A Summary of Revenue
Decoupling Evaluations
Dan Hansen
Christensen Associates Energy Consulting
July 2014
July 2014
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Outline
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Decoupling overview
Description of mechanisms studied
Risk issues
 Weather risk
 Economic and price risk
 Should allowed ROE be reduced
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July 2014
Changes in utility behavior
Effect on customer satisfaction
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Purpose of Revenue Decoupling

Traditional regulated rates recover fixed costs
through volumetric rates

Provides utility with:
 An incentive to increase usage
 A disincentive to promote conservation and
energy efficiency

Problem: revenues and sales are directly
related
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Solution? “Decouple” revenues from sales
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Purpose of Revenue Decoupling (2)

Revenue decoupling removes the link
between sales and revenues, thus making the
utility indifferent to the effects of
conservation

Decoupling does not provide an incentive for
the utility to promote conservation

Utility revenues are typically “recoupled” to
some other factor(s), such as the number of
customers
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Basic Decoupling Concept

Basic concept of revenue decoupling (RD):
RD Deferral = Allowed Revenue – Actual Revenue

A positive number means the utility underrecovered, and will lead to a future rate
increase
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A negative number means the utility overrecovered, and will lead to a future rate
decrease
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Basic Decoupling Concept (2)
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Typically every 6 or 12 months, the RD
deferral is rolled into rates as follows:
Rate change from RD = RD Deferral / E(Usage)
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Description of Mechanisms
Studied
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Independent Evaluations of
Decoupling Mechanisms

NW Natural Gas
 Completed in 2005.
 Distribution Margin Normalization (DMN).

New Jersey Natural Gas & South Jersey Gas
 Completed in 2009.
 Conservation Incentive Program (CIP).

Portland General Electric
 Completed in 2013.
 Sales Normalization Adjustment (SNA).
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Decoupling Mechanisms:
NW Natural

Revenue per customer decoupling (RPCD).

Removes effects of weather from deferrals.
 Separate WARM insulates NW Natural from
weather.

Initially capped deferrals at 90% of the nonweather difference between allowed and
actual revenue.
 Removed following our report’s recommendation.

Low-income bill assistance and
weatherization funding also approved.

Service quality standards imposed.
July 2014
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Decoupling Mechanisms:
New Jersey Natural Gas and South Jersey Gas
 RPCD.
 Includes weather effects.
 Separate weather normalization adjustment.


ROE test: can’t recover more than allowed
ROE due to deferrals (excess can’t be
recovered later).
Basic Gas Supply Service (BGSS) test.
 Non-weather component of deferral must be offset by BGSS savings.
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July 2014
Commit shareholder funds to conservation.
Large customer count adjustment.
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Decoupling Mechanisms:
Portland General Electric

RPCD for residential and small commercial.
Lost revenue adjustment for larger
commercial customers.
Largest customers (over 1 aMW) excluded
entirely.
Excludes effect of weather.
Reduced ROE by 10 basis points.

Decoupling includes fixed generation costs.



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 A proposal has been made to bifurcate the
mechanism such that G&T allowed revenue
would be fixed and D allowed revenue would
remain linked to the number of customers.
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Decoupling and Risk
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Decoupling and Risk Shifting:
Weather Risk

Does decoupling shift weather risk
from the utility to its ratepayers?

No. A reduction in risk for one party
does not necessarily mean that risk is
shifted to another party.
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Decoupling and Risk Shifting:
Coin Flipping

Suppose I flip a coin
 Heads = I pay you $20
 Tails = You pay me $20

This game exposes me to coin flipping risk. I gain or
lose $20 every time we play.

If I decide to stop playing the game, I eliminate my
coin flipping risk.

Did I shift the risk to you? No, your risk is eliminated
as well.

