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February 13, 2009

Electric Revenue Decoupling Explained

February 13, 2009
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Robert J. Michaels*

It is no secret that the stimulus bill contains both wasteful spending and economically destructive policies. However, one of the bill’s most alarming provisions is little known and difficult to understand: electricity revenue decoupling. Decoupling, another in a long line of anti-consumer energy policies, will force utility companies to raise electricity rates in an attempt to governmentally-mandate consumer conservation.

Currently, most state regulatory commissions grant electric utilities territorial monopolies. The commissions allow utility companies to recover no more than their prudently incurred costs and a “fair” profit to return to investors. The percentage limit means that utilities can only earn more dollars of profit if they invest more heavily in generation and transmission. The regulatory system gives electricity providers an incentive to sell as much power as they can.

Decoupling separates the utility’s revenue from its sales of electricity. If a utility’s conservation programs are successful, it might no longer earn its allowed profit. Under decoupling, the company would generate profits at the consumers’ expense. California introduced decoupling in 1983 and a handful of other states have since joined. Traditionally, electricity utilities make more money when they sell more electricity. Decoupling, on the other hand, rewards utilities for selling less electricity.

Decoupling aggravates well-known defects in the existing regulatory system. Companies’ implicit guarantees have long posed problems in the effort to incentivize utility companies to monitor their costs. If the government eliminates even more downside risk, it will provide shareholders with even surer returns and consumers with even higher electricity bills. Further inequities and perverse incentives abound. If decoupling raises rates per kilowatt-hour actually used, it decreases customers’ motivation to conserve, as they continue to see their bill rise regardless of their efforts.

If federally mandated programs, such as discounts for politically favored industrial customers or mandatory protections for migrating animals, impose costs or cuts revenues, state regulators will not be able to question the utility’s rights to recovery. In some areas utilities already incur substantial costs for activities that bear little relation to the production and distribution of power.

California includes numerous adjustment and balancing provisions in Pacific Gas & Electric’s (PG&E)[1] bills to its customers. These include a “Public Purpose Programs Revenue Adjustment Mechanism” for low income bill relief, as well as some research activities and expenses on renewables. There are also “California Alternative Rates for Energy,” another low-income program, a “Procurement Energy Efficiency Revenue Adjustment Mechanism,” a “Distribution Revenue Adjustment Mechanism,” with an allowance for franchise fees and uncollectibles, and a “Utility Generation Balancing Account.” These and other provisions will add $323 million to PG&E’s approximately $9 billion electricity bills in 2009. An imaginative Congress might invent many more programs that power users will have no choice but to pay for under decoupling, even if their states’ regulators object.

Decoupling rests on the false assumption that consumers use too much electricity and cannot figure out their own ways to conserve. As any of us who have turned off a lamp or put on a sweater know, consumers who want to conserve or save money on electricity have a variety options. This policy is a perfect illustration of unnecessary government intrusion into both the marketplace and American people’s homes.

A more in-depth examination of electric revenue decoupling is here.

*Robert Michaels is Professor of Economics at California State University, Fullerton and a Senior Fellow at the Institute for Energy Research.


[1] The list appears at California Public Utilities Commission, Agenda Draft Resolution E-4217 http://docs.cpuc.ca.gov/published/Agenda_resolution/95143-01.htm


View Comments
  • Edward A Law

    It appears that decoupling is a great incentive for power companies to increase rates and fill the pockets of shareholders; however, once again it is too much power for the federal/state governments. What happened to the free enterprise (Capitalism) that the US is noted for?

    Once again the government is getting involved and the people get gouged whether they conserve or splurge on the use of utilities. The US appears to be heading toward a Socialist State more and more as each day passes.

  • Edward A Law

    It appears that decoupling is a great incentive for power companies to increase rates and fill the pockets of shareholders; however, once again it is too much power for the federal/state governments. What happened to the free enterprise (Capitalism) that the US is noted for?

    Once again the government is getting involved and the people get gouged whether they conserve or splurge on the use of utilities. The US appears to be heading toward a Socialist State more and more as each day passes.

  • Lori Aniti

    The reason why decoupling is being touted is so that utilities will not have the disincentive they currently do to improve the technology of the transmission and distribution system that will allow much greater system efficiency and lower the amount of total energy needed to fulfill customer demand. Under the current rate system, utilities are afraid that with increased efficiency, they will lose some of their sales and thus some of their income. These technology improvements could allow a rate structure that encourages customers to both conserve energy and use more of it during off-peak times when fewer customers are using electricity and fewer generators (the cleaner, low cost ones) are running. This technology allows customers to know how much energy their appliances are using and when, so they can reduce use of “energy hog” appliances, and switch use to less expensive times of day. Currently, the utility has no way of knowing for most customers, who exactly is using energy and when and cannot communicate this to customers. Therefore, they cannot use these rate structures that encourage even more efficiency and peak load management. Still more efficiency savings will come from lowering electricity line losses which means that less generation will be needed to fulfill customer electricity demand. This advanced technology will also allow more intermittent renewable (clean) energy such as wind, roof top solar and fuel cells to connect to the electricity distribution system without causing problems. There are a lot of benefits to updating transmission and distribution technology, however, we need a rate structure that encourages investment in these technology improvements which are currently available and have the ability to greatly reduce the amount of generators needed to deliver electricity demanded by consumers and increase the amount of clean renewable generation.

