REVENUE DECOUPLING FACT SHEET

Decoupled rates approved in 2013 rate caseIn August 2013, CenterPoint Energy filed a request, called a rate case, with the Minnesota Public Utilities Commission (MPUC) to change its rates for utility distribution service. The final rates approved by the MPUC included a new 3-year pilot program for full revenue decoupling to begin July 2015 with annual revenue decoupling adjustments on customers’ bills starting in fall 2016. The MPUC will evaluate the decoupling pilot program on an annual basis.

Revenue decoupling removes the motivation to sell more gasHelping customers use energy more wisely and efficiently is the cheapest and easiest way to lower their energy bills – and also reduces greenhouse gas emissions. Under traditional regulation, a utility that successfully helps its customers become more energy efficient reduces its revenue and risks not being able to cover the fixed costs of serving customers.

Regulators of public utilities, such as the MPUC, are attempting to resolve this tension by applying a decoupling mechanism, which uses regular rate reconciliations every year to compensate for under/over-collection of fixed costs during the previous year. The decoupling mechanism is designed to remove the motivation for a public utility to encourage increased natural gas usage. More than half of the states in the U.S. have adopted a decoupling mechanism for either electric or natural gas utilities.

CENTERPOINT ENERGY REVENUE DECOUPLING QUICK FACTS

• The Minnesota Public Utilities

Commission (MPUC) approved a new

3-year full revenue decoupling pilot

program in CenterPoint Energy’s last rate

case in 2014.

• CenterPoint Energy had a previous partial

decoupling pilot program, which began in

2010 and ended in early 2015.

• CenterPoint Energy’s new full revenue

decoupling pilot program starts in July

2015.

• The first full decoupling rate adjustment

will appear on customer bills in the fall of

2016.

• Revenue decoupling is a regulatory tool

designed to separate a utility’s revenue

from changes in energy sales. When

a utility’s revenues are closely tied to

the amount of energy it sells, the utility

is discouraged from promoting energy

conservation. Revenue decoupling

provides for adjusting a utility’s rates

periodically to provide a mechanism to

recover certain revenues independent of

the amount of energy sold.

• Customers who use less gas will save on

their overall bill because the wholesale

commodity of natural gas makes up 60-70

percent of the bill.

Overview of decouplingRevenue decoupling separates the link between utility revenues and how much natural gas customers use. Decoupling is a regulatory tool that ensures that utilities collect the amount of revenue that has been approved by the MPUC – no more and no less. Decoupling does not apply to the wholesale commodity cost of natural gas; rather, it applies to CenterPoint Energy’s cost to deliver natural gas safely and reliably to customers and to maintain the delivery system.

Just like before, with decoupling, the MPUC establishes the amount of revenue that CenterPoint Energy needs to cover the cost of maintaining a safe and reliable gas distribution system. With revenue decoupling, the per therm natural gas rate is adjusted so that CenterPoint Energy doesn’t retain more or less revenue than what was approved in its last rate case. Revenue decoupling will allow CenterPoint Energy to adjust its rates once each year to make up for any shortfall or excess in sales revenue. For example, under revenue decoupling, if total actual natural gas sales were higher than expected in a given year, the utility would lower rates the next year to refund customers the ‘extra’ revenue from the additional usage. If gas sales were lower than utilities and regulators expected in a given year, the utility would increase rates the next year to make up the difference.

The purpose of revenue decoupling is to remove the motivation for CenterPoint Energy to sell more gas and allow the company to promote energy efficiency and conservation, while also maintaining revenue required to provide safe and reliable natural gas service.

Why it’s importantEnergy efficiency is the cheapest, easiest way to lower your bill and reduce your energy footprint. But under a traditional rate structure, where revenue is based on the volume of sales, utilities are discouraged from investing in energy efficiency because it harms the company financially. Under traditional rate design, the more natural gas CenterPoint Energy sells, the more revenue CenterPoint Energy earns. Conversely, when sales fall under traditional rates, CenterPoint Energy earns less revenue. If revenue falls too low, not all fixed costs are recovered. This rate design creates a motivation to increase natural gas sales, not invest in energy efficiency and conservation initiatives.

