Revenue Decoupling:

1. Revenue Decoupling: A proposed solution to the utilities’ traditional incentive to encourage wasteful energy use Christopher Grubb cbrucegrubb@gmail.com Energy Law, 2010

2. 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

3. Energy Conservation • Problem • Alternative Solutions • Revenue Decoupling • SFV • Proposed Solution • Case studies • Questions • Conclusion

4. Rate Regulation 101 • Problem • Alternative Solutions • Revenue Decoupling • SFV • Proposed Solution • Case studies • Questions • Conclusion • “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

5. Rate Regulation 101 • Problem • Alternative Solutions • Revenue Decoupling • SFV • Proposed Solution • Case studies • Questions • Conclusion • Traditional approach: Rate = • “Authorized Revenue” • Divided by • Amount of energy utility expects customers to consume

6. The Throughput Incentive • Problem • Alternative Solutions • Revenue Decoupling • SFV • Proposed Solution • Case studies • Questions • Conclusion • 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

7. The Throughput Incentive

8. Revenue Decoupling • Problem • Alternative Solutions • Revenue Decoupling • SFV • Proposed Solution • Case studies • Questions • Conclusion • 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

9. Revenue Decoupling • Primary difference with traditional rate-setting process: • Process established where regulator regularly compares authorized revenue with amount of revenue actuallycollected from a utility’s customers • Regulator periodically adjusts rates to make sure the two are equal • Problem • Alternative Solutions • Revenue Decoupling • SFV • Proposed Solution • Case studies • Questions • Conclusion

10. Revenue Decoupling • Problem • Alternative Solutions • Revenue Decoupling • SFV • Proposed Solution • Case studies • Questions • Conclusion • 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

11. Revenue Decoupling • Problem • Alternative Solutions • Revenue Decoupling • SFV • Proposed Solution • Case studies • Questions • Conclusion • You’re going to charge me more for using less?!?!

12. Decoupling Adjustments are Small • Problem • Alternative Solutions • Revenue Decoupling • SFV • Proposed Solution • Case studies • Questions • Conclusion

13. Straight Fixed-Variable Rate Design SFV recovers fixed costs by putting monthly fixed cost charges into customers’ energy bills • Problem • Alternative Solutions • Revenue Decoupling • SFV • Proposed Solution • Case studies • Questions • Conclusion Fixed cost charge here

14. Straight Fixed-Variable Rate Design • Problem • Alternative Solutions • Revenue Decoupling • SFV • Proposed Solution • Case studies • Questions • Conclusion Proponents argue SFV makes sense because these fixed costs are incurred on behalf of each customer regardless of usage

15. Straight Fixed-Variable Rate Design • Problem • Alternative Solutions • Revenue Decoupling • SFV • Proposed Solution • Case studies • Questions • Conclusion • Opponents dislike SFV because it: • reduces customers’ rewards for reducing energy use • Can hit people who use less electricity harder

16. Decoupling in Practice • Problem • Alternative Solutions • Revenue Decoupling • SFV • Proposed Solution • Case studies • Questions • Conclusion Decoupling policy Electric and gas decoupling Gas decoupling Electric decoupling Other

17. Decoupling in Oregon • Problem • Alternative Solutions • Revenue Decoupling • SFV • Proposed Solution • Case studies • Conclusion • Termed “Distribution Margin Normalization” (DMN) • Applied to one natural gas utility • Initial period 2002-2005

18. Decoupling in Oregon • Problem • Alternative Solutions • Revenue Decoupling • SFV • Proposed Solution • Case studies • Conclusion • Monthly calculations, annual adjustment • Adjustments were < 1% up or down 2003-2008

19. Decoupling in Oregon • 2005 independent report recommended decoupling be continued • In 2007, NW Natural and Oregon PUC agreed to continue through 2012 • Problem • Alternative Solutions • Revenue Decoupling • SFV • Proposed Solution • Case studies • Conclusion

20. Questions facing Regulators • Problem • Alternative Solutions • Revenue Decoupling • SFV • Proposed Solution • Case studies • Questions • Conclusion • How often to make rate adjustments? • Across the board adjustments or by customer class? • What about the weather?

21. Revenue Decoupling in Ma. • Problem • Alternative Solutions • Revenue Decoupling • SFV • Proposed Solution • Case studies • Questions • Conclusion

22. Revenue Decoupling in Ma. Cont’d • Problem • Alternative Solutions • Revenue Decoupling • SFV • Proposed Solution • Case studies • Questions • Conclusion • Massachusetts Attorney General wanted “consumer protections”: • exclude effects of weather • “deadband” • DPU rejected both in favor of full decoupling

23. Does Decoupling Work in Partially Deregulated States? • Problem • Alternative Solutions • Revenue Decoupling • SFV • Proposed Solution • Case studies • Questions • Conclusion • 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?

24. Summary • Problem • Alternative Solutions • Revenue Decoupling • SFV • Proposed Solution • Case studies • Questions • Conclusion • 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

25. But, Decoupling ≠ Energy Efficiency • Problem • Alternative Solutions • Revenue Decoupling • SFV • Proposed Solution • Case studies • Questions • Conclusion • Decoupling only removes the throughput incentive • Should be paired with other policies to promote energy conservation

26. Thank You ` • Problem • Alternative Solutions • Revenue Decoupling • SFV • Proposed Solution • Case studies • Questions • Conclusion Questions: cbrucegrubb@gmail.com