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.
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