Decoupling (utility regulation)

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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.[1] Instead, a rate of return is aligned with meeting revenue targets, and rates are adjusted up or down to meet the target at the end of the adjustment period. This makes the utility indifferent to selling less product and improves the ability of energy efficiency and distributed generation to operate within the utility environment.

Ideally, utilities should be rewarded based on how well they meet their customers' energy service needs. However, most current rate designs place the focus on commodity sales instead, tying a distribution company's recovery of fixed costs directly to its commodity sales.

In order to motivate utilities to consider all the options when planning and making resource decisions on how to meet their customers' needs, the sales-revenue link in current rate design must be broken. Breaking that link between the utility's commodity sales and revenues, removes both the incentive to increase electricity sales and the disincentive to run effective energy efficiency programs or invest in other activities that may reduce load. Decision-making then refocuses on making least-cost investments to deliver reliable energy services to customers even when such investments reduce throughput. The result is a better alignment of shareholder and customer interests to provide for more economically and environmentally efficient resource decisions.

As an added benefit, breaking the sales-revenue link streamlines the regulatory process for rate adjustments. Contention over sales forecasts consumes extensive time in every rate case. If the sales-revenue link is broken, these forecasts carry no economic weight, so the incentive to game forecasts of electricity sales is removed and rate cases become less adversarial.

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.

Decoupling plus[edit]

Decoupling plus is an economics term for the decoupling of higher profits for energy producers from higher energy use. Through government regulation, the energy producer makes a higher profit when energy conservation targets are met.[2] [3]

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References[edit]

  1. ^ Lazar, Jim; Frederick, Weston; Wayne, Shirley; Janine, Migden-Ostrander; Dave, Lamont; Elizabeth, Watson (November 2016). Revenue Regulation and Decoupling: A Guide to Theory and Application (PDF) (2nd ed.). Montpelier, VT: Regulatory Assistance Project. Retrieved 7 March 2020.
  2. ^ Friedman, Thomas (October 21, 2008). "Bailout (and Buildup)". The New York Times. Retrieved 2008-10-23. Second, Washington could impose a national requirement that every state move its utilities to a system of 'decoupling-plus.' This is the technical term for changing the way utilities make money — shifting them from getting paid for how much electricity or gas they get you to consume to getting paid for how much electricity or gas they get you to save.Several states have already moved down this path.
  3. ^ "The elusive negawatt". The Economist. May 8, 2008. Retrieved 2008-10-23. California, predictably, has gone further still. It first decoupled sales and profits for gas in 1978 and for electricity in 1982. Last year, it adopted a scheme called 'decoupling plus', which aims to make investments in energy efficiency more profitable for utilities than new power stations would be. Fees to finance energy-saving measures are added to each bill, and utilities spend the money in pursuit of targets set by the regulator, the California Public Utilities Commission (CPUC). The commission then calculates the savings from these investments, compared with the cost of new power plants. If a utility achieves between 85% and 100% of the target, it is allowed to keep 9% of these savings. If it exceeds the regulator's target, it gets 12%, more than it would earn from building new infrastructure. Between 65% and 85% it does not earn any return at all, and below 65% it pays a fine for every kilowatt-hour by which it has fallen short.