The state Public Utilities Commission today will begin considering a major restructuring of National Grid’s natural-gas distribution rates in Rhode Island, including a company proposal that would increase a typical customer’s bill by about 4.6 percent.

National Grid, the dominant gas and electricity utility in the state, said the rate increase would allow the company to speed up replacement of aging gas lines and create a discount for low-income customers. It would also increase the company’s “return on equity” –– a way of measuring profitability –– from 4.5 percent to 9.23 percent.

National Grid also wants the PUC to restructure distribution rates in a way that would protect the company from revenue losses that result from the conservation efforts of its customers.

The proposals are contained in a 1,500-page filing made to the commission in March. Since then, several groups and agencies have received permission from utility regulators to participate in the proceedings, which allowed them to pose questions to National Grid about its proposal.

The proceeding focuses on the company’s distribution rates, which account for about 30 percent of a typical customer’s bill. These rates cover the cost of operating and maintaining the gas distribution network and do not include charges for the gas itself. National Grid has said that distribution rates have not increased in 10 years.

The proposed rate increase would add $6.17 to a typical heating customer’s bill each month, an increase of about 5.1 percent. It would increase the total amount of money collected for natural-gas service by about $20 million, the company said.

The filing represents the first significant changes to natural-gas distribution rates since National Grid acquired New England Gas in August 2006. The calculations used to arrive at the rate increase take into account some of the savings achieved by the purchase of New England Gas and KeySpan Corp., another gas distribution company. Those acquisitions have resulted in savings of about $7 million, and National Grid is proposing to share about $3.6 million of that savings with its Rhode Island customers.

The PUC has already received written testimony from several “interveners” –– parties that have been granted permission to participate in the proceeding.

Judging by their comments, one proposal likely to generate debate is the one that would “decouple” the revenue National Grid receives from the amount of gas actually used by its customers. Under the current rate structure, the company stands to benefit if a customer uses more natural gas than expected. At the same time, it stands to lose if a customer uses less. That’s because distribution rates are set based on a prediction of customers’ usage going forward. If the actual usage turns out to be less than the prediction, then there is less revenue for the company to spend on maintaining the gas network, and for its own profits.

National Grid wants to change this structure so that its revenues would be insulated from changes in customers’ usage. The company has said this would take away a disincentive to encourage its customers to conserve energy.

“Stated simply, by implementing programs to help customers to use even less gas, the company is, at the same time, undermining its financial health,” said Nickolas Stavropoulos, executive vice president of gas distribution for National Grid, in testimony submitted in March.

At least two groups –– Environment New England and the Conservation Law Foundation –– support the concept of decoupling.

“Providing the utility with a mandate and incentive to provide efficiency and conservation [programs] without decoupling is like accelerating a car with one foot while applying the brakes with the other,” said Seth Kaplan, director of climate-change advocacy for the Conservation Law Foundation, in written testimony.

But several groups argue that decoupling is likely to raise rates without a guarantee that this new rate structure would actually result in more conservation.

The proposal would “increase costs to consumers at a time when they cannot afford the rates they are already required to pay,” wrote B. Jean Rosiello, a lawyer representing the George Wiley Center in Pawtucket. The center lobbies on behalf of low-income families.

“At the same time,” she continued, “it wouldn’t require National Grid to do anything beyond what it already receives an incentive to do.”

The Energy Council of Rhode Island, a nonprofit consortium of the largest commercial energy users in Rhode Island, also opposed decoupling. The group, which lobbies on behalf of those companies, said the concept is not “a particularly effective way to promote energy conservation,” wrote John Farley, executive director of the group.

The proposal, TEC-RI said, “shifts risk from the company to the ratepayer, but does not compensate the ratepayer in any way for assuming these new risks. ... Decoupling primarily serves the company’s goal of improving its earnings.”

TEC-RI said that it asked National Grid what would have happened to rates if decoupling been in place three years ago. Based on that response, TEC-RI said that for the 12 months ending June 2008, customers would have paid an extra $11.6 million to National Grid; over a four-year period, the payments would have totaled $34 million.

A consultant hired by the Division of Public Utilities and Carriers also said he doesn’t think decoupling is a good idea. The DPUC represents the interest of ratepayers in utility matters.

“The commission should find that National Grid’s [proposal] is inappropriate, potentially inequitable, and not necessary to encourage or support the pursuit of conservation and energy-efficiency improvements by Rhode Island gas customers,” wrote the consultant, Bruce Oliver.

The George Wiley Center said it also opposed a proposed increase in the customer charge, which would go from $9 a month to $16 a month for a heating customer. And the center also is against increasing National Grid’s allowable profit margin. To do so, the center said, “is neither reasonable nor just” given that Rhode Island is experiencing an economic recession, 7.5-percent unemployment rate and a record-high number of utility shutoffs.

Some participants took issue with the 10-percent discount that has been proposed for low-income customers. Although that discount is “welcome,” wrote Rosiello, of the George Wiley Center, the amount “is too small to be meaningful.”

It said that National Grid offers “far better discounts” to its gas customers in other states — up to four times as generous as the one proposed for Rhode Island. It proposed increasing the discount to match the discount offered to low-income electricity customers, which is a 50-percent discount on distribution charges.

Farley, of TEC-RI, said National Grid shareholders should pay half the cost of providing the 10-percent discount. The overall cost of the low-income rate would be about $1.6 million, National Grid estimates, and the company proposes to pass on this cost to all ratepayers.

“It is noble to offer someone a discount when you pick up the tab,” Farley said in his testimony. “It is less noble to offer someone a discount when you make someone else pick up the tab.”

Today’s hearing will be held at the Public Utilities Commission, 89 Jefferson Blvd., in Warwick, beginning at 9:30 a.m. The proceeding is scheduled to continue on Sept. 8, 10, 11, and 12.

tbarmann@projo.com