less available in the future and the “costs will be even more significant down the road,” he said.
“The kids will benefit from it; you might not today,” he said.