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Experiment offers a win-win possibility.

Making conservation pay for gas utilities

Paul Patel stands in front of his Pennsville, N.J. home. Patel has benefited from a New Jersey pilot program that gives utility incentives to help customers conserve energy. (Bonnie Weller / Staff Photographer)
Paul Patel stands in front of his Pennsville, N.J. home. Patel has benefited from a New Jersey pilot program that gives utility incentives to help customers conserve energy. (Bonnie Weller / Staff Photographer)Read more

Paul Patel and his family lived with a winter chill for more than 10 years. Then an odd mix of utility economics, global politics and environmental concerns came to his rescue - in the form of an offer of help from South Jersey Gas.

Encouraged by the natural gas utility, the Pennsville, N.J., resident signed up for an energy audit that finally found what ailed his 14-year-old, five-bedroom house. In one room, insulation was missing around a beam. Another area was cold because an attic door lacked insulation or weather-stripping.

The energy leaks in Patel's home were common, even in the best-built homes. What was unusual was the role played by South Jersey Gas Co. - and the reason it might care about a few cold drafts as much as Patel did.

Under a pilot program designed to reverse one of the basic laws of business, the utility's shareholders stand to benefit if customers such as Patel buy less of its product because of its efforts to promote conservation.

South Jersey Gas, based in Folsom and serving parts of Burlington, Camden and Gloucester Counties, is one of two New Jersey gas companies taking part in the business experiment, approved two years ago by the state Board of Public Utilities.

The program is meant to address a problem that has long bedeviled utilities: Public officials routinely encourage energy conservation to aid the environment and economy, and customers want to save money by using less energy. But as sales dwindle, what is virtue to utility customers and communities seems like vice to utility shareholders.

Gas utilities have it the worst. Unlike electric companies, they do not benefit from the steady flow of larger-screen TVs and other new electronics. Instead, they have faced long-term sales declines as homeowners install more-efficient furnaces and as new gas-powered appliances remain rare.

The answer embraced by a growing number of environmental advocates, state regulators and industry groups is called "decoupling," because it is designed to break the link between a utility's sales and its financial health.

Ralph Cavanagh, energy-program codirector for the Natural Resources Defense Council, said New Jersey was among 16 states that have adopted or are testing decoupling for natural gas utilities.

There are many variations of decoupling, but each provides some sort of mechanism - on South Jersey Gas bills, it is called a Conservation Incentive Program charge - under which ratepayers partly compensate utility shareholders as energy use declines.

Cavanagh's ultimate goal, he said, is that utilities that help their customers save energy will be more profitable than those that do not.

"If you want utilities to be investing in energy efficiency, and you want them to support new standards for energy efficiency, then this is critical," Cavanagh said. "If they automatically lose money whenever consumption drops, you're not going to get their sustained attention."

So far, Pennsylvania has moved slowly on decoupling, especially after an Erie gas utility, National Fuel Gas, drew more than 1,200 complaints in 2006 with a proposal that critics said would have done little more than compensate it for lost sales. Advocates and state officials say it is also crucial that a utility be required to promote energy efficiency.

John Hanger, acting secretary of environmental protection, said state officials were open to a more sophisticated form of decoupling. He said such an approach could help address "the large financial conflict of interest" that utilities face in promoting efforts meant to reduce their own sales.

That is exactly what a new state law enacted this fall requires: Over the next five years, Pennsylvania electric utilities must reduce overall consumption 3 percent and cut highly expensive peak demand 4.5 percent.

The law's main tool is a stick: If any utility does not meet its targets, it can be fined up to $20 million and lose control of its conservation program. Decoupling can be a useful carrot, its proponents say.

"I think decoupling designed appropriately can make a great deal of sense for both consumers and utilities," Hanger said.

Pennsylvania's consumer advocate, Irwin A. "Sonny" Popowsky, has reviewed a variety of approaches, and praises the South Jersey Gas pilot program.

"They said, 'You can decouple and you can raise rates if your sales go down. But you have to show that all customers benefited from the conservation programs,' " Popowsky said.

Under the New Jersey rules, South Jersey Gas can be compensated for a portion of lost revenue, but only if that compensation is fully offset by systemwide savings.

Starting in the second year of the four-year pilot, the utility's customers started paying a Conservation Incentive Program charge of 2.7 cents per therm, or $21.33 a year for the average residential customer.

That charge was offset by a 3.2-cent reduction in the Basic Gas Supply Service charge, which reflected about $10 million in savings because the utility was able to pare what it pays for pipeline capacity, said Samuel A. Pignatelli, vice president for rates and regulatory affairs.

The net savings were small on a per-therm basis, Pignatelli concedes. But he said the utility expected a larger reduction in the third year under a rate plan being negotiated with state regulators.

Of course, the greatest benefit goes to customers who heed the call to conserve, which appears to be succeeding: On a weather-adjusted basis, South Jersey Gas says its average customer used 805 therms in the year that ended Sept. 30, down 4 percent from the previous year - a drop worth $49.42 at current rates - and down 6 percent since the start of the pilot program. All told, South Jersey Gas says its customers have saved $50 million by cutting their consumption.

Gerry May, a staff member at the Board of Public Utilities, said that the board expected to hear next month from a consultant reviewing the pilot program's first two years. But May said initial signs were encouraging.

May said that South Jersey Gas' efforts have spurred additional interest among its customers in state-run conservation programs and that usage has declined steadily since the program began - even as gas prices fell from their 2005-06 peaks in the aftermath of Hurricanes Katrina and Rita.

As envisioned, the overall drop in demand has helped lower everybody's costs without harming shareholders' interests, May said.

"They now have the lowest gas-supply cost of any of the four utilities in the state," May said.

To Pignatelli, the South Jersey Gas vice president, the biggest change is a cultural one: Utility employees no longer look to increase sales by increasing average consumption. They see adding customers and boosting market share as their only path to growth - a strategy that will work best if they can continue to cut prices.

"We no longer promote the use of more gas by customers," he said. "We now promote energy efficiency and conservation, and the consumption of less gas."