decoupling the new jersey approach: “conservation and usage adjustment”

DECOUPLING

The New Jersey Approach:

“Conservation and Usage

Adjustment”

Atlantic CityAtlantic City

New YorkNew York

WilmingtonWilmington

Washington D.C.Washington D.C.

PhiladelphiaPhiladelphia

SJG Service Area

SJG Service Area

Seneca Niagara Casino

Seneca Niagara Casino

Borgata CasinoBorgata Casino

ACUA LandfillACUA Landfill

Warren CountyDistrict Landfill

Warren CountyDistrict Landfill

Borgata Phase IIBorgata Phase II

Mannington MillsMannington Mills

Resorts CasinoResorts Casino

GeographyGeography

CommodityMarketing

CommodityMarketing

FPLMarcus Hook

FPLMarcus Hook

ACUA LandfillPhase II & III

ACUA LandfillPhase II & III

Borgata Phase IllBorgata Phase Ill

1999 NJBPU Promotes Unbundled Rates and Customer Choice

Cost ofService Recovery

Cost ofService Recovery

Cost of GasPaid to SJG Cost of Gas

Paid to TPS

Relative Cost per Therm

SJG Sales Customer SJG TransportationCustomer

WIN - WIN - WIN

• CUSTOMERS REDUCED THEIR BILLS – BUYING GAS FROM A THIRD PARTY

• NEW JERSEY’S CUSTOMER CHOICE INITIATIVE WAS A SUCCESS

• SJG’S SHAREHOLDERS WERE NOT HARMED

Observations

• Average use per customer continues to decline as a result of:

•Customer initiated conservation measures

•Higher efficiency equipment being installed

• Lower volumes delivered or sold deteriorates utility income

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Currently

• SJG’s profitability is tied to the volume of gas that we deliver

• SJG earns less margin as customers reduce their usage

• SJG has had a disincentive to promote energy conservation

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Decoupling removes the inherent disincentive that a utility has under traditional ratemaking to promote energy conservation

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DecouplingDecouplingUnder the CUA we will help customers reduce their usage without negatively impacting the financial integrity of SJG

Under a decoupling mechanism, the utility cannot increase its earnings by

increasing its sales volumes because additional margin revenues are returned to

customers.

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Adding new customers is how we will grow SJG’s earnings in the future

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DECOUPLING MECHANISMS

• APPROVED IN:CALIFORNIA, MARYLAND, NORTH CAROLINA, OREGON

• PENDING IN:INDIANA, OHIO, NEW JERSEY

• DENIED IN:ARIZONA, ARKANSAS, GEORGIA, WASHINGTON

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Inside SJG’s “CUA” Proposal

• Conservation and Usage Adjustment (CUA) is an expansion of the margin recovery mechanism embodied in SJG’s Temperature Adjustment Clause (TAC)

• CUA rate adjustments can either increase or decrease a customer’s bill

• Rate adjustment based on change in average use per customer applied against unit margins by class

• SJG will launch new conservation and energy efficiency programs

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Cost PerTherm$1.65

BGSS

State Charges

Taxes

Cost of ServiceState Charges2% or $0.0314

Taxes15% or $0.2412

BGSS72% or $1.1924

Cost of Service11% or $0.1808

New Jersey, Customer and Company Benefits

• Eliminates SJG’s disincentives to promote energy conservation

• Removes the relationship between our sales volumes and profits

• Provides increased opportunities to customers to reduce gas consumption, as a result of aggressive conservation initiatives promoted by SJG

• Improves SJG’s ability to recover its fixed costs of providing service

• Customers’ bills will more closely reflect the margin recovery amounts approved by the NJBPU in our last rate case

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THE NEW JERSEY APPROACH

TO DECOUPLING

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THE NEW JERSEY APPROACH

TO DECOUPLING

STAY TUNED…

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PIPELINE INTEGRITY

MANAGEMENT REGULATIONS

South JerseySouth JerseyGasGas

South JerseySouth JerseyGasGasProposed Rate ProgramProposed Rate Program