This can happen when the risk is negatively
correlated across parties (e.g., when something
makes me better off, it makes you worse off).
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Decoupling and Risk Shifting:
Coin Flipping (2)
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July 2014
This example is similar to the effect of
weather on utility revenues (e.g., heads = hot
summer and tails = cold summer).
Reducing utility weather risk can also reduce
ratepayer weather risk.
Complications: decoupling deferrals affect
rates paid next year, so weather risk is only
eliminated over time and at the class level.
Weather risk can be reduced at the customer
level through weather normalization
mechanisms, as are found in the natural gas
industry.
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
Decoupling and Risk Shifting:
Economic and Price Risk
Decoupling may shift two types of risk
from the utility to ratepayers:
 Economic risk: recession may cause
customers to use less energy, which
decreases the current bill but increases
future rates.
 Price risk: high commodity prices may
cause customers to use less energy.
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July 2014
In an RPCD, these risk shifts can only
occur when economic conditions and/or
prices affect use per customer (UPC).
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Decoupling and Risk Shifting:
Economic and Price Risk (2)
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In each study, I conducted a statistical analysis of
UPC as a function of:




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Weather
Economic conditions
Price
Time trend
Findings:
 Very strong relationship between UPC and weather across
all utilities and customer groups.
 Very limited evidence of price response.
 Somewhat limited evidence of a relationship between UPC
and economic conditions.
– Stronger for commercial than residential customers.
– Stronger in PGE study, which contained much more severe
recession than other studies.
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
Decoupling and Risk Shifting:
Conclusions
Argument that decoupling shifts risk
from utilities to ratepayers may be
exaggerated.
 Doesn’t occur for weather.
 Limited evidence of shifting price risk.
 Some evidence of shifting economic risk.
– Could be mitigated by capping decoupling
adjustments.
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Decoupling and Risk:
Reduce Allowed ROE?

In the PGE study, we conducted a statistical
analysis of the effect of decoupling on the
variability of utility returns.

Used FERC Form 1 data from 1993 through
2011 for 44 utilities.

Approximated utility rate of return as annual
operating income divided by book assets.

Calculated the 3-year standard deviations of
this measure as the dependent variable (also
examined 5-year SDs).
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Decoupling and Risk:
Reduce Allowed ROE? (2)

Estimated a panel regression model to
determine whether decoupling is associated
with less variable returns.

Did not find any statistically significant
effects.

Caveats:
 Did not distinguish types of decoupling
mechanisms.
 Relatively short time period, many decoupled
utilities did not have it in place for very long.
 Effect may be small compared to “noise” in the
data.
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
Decoupling and Risk:
Utility Credit Reports
Also examined PGE credit reports.
Mostly favorable toward decoupling,
but effects are limited.
 Does not cover all customers.
 Not as important as the fuel cost
adjustment mechanism approved shortly
before decoupling.
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July 2014
Appears to have contributed to
improved credit rating.
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Effect of Decoupling on
Utility Behavior
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
Changes in Behavior:
Employee Messaging
NJ Natural and SJ Gas trained all
employees on how CIP changed
corporate incentives.
 Tent cards, posters, laminated cards, intraoffice messages emphasizing change in
incentives.
 Description of CIP programs being
introduced.
 Expectation that all employees help spread
conservation messages.
 E-tips provided to employees before
public.
July 2014
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Changes in Behavior:
Employee Incentives

NJ Natural and SJ Gas:
 Replaced incentives based on burner tip counts
with incentives based on enrolling new customers.
 CSRs provided incentives for including CIP
messaging in calls.
– $50 drawings for 8% increasing to 15%
– Changed union contract to include bonuses for 20%+

NW Natural had incentives based on
conservation objectives, customer satisfaction,
and cooperation with ETO.

PGE: no compensation changes reported.
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Changes in Behavior:
Staffing

NW Natural reallocated staff away from sales
positions and toward customer service (some
of this was due to time study, the remainder
could perhaps be attributed to decoupling).

PGE hired several employees to work on
conservation and energy efficiency.
July 2014
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
Changes in Behavior:
Home Analyzers
All utilities implemented on-line
systems to allow customers to audit
their usage.
 Provides recommendations based on
customer-specific circumstances.
 Can serve as a referral mechanism to
specific conservation programs.
 Provides CSRs with a tool to help with
high bill complaints. Helps the utility work
with customers.
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Changes in Behavior:
Customer Messaging

NJNG:
 Prior to CIP, 75% of articles in NJ Living Times
devoted to load growth (gas grills, patio heaters,
gas fireplaces).
 After CIP, 0%.

SJG:
 When working with potential conversion
customers, previously provided materials on gas
fireplaces, snow melt systems, patio heaters, gas
grills, garage heaters, gas lighting, pool and spa
heaters.
 Stopped that practice once CIP was implemented.
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
Changes in Behavior:
Customer Messaging (2)
NW Natural shifted from promotional
advertising toward conservation
messaging.

