AGL reinvents the rate case

Utilities Unbundled - Issue 15

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Rate cases can be an unpredictable aspect of business, but gas giant AGL Resources has found a way to improve the traditional structure.

“I like to think of this as a win-win-win-win: a collaboration that really balances the interests of customers, utilities, regulators and the state.”

— Shannon Pierce, AGL Resources

One of the most challenging tasks in any rate-regulated utility business is making a rate case to the state utility regulators. The ability to recoup years of investment may rest entirely on whether the commission accepts the utility’s rationale and timing for a rate hike.

Over the past decade and a half, AGL Resources, the largest gas-only distribution company in the US, has developed a new financing model that delivers many benefits:

  • Reduces the risks to the utility
  • Gives the commission a more direct regulatory role
  • Increases transparency of the utility planning process
  • Encourages steady, more cost-efficient infrastructure maintenance and extension of facilities to accommodate growth

Conceptually AGL’s model is simple: whenever it wants to make a significant investment to improve the quality of its 150,000 miles of pipeline or upgrade other infrastructure to serve its 4.5 million customers better, it doesn’t just start digging. Instead, AGL asks regulators to:

  • Approve the replacement approach
  • Provide a funding mechanism that balances the needs of customers and of the utility

AGL only begins once it has these approvals and provisions in place.

Advantages of asking first

“We think that a program that encourages new investment and replacing aging infrastructure is better if it encourages proactive replacement on a long-term schedule, not in response to an emergency,” says Shannon Pierce, Managing Director, Regulatory Affairs and Marketer Services at AGL Resources.

The process is also shorter and simpler – addressing two or three issues instead of 200, and lasting only three to six months instead of up to a year.

“It gives us time to plan, collaborate and compromise, have some give and take, and get suggestions and feedback from the regulators. I like to think of this as a win-win-win-win: a collaboration that really balances the interests of customers, utilities, regulators and the state,” says Pierce.

A new collaboration

AGL’s approach began in 1998 through collaboration with Atlanta Gas Light Company and the Georgia Public Service Commission. “This framework was the first of its kind. The Georgia commission recognized a problem, both with our system and with the traditional cost recovery model. They challenged Atlanta Gas Light to come up with a structure, and we have worked collaboratively over the past 15 years to fine-tune it,” Pierce explains.

Due to the success of those first initiatives, AGL has been able to invest more than US$2b in Georgia alone. Their approach is also cost efficient: “Although we invested US$2b, our rates to customers have actually trended below the rate of inflation,” Pierce notes.

Since then, AGL has taken a similar model to its other subsidiaries, including the Illinois-based Nicor Gas.

The idea has caught on beyond the company. More than 40 utilities in over 28 states have now developed similar programs, says Pierce.

Although the process is more efficient than a rate case, it still requires painstaking planning. “What I have learned is that you have to make sure all your internal stakeholders are appropriately engaged. You also must engage external stakeholders early and often – your commission and, in some cases, legislators, customers and consumer advocates, and economic development organizations. Broad collaboration is critical to success.”

This is an abridged version of the full article in Utilities Unbundled.

For more information on this topic, contact Roy Ellis.