National Fuel Gas Co.’s rates will stay the same in the coming months, but customers could be in line for a refund – and potentially a rate cut – if state regulators later determine that the Amherst-based energy company is charging too much.
The state Public Service Commission, over the objections of National Fuel, on Thursday approved a series of temporary rates for the utility that will freeze its delivery charges while the PSC conducts a broader review of its rates that could take nearly a year to complete.
But because National Fuel’s earnings from its New York utility business have been significantly higher than the targets set by the commission in its rate plan that took effect at the beginning of 2008, the PSC also took the unusual step of making the company liable for refunding a portion of those delivery charges if the review finds that its rates going forward were too high.
“It provides protection for ratepayers,” said PSC Chairman Garry A. Brown. “We’ll do an examination. We’ll find out” if National Fuel’s rates are higher than they need to be to provide “safe and adequate service.”
If the commission determines that National Fuel has been earning more than it should – and that it is likely to keep doing so in the future under its existing rates – the PSC could lower the company’s delivery charges and order the utility to refund the difference between the current rates and the new rates dating back to today.
National Fuel officials argued that the company is being penalized for doing a good job running its New York utility business, cutting costs and improving the efficiency of its operations while freezing the rates it has charged its customers since the beginning of 2008. The company has reduced its operating and maintenance costs by about 6 percent, or $10 million, since 2008.
“The level of earnings that National Fuel has experienced were reasonable and due entirely to its cost-cutting and productivity efforts,” said Karen L. Merkel, a National Fuel spokeswoman. “If utilities had no opportunity to earn more from cutting costs, or if those earnings actually achieved were taken away, utilities would have no incentive to cut costs or provide quality service.”
While PSC commissioners praised National Fuel for doing a good job running its utility business even while reducing its operating costs, the commission’s staff estimated that National Fuel could be overcharging its 516,000 customers in Western New York by “hundreds of thousands of dollars” during each of the summer months, when natural gas use is at its lowest. Over the course of a full year, the PSC staff estimated that the overcharges could top $10 million.
In late March, National Fuel proposed a rate plan that would freeze its delivery charges for three more years, while instituting a new system that would let it earn a slightly higher return from its utility operations through a program to split any earnings beyond its target with its customers.
Instead, the commission bypassed that proposal in favor of the temporary rates and the more thorough examination of National Fuel’s rate structure. Even so, PSC commissioners Thursday spoke in favor of including a mechanism to share earnings above a certain target between customers and ratepayers in whatever rate plan is developed under the current proceedings. National Fuel is the only major electric or natural gas utility in the state without an earnings sharing mechanism in its rate plan.
Even if the PSC eventually decides that National Fuel has been overcharging customers during the time it was operating under the temporary rate structure, any refunds collected from the company may not flow directly to consumers, Brown warned.
Instead, the refund could be used to fund other initiatives or cover other liabilities that the company is facing. National Fuel, for instance, stands to collect more than $35 million in expenses from ratepayers in the future to cover benefits for retirees and site-improvement costs that it has absorbed under the current rate plan.
At the center of the issue is just how much National Fuel’s utility earnings are exceeding the profitability target included in its current rate plan, and while both sides differ on how high the utility’s earnings have been, they agree that they have been comfortably more than the benchmark.
Last year, National Fuel earned a return equal to 12.4 percent of its equity, according to the PSC staff’s calculations. National Fuel, using a slightly different method, contends that it earned 11.3 percent on its equity, easily topping its 9.1 percent earnings target.
This year, the PSC’s staff estimates that the company will earn an 11.1 percent return, while National Fuel projects that its earnings will be 9.2 percent, barely higher than its targeted rate of return.
PSC Commissioner Gregg C. Sayre urged the commission’s staff and National Fuel executives to work together to try to develop a mutually acceptable rate agreement, which would avoid the agency’s costly, nearly yearlong process of developing a utility rate plan.