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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.

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revenue decoupling

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
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
slide3

Energy Conservation

  • Problem
  • Alternative Solutions
  • Revenue Decoupling
  • SFV
  • Proposed Solution
  • Case studies
  • Questions
  • Conclusion
slide4

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
slide5

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
slide6

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 rate-setting process
slide8

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
slide9

Revenue Decoupling

  • Primary difference with traditional rate-setting process:
    • Process established where regulator regularly compares authorized revenue with amount of revenue actuallycollected from a utility’s customers
    • Regulator periodically adjusts rates to make sure the two are equal
  • Problem
  • Alternative Solutions
  • Revenue Decoupling
  • SFV
  • Proposed Solution
  • Case studies
  • Questions
  • Conclusion
slide10

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
slide11

Revenue Decoupling

  • Problem
  • Alternative Solutions
  • Revenue Decoupling
  • SFV
  • Proposed Solution
  • Case studies
  • Questions
  • Conclusion
  • You’re going to charge me more for using less?!?!
slide12

Decoupling Adjustments are Small

  • Problem
  • Alternative Solutions
  • Revenue Decoupling
  • SFV
  • Proposed Solution
  • Case studies
  • Questions
  • Conclusion
slide13

Straight Fixed-Variable Rate Design

SFV recovers fixed costs by putting monthly fixed cost charges into customers’ energy bills

  • Problem
  • Alternative Solutions
  • Revenue Decoupling
  • SFV
  • Proposed Solution
  • Case studies
  • Questions
  • Conclusion

Fixed cost charge here

slide14

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

slide15

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
slide16

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

slide17

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
slide18

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
slide19

Decoupling in Oregon

  • 2005 independent report recommended decoupling be continued
  • In 2007, NW Natural and Oregon PUC agreed to continue through 2012
  • Problem
  • Alternative Solutions
  • Revenue Decoupling
  • SFV
  • Proposed Solution
  • Case studies
  • Conclusion
slide20

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?
slide21

Revenue Decoupling in Ma.

  • Problem
  • Alternative Solutions
  • Revenue Decoupling
  • SFV
  • Proposed Solution
  • Case studies
  • Questions
  • Conclusion
slide22

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
slide23

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?
slide24

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
slide25

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
slide26

Thank You

`

  • Problem
  • Alternative Solutions
  • Revenue Decoupling
  • SFV
  • Proposed Solution
  • Case studies
  • Questions
  • Conclusion

Questions: cbrucegrubb@gmail.com