Lost Revenue Recovery

Lost revenue recovery is a ratemaking mechanism designed to allow a utility to recoup declines in sales attributable to measurable and verifiable energy efficiency (EE) programs. It removes utilities’ disincentive to reducing sales through energy efficiency programs. Residential and small commercial ratemaking typically places a large portion of fixed cost recovery in the volumetric ($/kWh) energy charge. That means that lost revenues can lead to a utility recovering less than its commission-approved revenue requirement. This is one of the primary roadblocks preventing utilities from engaging in aggressive energy efficiency programs. Decoupling and lost revenue adjustment mechanisms (LRAM) are the two most common mechanisms for recovering lost revenues. Full decoupling completely severs the tie between utility sales and revenues. LRAM determines how much of a utility’s revenues are lost due to the implementation of EE programs and allows recovery through a rate adjustment. While both methods eliminate the disincentive to promote EE, LRAM is targeted to only recover revenue losses due to EE programs.

How they work

The cost of an energy efficiency program can be divided into three parts: program costs, opportunity costs and lost revenues. The program carries implementation costs: advertising, marketing, personnel, etc. Opportunity costs are the other ventures that could have been funded if the money had not been allocated to energy efficiency programs. For instance, more dollars might have been available for capital expenditures such as plant and line upgrades – if the money had not been spent on energy efficiency programming. And lost revenues are the sales that would have come from customer consumption if the utility had not implemented the energy efficiency program to help the customer reduce usage.

Typically, program costs are easily identifiable and recoverable. For a utility, recovery of opportunity costs means placing investments in energy efficiency on a level playing field with investments in supply-side resources, with an opportunity to earn a fair rate of return.

The third category, lost revenue recovery has become one of the most common methods for traditionally regulated states to make utilities whole after they implement energy efficiency programs. One common mechanism for lost revenue recovery is through a tracker or surcharge. The tracker is calculated to recover revenues lost in between rate cases due to measurable and verifiable reductions in usage due to utility sponsored energy efficiency programs.

Program Cost Recovery
SOURCE: http://www.epa.gov/statelocalclimate/documents/pdf/background121307.pdf

AEP position

AEP is a strong supporter of lost revenue recovery as it is verifiable and non-speculative. Lost revenue recovery makes the utility whole, relative to where it would have stood financially without energy efficiency programs. It does not, however, unduly reward the utility for declines in electricity sales unrelated to such programs.

Issues In Electricity

Issues In Electricity

Lost Revenue Recovery

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