To remove this disincentive, regulators can decouple utilities’ recovery of fixed costs from sales. According to the National Resources Defense Council, “Years of experience in numerous states shows that decoupling eliminates the disincentive for utilities to help their customers become more energy efficient.”

How does decoupling work?Decoupling is a mechanism that breaks the link between amount of natural gas sold and recovery of costs to deliver gas and maintain a safe and reliable distribution system. Under decoupling, an individual bill for natural gas is still based on the amount of natural gas used, so individual customers who use less will pay less and customers who use more will pay more.

Revenue decoupling is a regulatory tool designed to separate a utility’s revenue from changes in energy sales.

When a utility’s revenues are closely tied to the amount of energy it sells, the utility is discouraged from promoting

energy conservation. Revenue decoupling provides for adjusting a utility’s rates periodically to provide a mechanism

to recover certain revenues independent of the amount of energy sold.

UNDERSTANDING DECOUPLING

TERMINOLOGY:

• Allowed utility revenue -

regulators determine the revenue

the utility needs to deliver gas and

maintain a safe and reliable system

• Utility costs - the cost to deliver gas

and maintain a safe and reliable

system; these costs don’t change

significantly when usage changes

• Cost of gas - cost for the natural

gas used by customers, total

cost of gas is directly related to

amount of gas used

WHAT HAPPENS WITH DECOUPLING?

• Traditional rate case to determine

allowed utility revenue based on

approved, expected usage.

• Each month the company tracks actual

usage vs. approved, expected usage.

• At the end of a 12-month period, the

company calculates the difference

between actual usage and expected

usage and the impact on utility revenue.

- If usage is higher than expected, then

total revenue is more than needed to

cover utility costs, and customers get

a refund.

- If usage is lower than expected, then

total revenue is less than needed to

cover utility costs and customers will

be surcharged, but still save on cost

of gas for lower than expected usage.

Your gas dollarCenterPoint Energy’s proposed Basic and Delivery charges recover only the cost of utility distribution service – about 40 percent of the bill. The wholesale cost of gas – about 60 percent of the bill – is passed through to customers with no markup.

COST OF GAS CenterPoint Energy does not mark up the price it pays for

natural gas. The company pays natural gas suppliers and bills customers at the same cost.

CENTERPOINT ENERGY DISTRIBUTION COSTS

Utility rates backgroundRates vary by customer type/class. Customers’ bills contain three parts:

1. A basic charge 2. A delivery charge 3. Cost of gas

Wholesale gas cost is passed directly to customers without mark-up and makes up about 60-70 percent of the bill. The Basic Charges and Delivery Charges recover the cost of providing utility distribution service to customers.

Utility distribution costs – don’t change significantly with more or less usage

Total revenue = cost of gas + utility costs

• Cost of gas – cost for the actual commodity.

• Utility costs – costs to deliver natural gas and maintain a safe and reliable system. Utility costs don’t change significantly when usage changes. In a rate case, the rates are approved by MPUC only after thorough review of utility costs.

Decoupling compared to traditional regulationJust as with traditional rates, under decoupling the commodity cost of gas is passed through without mark-up and customers save the cost of gas when they reduce their usage.

Decoupling includes checks and balances• The MPUC put a cap on the amount

that CenterPoint Energy can surcharge customers in years where the rate case approved revenue was not achieved. The surcharge is capped at 10 percent of the utility’s non-gas commodity costs, which is equal to approximately 3 to 4 percent of your total bill.

• There is no cap on the amount that CenterPoint Energy must refund customers in years where the company recovers more than the rate case approved revenue.

• Decoupling does not guarantee that CenterPoint Energy will earn a profit. It only determines how much revenue a utility can make. The utility must still manage costs so that expenses aren’t more than what was determined in a rate case.

• CenterPoint Energy will submit regular reports to regulatory agencies.

• CenterPoint Energy’s new decoupling mechanism is a 3-year pilot program.

• On the next page is an example of an average customer monthly bill under the decoupling mechanism. As shown, when a customer increases their natural gas usage, the customer’s bill will increase. When the customer decreases their natural gas usage, their bill will go down. This is the same under decoupled rates and under traditional regulation.

Rate case Numbers are reviewed and crunched in a rate case to determine a utility’s allowed revenue.

Numbers are reviewed and crunched in a rate case to determine a utility’s allowed revenue.

