Weather Normalization and Natural Gas Regulation

The residential demand for natural gas is the subject of two recent articles in this journal.' Each used pooled time-series/cross-section data to estimate price and income elasticities as well as other relationships that determine the quantity of natural gas consumed by individual households or groups of households. Not surprisingly, among relationships other than price or income, the most important links consumption to weather conditions .2 Regulating natural gas distribution companies requires that this dependence of consumption on weather conditions be recognized and reflected in ratemaking. If it is not (or if it is recognized incorrectly) the regulator will approve prices and revenues that make expected return on utility investment either greater or smaller than allowed return.