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How Gas Rates Are Set

Natural gas bills have two main components, delivery and commodity. A typical residential heating customer’s annual gas cost in 2019 was roughly 55% delivery charges and 45% commodity charges

The delivery charge covers costs associated with the delivery of gas through the local utility pipelines (i.e., gas distribution costs, system maintenance, safety and inspection programs, customer service, metering, billing, etc.) and is set by the Public Utilities Commission. The delivery charge is 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 covers the cost associated with gas supply.  Gas supply costs include commodity prices (the cost of gas), the cost to transport the gas over the gas pipelines, and storage costs. The utility has little control over the price of natural gas, which is an unregulated commodity. Similarly, the utility has little control over pipeline transportation rates, as those are set by the Federal Energy Regulatory Commission. Also factored into the commodity charge is the cost of both on-system and off-system storage, used to meet winter demand. On-system storage costs are for storage facilities that are owned and operated by the utility and located within its distribution system. Off-system storage costs are the contract costs for use of non-utility owned storage facilities. Commodity charges are initially set using projected costs and sales for the upcoming winter and summer periods. The utility may adjust the commodity charge monthly to take into account changes in the natural gas market based on actual costs to date and projected costs for the remainder of the period. To the extent that adjustments are based on projected costs, they are subject to reconciliation after actual costs are known, and commodity rates are adjusted accordingly. The Commission does regular audits and prudence reviews of all supply decisions and related costs.

Last updated 1/29/2020

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