Integrated resource planning for local gas distribution companies: A critical review of regulatory policy issues

(NRRI) with funding provided by participating member commissions of the National Association of Regulatory Utility Commissioners (NARUC). The views and opinions of the authors do not necessarily state or reflect the views, opinions, or policies of the NRRI, the NARUC, or NARUC member commissions. EXECUTIVE SUMMARY Public utility commissions (PUCs) are increasingly adopting, or considering the adoption of, integrated resource planning (IRP) for local gas distribution companies (LDCs). The Energy Policy Act of 1992 (EPAct) requires PUCs to consider IRP for gas LDCs. This study has two major objectives: (1) help PUCs develop appropriate regulatory approaches with regard to IRP for gas LDCs; and (2) help PUCs respond to the EP Act directive. IRP requires a regulated utility to give equal consideration to both supply side and demand-side management (DSM) options in planning a resource mix. IRP has been extensively used as a policy tool to regulate electric utilities; it is a relatively new regulatory approach for gas LDCs. The rapidly developing competition in the energy industry warrants a reexamination of underlying issues and policy goals of IRP. Some of these issues include the nexus between competition and the participatory approach germane to the IRP process, the traditional regulatory issues of cost minimization and ratepayer equity, and the effectiveness of PUC regulation to achieve IRP goals of energy efficiency and environmental protection. The study finds that it is appropriate for PUCs to pursue energy efficiency within the traditional regulatory framework of minimizing private costs of energy production and delivery. The study concludes that PUCs should playa limited role in addressing environmental externalities. The study finds that in promoting energy efficiency, PUCs should pursue policies that are incentive-based, procompetitive, and sensitive to rate impacts. The study evaluates a number of traditional ratemaking mechanisms, in addition to nontraditional mechanisms, on the basis of cost minimization, energy efficiency, competitiveness, and other criteria. The mechanisms evaluated include direct recovery of DSM expenses, lost revenue adjustments for DSM options, revenue decoupling mechanisms, sharing of DSM cost savings, performance-based rate of return for DSM, provision of DSM as a separate service, deregulation of DSM service, price caps, and deregulation of the noncore gas III market. The study concludes with general recommendations for regulatory approaches and ratemaking mechanisms that PUCs may wish to consider in advancing IRP objectives.