Staying Normal
Utilities like PGW are able to adjust bills to reflect odd weather
The weirdly warm autumn has been a boon for consumers, who require less energy to heat their homes and businesses. What's good for consumers, however, causes pain for energy producers and distributors, whose sales volumes are in the dumps.
But some utilities have a mechanism to soften the financial effects of abnormal weather. A "weather normalization adjustment" undoes nature and allows utilities to nudge their rates up - or down - to earn what they would have made if the weather had been normal.
Customers of Philadelphia Gas Works, the city-owned utility, may have noticed a not-insignificant charge on their bills during this balmy autumn. So far this fall, PGW has pulled in an extra $5 million in revenue through the weather normalization adjustment, or WNA.
"What it does, it kind of stabilizes your business," said Greg Stunder, PGW's vice president of regulatory and legislative affairs.
Not every utility has this magic wand in its tool kit. Peco Energy Co. does not have one. South Jersey Gas and Public Service Electric & Gas Co. in New Jersey adjust their rates annually to reflect weather deviations from the previous heating season. But the credit or charge is not listed as a separate line item.
Weather normalization adjustments are part of a larger debate that is picking up tempo among regulators about "decoupling" utility revenue from the amount of electricity or gas they sell.
Under the traditional model, utilities have a profit incentive to encourage greater consumption. But a new generation of laws such as Pennsylvania's Act 129 of 2008, as well as regulations such as the federal Clean Power Plan, are aimed at encouraging customers to become more efficient.
"We don't want utilities trying to upsell more product to customers," said Robert F. Powelson, a member of the Pennsylvania Public Utilities Commission. The PUC has scheduled a hearing in March to explore potential decoupling mechanisms.
Utilities have already been pushing to decouple their revenues from energy sales by pushing to shift more of their costs to fixed monthly fees. For electric utilities, fixed fees are a defensive measure that reduces the impact of a growing number of customers who install solar panels, who buy less power from the utility, but still rely on the electric grid.
The PUC on Thursday approved a $127 million electricity rate increase for Peco Energy Co. that includes boosting the monthly fixed charge for residential customers from $7.13 to $8.45, or 18.5 percent. Peco had proposed increasing the fixed fee to $12 a month.
Weather normalization adjustments are a variant on decoupling. Twenty-four states allow WNAs, according to the American Gas Association, and 57 utilities have incorporated them into their tariffs.
The PUC's Powelson said there had been an increase in interest in rate-stabilization mechanisms in the last decade after natural gas prices soared to $14 per thousand cubic feet in 2008 (the current price is about $2) and the polar vortex in 2014 caused fuel prices to skyrocket.
"If a WNA is on the books, you're basically creating a leveling effect on a customer's 12-month gas bill by reducing the bill in the months when it's colder than normal, when usage is up, but increasing billing during warmer months."
Until Columbia Gas launched a weather normalization adjustment in 2012, PGW was the only Pennsylvania gas utility that had the tool.
PGW adopted the rate mechanism in 2002 when the utility was in financial distress. Unlike investor-owned utilities, the city-owned gas utility operates on a cash basis and is more vulnerable when sales volumes don't meet expectations.
Ironically, the PGW had to give customers a credit the first year because the weather was cooler than normal. "It works both ways," said PGW's Stunder.
The rate adjustment kicks in when the temperature deviates from "normal." Normal is determined by adding up heating degree days, which measure the average daily temperature below 65 degrees. (Lower numbers mean a warmer temperature.) In Philadelphia, the 30-year seasonal average that PGW uses is 4,550 heating degree days.
The last two winters were colder than normal, and PGW customers received credits of more than $10 million each year. The winter of 2012 was the warmest in PGW's history, with 3,571 heating degree days. Customers paid $45.4 million in WNA charges to compensate for lower heating demand.
So far this season, the region is outpacing the record warm year of 2012. By Nov. 30, the National Oceanic and Atmospheric Administration had measured 556 heating degree days at Philadelphia International Airport, 28 percent below the normal level of 770 heating degree days.
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