revenue decoupling: a proposed solution to the utilities’ traditional incentive to encourage...

Revenue Decoupling:

A proposed solution to the utilities’ traditional incentive to encourage

wasteful energy use

Christopher [email protected]

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

Problem

Alternative Solutions•Revenue Decoupling•SFV

Proposed Solution•Case studies

Questions

Conclusion

Energy Conservation

Problem



Questions

Conclusion

Rate Regulation 101

•“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

Problem



Questions

Conclusion

Rate Regulation 101

Traditional approach: Rate = •“Authorized Revenue”

•Divided by•Amount of energy utility expects customers to consume

Problem



Questions

Conclusion

The Throughput Incentive

•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

The Throughput Incentive

Sales (% of assumed)

Sales (kWh) Rate ($/kWh)

Commission-authorized 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

Problem



Questions

Conclusion

Revenue Decoupling

•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

Problem



Questions

Conclusion

Revenue Decoupling

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

Problem



Questions

Conclusion

Revenue Decoupling

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

Problem



Questions

Conclusion

Revenue Decoupling

You’re going to charge me more for

using less?!?!

Problem



Questions

Conclusion

Decoupling Adjustments are Small

Problem



Questions

Conclusion

Straight Fixed-Variable Rate Design

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

Fixed cost charge here

Problem



Questions

Conclusion


Proponents argue SFV makes sense because these fixed costs are incurred on behalf of each customer regardless of usage

Problem



Questions

Conclusion


Opponents dislike SFV because it: •reduces customers’ rewards for reducing energy use

•Can hit people who use less electricity harder

Problem



Questions

Conclusion Decoupling policyElectric and gas decouplingGas decouplingElectric decouplingOther

Decoupling in Practice

Problem



Conclusion

Decoupling in Oregon

•Termed “Distribution Margin Normalization” (DMN)•Applied to one natural gas utility•Initial period 2002-2005

Problem



Conclusion


•Monthly calculations, annual adjustment

•Adjustments were < 1% up or down 2003-2008

Problem



Conclusion


•2005 independent report recommended decoupling be continued

•In 2007, NW Natural and Oregon PUC agreed to continue through 2012

Problem



Questions

Conclusion

Questions facing Regulators

•How often to make rate adjustments?

•Across the board adjustments or by customer class?

•What about the weather?

Problem



Questions

Conclusion

Revenue Decoupling in Ma.

Problem



Questions

Conclusion

Revenue Decoupling in Ma.Cont’d

•Massachusetts Attorney General wanted “consumer protections”:

•exclude effects of weather•“deadband”

•DPU rejected both in favor of full decoupling

Problem



Questions

Conclusion

Does Decoupling Work in Partially Deregulated States?

•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?

Problem



Questions

Conclusion

Summary

•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

Problem



Questions

Conclusion

But, Decoupling ≠ Energy Efficiency

•Decoupling only removes the throughput incentive

•Should be paired with other policies to promote energy conservation

Problem



Questions

Conclusion

Thank You`

Questions: [email protected]

revenue decoupling: a proposed solution to the utilities’ traditional incentive to encourage...

Documents

revenue decoupling questions

authorized revenue

proposed solution

electricity slide

sales slide

process slide

equal slide

traditional rate