NJNG field staff
 Carried larger pads with conservation tips
to distribute, but often left in the truck due
to size.
 Feedback from field staff led to smaller
materials and door hangers being
provided.
July 2014
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
Changes in Behavior:
Customer Messaging (3)
NJNG has a difficult mass media
market in which to operate, so they
focused on grass roots efforts.
 Community Rewards: $5 to the school for
every referral to the Conserve to Preserve
Dashboard (very cost effective compared to
mass mailers).
 Outreach to realtors to increase program
awareness.
July 2014
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
Changes in Behavior:
Customer Messaging (4)
SJG used more mass media than NJNG.
 CEO message: “Your partner in energy
efficiency, comfort, and savings.”
 CEO emphasized that decoupling is
important to larger corporate mission, as
unregulated divisions sell energy-efficient
technologies.
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Percent Share
Changes in Behavior:
Home Analyzers, Effects
Shares of NJCEP Audits
100%
90%
80%
70%
60%
NJNG
50%
40%
July 2014
SJG
"Controls"
30%
20%
10%
0%
Month-Year
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Changes in Behavior:
High Efficiency Furnace (HEF) Programs
 NW Natural:
 Improved program by working more
directly with distributors.
 Interviews with distributors indicated
increased sales of HEF to NW Natural
customers compared to customers of other
utilities.

New Jersey:
 Emphasized HEF for new conversions.
 Pre-CIP HEF rates = 30 to 35%
 Post-CIP = 50%
July 2014
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Changes in Behavior:
Third-Party Provider of EE


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July 2014
Oregon has a third-party provider of energy
efficiency programs, the Energy Trust of
Oregon (ETO).
I interviewed the Executive Director of the
ETO (Margie Harris) as part of both the NW
Natural and PGE evaluations.
She conveyed the importance of utility
cooperation in meeting ETO objectives.
She was not opposed to decoupling, but
could not say definitively whether it affected
utility behavior regarding conservation
(relative to other factors such as legislation or
least-cost planning as part of the IRP).
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Effect of Decoupling on
Customer Satisfaction
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Effect on Customer Satisfaction:
NW Natural

No complaints regarding DMN
registered with OPUC (DMN deferrals
are not itemized on the bill).

Internal customer service ratings were
quite stable before and after DMN.
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Effect on Customer Satisfaction:
NW Natural JD Power Rank Among 55 Utilities
Question
2003
2004
Ability of utility to help reduce bill
26
14
Familiarity w/ programs to help use
less gas
6
6
Overall customer satisfaction index
10
9
Customer service index
4
5
July 2014
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
Effect on Customer Satisfaction:
New Jersey
President of the New Jersey Board of
Public Utilities Jeanne M. Fox:
“I believe that the high level of customer
satisfaction for South Jersey Gas and
New Jersey Natural Gas is largely
attributable to their respective customer
incentive programs.”
July 2014
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
Effect on Customer Satisfaction:
PGE, Customer Complaints
Three complaints registered with
OPUC:
 Don’t want to pay for energy they don’t
use.
 Unethical to charge customers for
conservation given PGE’s corporate waste.
 A clarification of the program, not a
complaint.
July 2014
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Effect on Customer Satisfaction:
PGE, JD Power Survey
Table 6.5.2: PGE’s Rank among Large West Region Utilities, Residential
July 2014
Year
Overall CSI
2006
2007
2008
2009
2010
2011
2012
6 of 12
3 of 13
3 of 13
3 of 13
3 of 13
3 of 13
3 of 13
Power
Quality &
Reliability
4 of 12
2 of 13
2 of 13
3 of 13
2 of 13
2 of 13
2 of 13
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Price
Customer
Service
10 of 12
4 of 13
5 of 13
5 of 13
4 of 13
7 of 13
5 of 13
3 of 12
1 of 13
2 of 13
1 of 13
2 of 13
4 of 13
2 of 13
Other Effects of Decoupling?

No evidence of reduced service quality
(i.e., outages).

Possible distributional effects.
 Customers who do not conserve may
experience bill increases.
 Small effect with decoupling compared to
Straight Fixed Variable rates.
 Not quantified in the evaluations.
July 2014
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Questions?

July 2014
If you have questions, please contact Dan Hansen at
dghansen@caenergy.com
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