The issue
Decoupling is defined as a separation of revenue requirements from sales volume.
Full decoupling is a ratemaking framework in which utility revenues are separated from electric sales. This may be accomplished by placing all a utilities fixed costs into a customer charge by rate class, or through continued use of a volumetric ($/kWh) charge with a periodic rate adjustment mechanism that keeps utility revenues steady. Income is predictable but the model offers no flexibility to the benefit of either the utility or the consumer. At the other end of the spectrum is traditional rate design where rates are set during a base case and utility income is subject to considerable volatility as consumption and costs fluctuate without an adjustment mechanism.
How we got to this point
Today, the electric utility industry faces a future that compels policy-makers to question the suitability of traditional cost-of-service ratemaking as a tool for achieving public policy objectives. Decoupling has become a fashionable regulatory construct offered as a solution for overcoming the perceived disincentive for utilities to promote aggressive energy efficiency initiatives that might reduce sales and thus profits. .
Decoupling Definitions
- Full decoupling: Separation of revenues from sales volume. Decoupling insulates a utility’s earnings collections from any deviation of actual sales from expected sales.
Several forms of full decoupling are in use, and definitions vary widely across the industry and among policymakers and stakeholders.
In general, decoupling methodologies involve separating a utility’s revenues from sales volumes. This may be accomplished through an increased customer charge that contains nearly all a utility’s fixed costs or through a periodic rate adjustment mechanism that raises or lowers rates to keep utility revenues stable.
- Limited decoupling: Only specified causes of variations in sales result in adjustments. For instance, only weather-related variations may be subject to true-up.
- Partial decoupling: Insulates only a portion of the utility’s revenue collections from deviations of actual sales from expected sales. For instance, 90% of a revenue shortfall may be recovered.
What the stakes are
The “greening” of the electric utility industry has caused many analysts to reassess the “throughput incentive” – the link between sales and revenues. In a world where we need to encourage consumers to use less electricity, the throughput incentive definitely discourages promotion of energy conservation. Yet, the industry is not flocking to decoupling – here’s why:
- Other less drastic frameworks may achieve the same results as decoupling in the energy efficiency arena, and do so without a total revision of the nation’s regulatory architecture.
- Decoupling could have significant negative impacts on a company’s approved rates of return.
- Decoupling weakens the price signal for reduced energy usage. When usage declines rates are increased to maintain level revenues, negating a portion of the savings a customer would experience on their bill.
- By increasing the utility’s reliance on a customer charge for revenues, decoupling could create cost-shifting that disadvantages low consumption customers.