Traditional rate design Decoupling

Per-unit rate The per-unit rate (other than wholesale gas costs) is constant between rate cases, but actual revenue floats up or down as sales go up or down while costs stay the same. Total revenue (utility costs + cost of gas) is proportional to amount used, but non-gas costs are fixed.

Uses rates set in a rate case, but allows annual adjustments to ensure that the utility recovers the allowed revenue amount.

Actual revenue Actual revenue = per-unit rate x actual unit sales

Actual revenue = adjusted per-unit rate x actual unit sales; designed to reflect allowed revenue

Usage increases If overall usage increases:

• The utility benefits – revenue increases, but costs stay the same

• Customers pay more for delivery costs on the additional gas they consume

• Customers who use more gas pay higher bills for the additional amount of gas they consume

If overall usage increases:

• The utility reduces rates in the following year to recover what is approved in a rate case

• Customers pay more for delivery costs on the additional gas they consume, but will see a refund the following year.

• Customers who use more gas pay higher bills for the additional amount of gas they consume.

Usage decreases If overall usage decreases:

• The utility doesn’t receive enough revenue to cover the costs to maintain the system.

• Customers pay less for delivery costs on the decreased amount of gas they consume

• Customers who use less pay less for the decreased amount of gas they consume

If overall usage decreases:

• The utility increases rates in the following year to recover what is set in rate case

• Customers pay less for delivery costs on the decreased amount of gas they consume, but will see a surcharge the following year

• Customers who use less pay less for the decreased amount of gas they consume

$22

$54.47

$22

$56.85

$22

$59.24

When rates set

Usagedecreases

Usageincreases

$70

$60

$50

$40

$30

$20

$10

$0

Cost of gas

Delivery cost +decoupling adjustment

Reduce energy use and lower monthly billsCustomers can save money, natural resources and reduce their carbon footprint by pursuing these projects:

• Installation of low flow shower heads and faucet aerators to save 10 percent on annual water heating costs;

• Earn cash rebates by taking advantage of CenterPoint Energy’s Conservation Improvement Program (CIP) rebate programs;

• Schedule a low-cost energy audit through CenterPoint Energy’s CIP program;

• Have your furnace checked annually, change filter once a month and clean ducts and vents to improve efficiency;

• Set your water heater temperature to 120 F to save energy;

• Set thermostat to 68 F and add layers before adjusting the thermostat (For every one-degree reduction in the thermostat setting, customers can save up to 5 percent on heating bills.);

• Install a programmable thermostat that can lower the heating temperature while away from home; and

• Get your home air sealed and improve your home’s insulation and receive newly offered air sealing and insulation rebates through CenterPoint Energy’s CIP program.

Customers can measure how their energy saving choices impact the environment by visiting our energy costs and emissions calculator and our new “What-if I save gas” calculator at CenterPointEnergy.com/SaveEnergy.

Customer bill under decoupling, with an example of lower and higher usageThe following graph shows an example of a hypothetical residential customer bill under decoupling (individual customer bills will vary depending on the amount of gas used and the cost of gas each month). The example in the graph shows the costs associated with a bill for 73 therms per month and the impact of increasing or decreasing usage by 5 therms. As shown below, with a decoupling adjustment, recovery of fixed delivery costs (shown in tan) remain the same no matter a customer’s usage. However, customers will pay more in gas costs when they consume more gas and less for gas costs when they consume less gas.

FOR MORE INFORMATION

You are invited to visit our website at

CenterPointEnergy.com/Decoupling

Residential

612-372-4727

800-245-2377

Business

Call your account manager or the Business

Customer Hotline

612-321-4939

877-809-3803CenterPoint Energy helps provide the best energy value of an abundant and domestic fuelCenterPoint Energy works hard to provide reliable supplies of natural gas at the lowest reasonable prices. The price of gas, which has no mark-up, makes up about 60 to 70 percent of your monthly gas bill. The other 30 to 40 percent of your bill covers our cost of doing business, issuing bills, maintaining facilities and gas lines, delivery costs and more.

Join CenterPoint Energy’s Budget Billing PlanCustomers should consider enrolling in CenterPoint Energy’s Budget Plan. By spreading payments evenly throughout the year, the experience is a predictable, levelized payment each month and avoidance of high winter bill peaks.

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