  • Lori Aniti

    The reason why decoupling is being touted is so that utilities will not have the disincentive they currently do to improve the technology of the transmission and distribution system that will allow much greater system efficiency and lower the amount of total energy needed to fulfill customer demand. Under the current rate system, utilities are afraid that with increased efficiency, they will lose some of their sales and thus some of their income. These technology improvements could allow a rate structure that encourages customers to both conserve energy and use more of it during off-peak times when fewer customers are using electricity and fewer generators (the cleaner, low cost ones) are running. This technology allows customers to know how much energy their appliances are using and when, so they can reduce use of “energy hog” appliances, and switch use to less expensive times of day. Currently, the utility has no way of knowing for most customers, who exactly is using energy and when and cannot communicate this to customers. Therefore, they cannot use these rate structures that encourage even more efficiency and peak load management. Still more efficiency savings will come from lowering electricity line losses which means that less generation will be needed to fulfill customer electricity demand. This advanced technology will also allow more intermittent renewable (clean) energy such as wind, roof top solar and fuel cells to connect to the electricity distribution system without causing problems. There are a lot of benefits to updating transmission and distribution technology, however, we need a rate structure that encourages investment in these technology improvements which are currently available and have the ability to greatly reduce the amount of generators needed to deliver electricity demanded by consumers and increase the amount of clean renewable generation.

  • http://www.greenislandinc.com Herbert A Samuel

    Professor Michaels argues that decoupling “rests on the false assumption that consumers use too much electricity and cannot figure out their own ways to conserve. As any of us who have turned off a lamp or put on a sweater know, consumers who want to conserve or save money on electricity have a variety [of] options.”

    I find this a somewhat disengenious argument. First of all, he sets up a straw man (assumption that consumers “use too much energy”)to knock down. After all: how much is too much? Who decides? Too much for me may be not enough for someone else. Clearly, this is a subjective, values-based judgement and any such assumption can be easily discredited on that basis.

    Of more importance is the next part of his argument; that consumers “who want to” conserve or save money on energy can figure out on their own how to conserve and that they have a wide range of options to do so.

    Both of these assertions are correct, but that’s not really the point. It is a truism that informed people can figure out how to do the right thing, and often have a variety of options for taking action, in a given situation. But the implication that, left to themselves, consumers will actually *do* the right thing, is suspect. It is well known that people often do not take the necessary action, even when equipped with the right information.

    For example: consider the problem of obesity. Most people in the developed world know how to lose weight or keep their weight down, but (according to World Health Organisation data) people all over the world are getting fatter.

    Then, there is the question: how many consumers “want to” conserve? Does everyone want to? Should everyone want to? Energy conservation has long been accepted as a good thing for society in general. In free societies (and constrained by the law) people can “want to” do anything. But if incentives are available to increase the number of people who actively want to conserve, that would seem to be a good thing as well.

    So the issue comes back to the problem of providing the right incentives for action. In this case, incentives need to be provided to both sides of the electricity consumption equation: the supplier side and the consumer side. Whether decoupling is the most effective supply-side policy or not is debatable, but it seems clear that a laissez-faire approach has not worked in the area of energy conservation.

  • http://www.greenislandinc.com Herbert A Samuel

    Professor Michaels argues that decoupling “rests on the false assumption that consumers use too much electricity and cannot figure out their own ways to conserve. As any of us who have turned off a lamp or put on a sweater know, consumers who want to conserve or save money on electricity have a variety [of] options.”

    I find this a somewhat disengenious argument. First of all, he sets up a straw man (assumption that consumers “use too much energy”)to knock down. After all: how much is too much? Who decides? Too much for me may be not enough for someone else. Clearly, this is a subjective, values-based judgement and any such assumption can be easily discredited on that basis.

    Of more importance is the next part of his argument; that consumers “who want to” conserve or save money on energy can figure out on their own how to conserve and that they have a wide range of options to do so.

    Both of these assertions are correct, but that’s not really the point. It is a truism that informed people can figure out how to do the right thing, and often have a variety of options for taking action, in a given situation. But the implication that, left to themselves, consumers will actually *do* the right thing, is suspect. It is well known that people often do not take the necessary action, even when equipped with the right information.

    For example: consider the problem of obesity. Most people in the developed world know how to lose weight or keep their weight down, but (according to World Health Organisation data) people all over the world are getting fatter.

    Then, there is the question: how many consumers “want to” conserve? Does everyone want to? Should everyone want to? Energy conservation has long been accepted as a good thing for society in general. In free societies (and constrained by the law) people can “want to” do anything. But if incentives are available to increase the number of people who actively want to conserve, that would seem to be a good thing as well.

    So the issue comes back to the problem of providing the right incentives for action. In this case, incentives need to be provided to both sides of the electricity consumption equation: the supplier side and the consumer side. Whether decoupling is the most effective supply-side policy or not is debatable, but it seems clear that a laissez-faire approach has not worked in the area of energy conservation.

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