Revenue Decoupling:
A proposed solution to the utilities’
traditional incentive to encourage
wasteful energy use
Christopher Grubb
cbrucegrubb@gmail.com
Energy Law, 2010
Presentation Roadmap
• Problem: The traditional electric utility
business model provides a perverse incentive
to encourage wasteful electricity use
• Alternative Solutions
– Revenue decoupling
– Straight fixed variable (SFV) rate design
• Proposed Solution: Revenue decoupling
• Questions for Regulators / Policymakers
Energy Conservation
Problem
Alternative Solutions
•Revenue Decoupling
•SFV
Proposed Solution
•Case studies
Questions
Conclusion
Rate Regulation 101
Problem
Alternative Solutions
•Revenue Decoupling
•SFV
Proposed Solution
•Case studies
Questions
Conclusion
•“Market Power” problem led states
to create regulatory commissions
•One of the four key functions of
regulatory commissions:
•Set the rates that public utilities
can charge customers for
providing electricity
Rate Regulation 101
Problem
Alternative Solutions
•Revenue Decoupling
•SFV
Proposed Solution
•Case studies
Questions
Conclusion
Traditional approach: Rate =
•“Authorized Revenue”
•Divided by
•Amount of energy utility
expects customers to
consume
The Throughput Incentive
Problem
Alternative Solutions
•Revenue Decoupling
•SFV
Proposed Solution
•Case studies
Questions
Conclusion
•Once rates are set, usually once
every few years, a utility’s ability to
recover its authorized costs
depends on how much electricity
its customers use
•Creates an incentive for utilities to
encourage electricity use beyond
what was anticipated in the ratesetting process
The Throughput Incentive
Sales (% of
assumed)
Sales (kWh)
Rate
($/kWh)
Commissionauthorized
fixed costs
($)
Revenue ($)
Profits
Profits (%
above/
(below)
assumed)
100
1,000,000,000
.10
$90,000,000
$100,000,000
$10,000,000
0
98
980,000,000
.10
$90,000,000
$98,000,000
$8,000,000
(20)
102
1,020,000,000
.10
$90,000,000
$102,000,000
$12,000,000
20
Revenue Decoupling
Problem
Alternative Solutions
•Revenue Decoupling
•SFV
Proposed Solution
•Case studies
Questions
Conclusion
•A mechanism to remove the
throughput incentive whereby the
regulatory commission initiates:
•Small but regular adjustments to
rates
•Ensures the utility recovers no more
and no less than its authorized costs
Revenue Decoupling
Problem
Alternative Solutions
•Revenue Decoupling
•SFV
Proposed Solution
•Case studies
Questions
Conclusion
Primary difference with traditional
rate-setting process:
•Process established where
regulator regularly compares
authorized revenue with amount of
revenue actually collected from a
utility’s customers
•Regulator periodically adjusts
rates to make sure the two are
equal
Revenue Decoupling
Problem
Alternative Solutions
•Revenue Decoupling
•SFV
Proposed Solution
•Case studies
Questions
Conclusion
Result of small, automatic
adjustments:
Either gives back to customers or
restores to utility amount over or
under-collected as a result of
fluctuations in sales
Revenue Decoupling
Problem
Alternative Solutions
•Revenue Decoupling
•SFV
Proposed Solution
•Case studies
Questions
Conclusion
You’re going to charge
me more for using
less?!?!
Decoupling Adjustments are Small
Problem
Alternative Solutions
•Revenue Decoupling
•SFV
Proposed Solution
•Case studies
Questions
Conclusion
Straight Fixed-Variable Rate Design
Problem
SFV recovers fixed costs by putting
monthly fixed cost charges into customers’
energy bills
Alternative Solutions
•Revenue Decoupling
•SFV
Proposed Solution
•Case studies
Questions
Conclusion
Fixed cost
charge here
Straight Fixed-Variable Rate Design
Problem
Alternative Solutions
•Revenue Decoupling
•SFV
Proposed Solution
•Case studies
Questions
Conclusion
Proponents argue SFV makes
sense because these fixed costs
are incurred on behalf of each
customer regardless of usage
Straight Fixed-Variable Rate Design
Problem
Alternative Solutions
•Revenue Decoupling
•SFV
Proposed Solution
•Case studies
Questions
Conclusion
Opponents dislike SFV because it:
•reduces customers’ rewards for
reducing energy use
•Can hit people who use less electricity
harder
Decoupling in Practice
Problem
Alternative Solutions
•Revenue Decoupling
•SFV
Proposed Solution
•Case studies
Questions
Conclusion
Decoupling policy
Electric and gas decoupling
Gas decoupling
Electric decoupling
Other
Decoupling in Oregon
Problem
Alternative Solutions
•Revenue Decoupling
•SFV
Proposed Solution
•Case studies
Conclusion
•Termed “Distribution Margin
Normalization” (DMN)
•Applied to one natural gas utility
•Initial period 2002-2005
Decoupling in Oregon
Problem
Alternative Solutions
•Revenue Decoupling
•SFV
Proposed Solution
•Case studies
Conclusion
•Monthly calculations, annual
adjustment
•Adjustments were < 1% up or
down 2003-2008
Decoupling in Oregon
Problem
Alternative Solutions
•Revenue Decoupling
•SFV
Proposed Solution
•Case studies
Conclusion
•2005 independent report
recommended decoupling be
continued
•In 2007, NW Natural and Oregon
PUC agreed to continue through
2012
Questions facing Regulators
Problem
Alternative Solutions
•Revenue Decoupling
•SFV
Proposed Solution
•Case studies
Questions
Conclusion
•How often to make rate adjustments?
•Across the board adjustments or by
customer class?
•What about the weather?
Revenue Decoupling in Ma.
Problem
Alternative Solutions
•Revenue Decoupling
•SFV
Proposed Solution
•Case studies
Questions
Conclusion
Revenue Decoupling in Ma.
Cont’d
Problem
Alternative Solutions
•Revenue Decoupling
•SFV
Proposed Solution
•Case studies
Questions
Conclusion
•Massachusetts Attorney General
wanted “consumer protections”:
•exclude effects of weather
•“deadband”
•DPU rejected both in favor of full
decoupling
Does Decoupling Work in
Partially Deregulated States?
Problem
Alternative Solutions
•Revenue Decoupling
•SFV
Proposed Solution
•Case studies
Questions
Conclusion
•Most profitable part of unbundled electric
utility is its unregulated electric
generation component
•Even if the utility is made indifferent to
sales losses from its distribution business
through decoupling, doesn’t it still have
big incentive to increase sales from its
generating business?
Summary
Problem
Alternative Solutions
•Revenue Decoupling
•SFV
Proposed Solution
•Case studies
Questions
Conclusion
•SFV and decoupling are alternatives to
removing the throughput incentive
•Unlike SFV, decoupling does not reduce
customer incentives to invest in energy
efficiency
•Questions remain, but experience of
states like Oregon demonstrates
decoupling can work well
But, Decoupling ≠ Energy Efficiency
Problem
Alternative Solutions
•Revenue Decoupling
•SFV
Proposed Solution
•Case studies
Questions
Conclusion
•Decoupling only removes the
throughput incentive
•Should be paired with other
policies to promote energy
conservation
Thank You
Problem
Alternative Solutions
•Revenue Decoupling
•SFV
Proposed Solution
•Case studies
Questions
Conclusion
`
Questions: cbrucegrubb@gmail.com