Decoupling

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In public utility regulation, decoupling refers to the disassociation of a utility's profits from its sales of the energy commodity. In the traditional model for establishing rates for customers of regulated electric and natural gas utilities, higher sales of energy lead to higher utility revenues (and, in turn, utility profits). This creates a strong financial disincentive for utilities to engage in customer energy efficiency programs, since these programs reduce energy sales through improving efficiency. Reduction of energy sales reduces revenues and associated utility profits.

When state regulators introduce “decoupling,” they separate utilities’ sales from their revenues and profits.[1] While there are a number of regulatory mechanisms being proposed to achieve this result, a commonly used approach is to establish a "revenue per customer" formula as described by a NY Times Blog:[2]

Under a decoupling scheme, customers pay for electricity more or less like they pay for their cable bill: a pre-determined rate every month, even if they never turn on the television. If overall revenues fall below a utility's fixed costs, the rate is adjusted accordingly across the entire customer base -- though some states are establishing rate caps, to protect consumers. The overall result, however, is that a utility's revenues are no longer tied directly to the amount of energy it sells.

Criticisms

According to the American Council for an Energy-Efficient Economy (ACEEE): "Although decoupling can neutralize the disincentive to support energy efficiency programs, it doesn’t create a financial incentive to save energy through investing in energy efficiency that is comparable to the financial incentives that exist for utilities to invest in capital assets such as new power plants and facilities. Consequently, states that wish to establish energy efficiency as a comparable alternative to supply-side investments also need to establish a performance reward mechanism that allows utilities to earn a positive return on their energy efficiency investments."[1] David Roberts in Grist also notes that decoupling based on a fixed price paid by electricity users "removes ratepayers' (already meager) incentive to conserve." [3]

A 2009 EPA report, Discussion of Consumer Perspectives on Regulation of Energy Efficiency Investments found that while many environmentalists and conservation advocates support decoupling, many consumer advocates representing utility ratepayers have opposed decoupling as it attempts to guarantee revenue levels to utility companies. Decoupling mechanisms reduce a utility company's financial risk from reducing sales, due to conservation, weather and economic conditions. As a result, many consumer advocates have requested and state and federal regulators have required that utility companies profit levels (measured through a return on equity allowance) be reduced to reflect lower risk.[4]

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