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How Gas Rates Are Set

Natural gas bills can be broken down into two primary components, delivery and commodity. A typical residential heating customer’s annual gas cost is roughly 30% delivery charges and 70% commodity charges.

The delivery charge covers costs associated with the delivery of gas supply through the local utility pipelines (i.e. gas distribution costs, system maintenance, safety and inspection programs, customer service, metering, billing, etc.) and are regulated by the Public Utilities Commission. The rates are based on reasonable and prudent expenses incurred in providing service and a reasonable rate of return on the utility’s plant investment. It is through the allowed rate of return on plant investment that the utility has the opportunity to earn a profit.

The commodity charge is for gas supply purchased by the local utility on behalf of the customer and is set twice each year (summer and winter periods) with all gas supply costs (i.e., commodity costs, interstate pipeline transportation, underground storage contracts, etc.) factored into the rate. While the interstate pipeline rates are regulated by the Federal Energy Regulatory Commission (FERC), natural gas and propane are unregulated commodities. The gas utilities are allowed to pass those costs through to customers on a dollar for dollar basis, with no mark-up. The Public Utilities Commission staff does regular audits and prudence reviews of all supply decisions and related costs. Following a hearing on all issues, the Commission sets a Cost of Gas rate.

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