Electric Revenue Decoupling Explained

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.