Purchased Gas Adjustments

Policy February 15, 2007


Natural gas distribution companies typically include in their base rates the cost of gas the utilities purchase for customers. Utilities do not mark-up or earn a profit on the sale of the natural gas commodity they acquire on behalf of their customers. Instead, utilities are reimbursed the costs of natural gas supplies through base rates, which are set in periodic rate cases before state regulatory commissions.

Base rates allow utilities to recover only the exact cost of the gas purchased for customer consumption. Because the cost of gas changes frequently and gas utilities continuously purchase gas, the cost of gas to the customer usually changes in the time between rate cases. In order for companies to charge customers for these cost changes, most regulators allow companies to employ Purchased Gas Adjustments (PGAs) on a regular basis. PGAs are examples of rate adjustment clauses, regulatory mechanisms that are designed to allow a utility s rates to fluctuate in response to changes to certain operating costs and conditions that are beyond the control of the utility. Surveys of AGA member utilities show that PGAs are currently approved in every state in the nation.

PGAs are also examples of regulatory assets, costs that a regulatory agency permits a utility to defer to its balance sheet. Regulatory assets are permitted by Generally Accepted Accounting Principles (GAAP) but are not currently allowed under the International Financial Reporting Standards (IFRS) that are administered by the International Accounting Standards Board (IASB) and that are used in 110 nations. The United States is considering converting to IFRS in 2014.

AGA Viewpoint

As gas commodity prices remain volatile in the current market environment, compensating utilities for gas costs incurred on behalf of their customers is critical to the financial health of the utility sector. AGA supports complete and timely recovery of gas costs for its members, as well as full compensation for the time-value of under-recovered gas costs for gas utilities. In addition, AGA supports a project by the IASB to address accounting for the economic effects of regulatory structures, such as PGAs, in various markets.

AGA Contact: Michaela Burroughs, 202-824-7311, mburroughs@aga.org