Speaking recently at a Bonneville Power Administration-sponsored conference entitled, "Energizing the Northwest, Northwest Natural CEO Mark Dodson, discussed the problem and his utility's response. "When we rely on volumetric rates to cover our fixed costs, we have a vested interest in customers using more energy. The more kilowatt hours or therms we sell, the greater our cost recovery. Conversely, if customers conserve and reduce their energy use, we are less able to recover our fixed costs. So the interests of customers are pitted against the interest of our companies, and our shareholder or owners. We are forced to choose between satisfying one group or the other," Dodson said. He added: "I firmly believe that no organization, public or private, will succeed if it regularly finds itself at cross-purposes with its customers." For all practical purposes, under the traditional structure, a utility can only meet its financial obligations if it meets or exceeds projected sales volumes.

To break that impasse, Northwest Natural made a compact with its customers and commission, which it calls a conservation tariff. The tariff basically said: If you don’t penalize us for our efforts, we will do everything we can to encourage conservation.

The concept was simple, Dodson said. We have over the years established a baseline usage for our customers. Each year actual usage is affected by weather as well as price elasticity – that is, if the prices go up, customers tend to use less. We normalize our usage data for weather and price; any change in consumption beyond that is identified as conservation, Dodson said.

Getting regulatory approval and customer support was a long and painstaking process. “We were convinced that we needed the support of the state’s consumer advocates before we took a proposal to the Oregon Commission. So we worked with the Citizens Utility Board and the NW Energy Coalition in designing the mechanism,” Dodson said. The company filed the conservation tariff in June 2001, but it was not approved until October 2002. That approval has, for example, allowed the utility to successfully promote the sale of high-efficiency gas furnaces that can reduce heating load by 20-25%

Northwest Natural’s conservation tariff has captured the attention of the industry. The basic concept is the same one recommended by the Edison Electric Institute and the Natural Resources Defense Council to National Association of Regulatory Utility Commissioners (NARUC) in November 2003. “To eliminate a powerful disincentive for energy efficiency and distributed-resource investment, we both support the use of modest, regular true-ups in rates to ensure that any fixed costs recovered in kilowatt-hour charges are not held hostage to any sales volumes,” they said. In July 2004 Dodson, representing the American Gas Assn. and Ralph Cavanagh of the Natural Resources Defense Council presented a similar joint position to NARUC.

Dodson says the conservation tariff enables him to tout gas conversion for some purposes without appearing to be self-serving. He noted, for example, that the NW Planning Council has identified 100,000 electric water heaters in homes that NW Natural serves with gas. If those water heaters were converted to gas, Northwest Natural would not make any more money under the conservation tariff, but the council believes the state of Oregon would reduce its peak load demand for power by over 400 MW. That is the equivalent of one of the new gas-fired generation plants in the queue for siting, and it saves gas, Dodson said.

When gas is burned to create electricity, between 45-75% of the energy value is lost. When it is used directly in applications, such as from the burner tip to heat water, only 5-10% of the energy value is lost, Dodson said. “At a time when we are all concerned about future energy supplies, does it make sense to waste half the value of the natural gas we’re using? If possible, shouldn’t we obviate the need to build power plants by using our resources more wisely?”

He continued: “For the sake of our society, our energy supplies and the long-term health of our businesses, we should be advocating the right energy source for the right use. Electricity, in many cases, should be used where it is the only or obvious best choice --- for lighting, power, irrigation, motors, etc., and I would be the first to acknowledge that. But where natural gas can be substituted for electricity, I believe saving the resource that would have been wasted to generate the electricity; natural gas should be the preferred choice.”

Dodson, who also co-chairs Oregon’s global warming commission, said “the power of public opinion, and the scope and depth of the environmental movement, cannot be ignored.” While people argue over the science, I have been stunned at the level of public concern, he said. “People are demanding that something be done and we must respond. Not only do we have a compelling need to respond to people’s concerns; it is right to be environmentally sensitive in the way we run our businesses,” Dodson said.

“At Northwest Natural, we have learned that new ideas can succeed in the regulatory arena when the parties involve focus on the outcomes that benefit both customers and shareholders. To put these groups at odds with one another is unfair, unwise and bad energy policy,” Dodson concluded.

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