1. Policy Options for Energy Efficiency Programs: Decoupling and Other Innovative Rates Joint Meeting of the NARUC Committees on Gas, Electricity, Consumer Affairs, and Energy Resources and the Environment New York City, New York July 17, 2007 Cynthia J. Marple Director, Rates and Regulatory Affairs

2. Tentative and Preliminary U.S. Natural Gas Customer Usage and Investment (Distribution Sector) 15 million new residential customers from 1980 to 2005 $96 billion in new construction from 1980 to 2005 1980 total residential consumption = 4.7 Tcf 2005 total residential consumption = 4.8 Tcf 2

3. Tentative and Preliminary U.S. Customer Energy Efficiency Decreased gas consumption on a per customer basis equaled one percent per year from 1980 to 2000 Energy efficiency and conservation are trending upward Total per residential customer consumption decreased 33 percent between 1980 and 2005 U.S. TREND: Declining Use Per Customer 3

4. Tentative and Preliminary Traditional Rate Design Turn of the last century design Volumetric – each unit of commodity is assigned a pro-rata share of costs Implies cost recovery only if customers don’t conserve Increasing sales is a major objective Contains a financial disincentive for aggressively promoting energy efficiency and conservation 4

5. Tentative and Preliminary Why Innovative Rate Design? New Paradigm: Regulatory Goal is Shifting From Building Infrastructure to Encouraging Efficient Use of Resources High and volatile natural gas prices Global climate change Appliance and building efficiency Under-recovery of approved costs 5

6. Tentative and Preliminary Types of Innovative Rates Automatic Adjustments and Cost Trackers (partial decoupling) Weather Normalization Clause (decouples weather) Bad Debt Tracker (cost tracker) PGA Clause (cost tracker) Revenue Decoupling Rate Stabilization Tariffs Flat Monthly Fee and Variants Fixed Monthly Distribution Charge Two-Tier Customer Charge Straight Fixed Variable (Demand Rate) 6

7. Tentative and Preliminary 77 NATURAL GAS REVENUE DECOUPLING AS OF JULY 12, 2007 Approved Revenue Decoupling Pending Revenue Decoupling

8. Tentative and Preliminary Decoupling Tariffs APPROVED - 10 States 1.CA – Pacific Gas and Electric 2.CA - San Diego Gas and Elec. 3.CA – Southern California Gas 4.CA – Southwest Gas 5.IN – Vectren Indiana 6.MD – Baltimore Gas and Elec. 7.MD – Washington Gas 8.NJ – NJ Natural Gas 9.NJ – South Jersey Gas 10.MO – Atmos Energy 11.OH – Vectren Ohio 12.OR – Cascade Natural Gas 13.OR – NW Natural Gas 14.NC - Piedmont Natural Gas 15.UT – Questar Gas Co. 16.WA – Avista Corp. 17.WA – Cascade Natural Gas 15 Million Residential Customers PENDING - 9 States + DC 1.AR – Arkansas Oklahoma 2.AR – Arkansas Western 3.AR – CenterPoint Energy 4.AZ – UNS Gas 5.CO – PSC of Colorado 6.DC – Washington Gas 7.IL – Peoples Gas/Integrys 8.MI – CMS Energy 9.NY – Consolidated Edison 10.NY – National Fuel Gas Dist. 11.TN – Chattanooga Gas 12.VA – Washington Gas 13.WI – Wisconsin Gas 14.WI – Wisconsin Electric 7 Million Residential Customers * Of 58 Million Customers in U.S. * 8

9. Tentative and Preliminary Decoupling Calculation A Representative Example – Average Usage $300,000,000 Annual Distribution Service Cost 1,000,000 Residential Customers 100 Mcf per customer per year Per Mcf (Volumetric) 100,000,000 Mcf/yr - Total System Throughput $3 Distribution Charge/Mcf Per Customer (Non-volumetric) 1,000,000 Residential Customers $300 Distribution Charge/customer 9

10. Tentative and Preliminary Decoupling Calculation (Cont) Average Usage Traditional Rate Design 5% volume reduction 95 Mcf/Cust./yr x$3 Dist. Chg/Mcf $285 Rev/Cust. $15 Rev Shortfall $15 Loss in Yr 1 No rate adjustment in Yr 2 Revenue Decoupling 5% volume reduction 95 Mcf/Cust./yr x$3 Dist. Chg/Mcf $285 Rev/Cust. in Yr 1 $15 Rev Shortfall 100 Mcf/Cust./Yr x$3.15/Dist. Chg/Mcf $315 Rev/Cust. in Yr 2 $15 Rev Adjustment in Yr 2 10

11. Tentative and Preliminary Decoupling Calculation High and Low Volume Usage High Volume (133 Mcf/yr) 5% volume reduction $399 Expected Rev. 126 Mcf/Cust./Yr x$3 Dist. Chg/Mcf $378 Rev/Cust. in Yr 1 $21 Rev Shortfall 133 Mcf/Cust./Yr x$3.15/Dist. Chg/Mcf $420 Rev/Cust in Yr 2 $21 Rev Adjustment in Yr 2 Low Volume (67 Mcf/yr) 5% volume reduction $201 Expected Rev. 64 Mcf/Cust./Yr x$3 Dist. Chg/Mcf $192 Rev/Cust. in Yr 1 $9 Rev shortfall 67 Mcf/Cust./Yr x$3.15/Dist. Chg/Mcf $210 Rev/Cust. in Yr 2 $9 Rev Adjustment in Yr 2 11

12. Tentative and Preliminary 12 STATES ADOPTING VARIOUS TYPES OF INNOVATIVE NATURAL GAS RATES Pending Revenue Decoupling Pending Straight Fixed Variable Weather Normalization Adjustment Approved Revenue Decoupling Approved Rate Stabilization Tariffs Pending Rate Stabilization Tariffs Pending Rate Stabilization Tariffs Approved Straight Fixed Variable States with Non-Volumetric Rate Designs JULY 12, 2007

13. Tentative and Preliminary For further information, contact Cynthia Marple Director, Rates and Regulatory Affairs American Gas Association 400 N. Capitol St., NW Washington, D.C. 20001 (202) 824-7228 cmarple@aga.org 13