About Central Hudson Gas & Electric Corporation.

Why is Central Hudson going to increase rates now?

There are actually many reasons why we need to file for a rate increase. First and foremost, Central Hudson’s current rate order with the New York State Public Service Commission will expire on June 30, 2009. Electric and gas rate case proceedings are conducted over an 11-month process, and a new rate plan is proposed in order to be ready before the expiration of the current plan next year. The filing also provides an opportunity to propose

Poughkeepsie Journal /
Karl Rabe

an energy efficiency program that would provide energy education, technical assistance and financial incentives to help residents and businesses use energy more efficiently.

We are seeking a modest increase in our delivery rates for many reasons, including increased expenses for items such as trimming trees, providing fleet fuel and paying taxes, as well as continuing infrastructure investments to improve the reliability of our service and meet the needs of the Hudson Valley. Costs for many of the goods and services used to maintain and operate the natural gas and electric system have also increased substantially. Vendors to Central Hudson report that prices for steel, copper and aluminum have increased by more than 25 percent since the beginning of 2008, while gasoline and diesel have increased by 39 and 61 percent, increasing the prices of supplies they provide.

We understand how rising costs affect our customers, too, and seized every available opportunity to reduce our costs. For example, we worked closely with our employees to reduce labor and benefit expenses with an expected savings of $80 million over five years.

Central Hudson's rates compare favorably with those of other utilities and the region: Electric rates are among the lowest in NewYork, and natural gas rates are near the state average.

Natural gas prices, even with the new rate proposal, also compass very favorably with other heating fuels, and is currently more than 30 percent less than heating oil at this summer's market prices.

The chart below shows how Central Hudson's electric rates compare during the winter of 2008. The orange bar depicts what Central Hudson's rates would have been if the proposed rates were in effect.

(click here for a larger version of the image)

I heard that Central Hudson is increasing rates because of insufficient sales – is that true?

It's important to understand that utilities are regulated, and rates are designed to recover the largely fixed costs of owning, operating, and maintaining the electric and natural gas systems based on a forecasted level of sales. The sales forecast approved in the current rate agreement was based upon historical trends and assumed delivered energy volumes would be higher than has actually occurred. This has resulted in a shortfall in operating revenue, and means that Central Hudson is not earning sufficient revenues to cover its obligations to both customers and shareholders.

It's also important to note that electric and natural gas bills are separated into delivery and supply:

Delivery rates are regulated and set by the New York State Public Service Commission; Central Hudson receives only the delivery portion of bills and uses that income to maintain and operate the electric and gas delivery system of wires and pipelines, as well as to provide services such as reading meters, restoring service after storms, installing new equipment and answering telephones. Delivery rates have been relatively stable, and are adjusted through a formal ratemaking process – the rate proposal Central Hudson currently has before the Public Service Commission is for delivery charges. Delivery represents 30 to 40 percent of your total Central Hudson bill.

Supply rates are for the electricity and natural gas commodity used by the customer, and prices vary with market conditions. The supply portion of the typical bill represents 60 to 70 percent; these prices fluctuate with changes in energy commodity prices. Central Hudson passes the cost of purchasing energy supply through a competitive market on to customers without any type of mark up in price; and the utility actually provides some measure of supply price stability for its customers through hedging and buying practices.

The average dollar received by Central Hudson is used primarily to purchase the electricity and natural gas used by customers:

(click here for a larger version of the image)

More than 70 cents of every dollar Central Hudson receives is used to pay for the electricity and natural gas used by customers plus taxes. The remainder is used for supplies (including gasoline and diesel fuel for vehicles), tree trimming and vegetation management, labor, depreciation and reinvestment in the electric and gas system, and a small amount (less than one percent) as a contribution towards shareholder dividends.

Steps customers may take to save energy would not be negated by changes in delivery rates. Even with a modest rise in delivery rates, conservation will still allow customers who use energy more efficiently to realize a net savings because reductions in energy use will still decrease both delivery and supply charges. Also, reductions in the supply portion, which is the greater amount of the bill, will more than offset any changes in delivery prices.

Remember, too, that Central Hudson customers have paid amongst the lowest electric bills in New York since 1993, and natural gas bills are near the statewide average. Our goal is to continue to provide customers with safe, dependable electric service at the lowest possible price.

What is a Revenue Decoupling Mechanism, and how does that benefit customers?

The largely fixed operating costs of owning, operating and maintaining the natural gas and electric infrastructure is recovered by delivery rates based on a forecasted sales volume (supply prices are for the energy portion only, and are based on market costs for electricity and natural gas). If sales are too low, utilities do not earn sufficient delivery revenues to operate and maintain the system; and if sales are too high, earnings rise above the level considered reasonable by our regulators. A revenue decoupling mechanism, or RDM, breaks the link between sales and earnings by providing utilities with the revenues necessary to operate and maintain the system – no more, and no less – through periodic adjustments (up and down) to delivery rates.

This is a fundamental change to the way that our rates have been structured for the last century. An RDM also allows utilities to encourage energy efficiency programs that help customers save on their energy bills and protect the environment. The combination of an RDM and energy efficiency provides a win-win solution by benefiting customers through energy savings and allowing Central Hudson to earn the revenues needed to maintain and operate the electric and natural gas system.