Report: "Decoupling" is Transforming the Utility Industry

Half of the U.S. states now recognize that it’s a good thing for consumers to be rewarded with lower utility bills for saving energy but it shouldn’t lead to a lower credit rating for their hometown utility if electricity or natural gas sales decline, or grow more slowly, as a result. 

That’s great progress for an important concept known as “decoupling,” which NRDC has long supported because it allows for periodic tune-ups in electricity and natural gas rates that restore to the utilities – or consumers – any fixed-cost dollars under-recovered or over-recovered due to sales fluctuation when people do the right thing and save energy.

A new report shows that not only had 25 states adopted decoupling for at least one electric or natural gas utility by the end of 2012, the rate impacts for consumers have been “small to miniscule” and in nearly two-fifths of the cases, produced refunds. 

I have written previously about the enormous potential importance of utilities as clean energy investors and facilitators, and about the need to make sure that their business models are consistent with helping their customers use electricity and natural gas more efficiently. 

In particular, I’ve noted the financial health of most gas and electric utilities is tied directly to retail sales, because their fixed costs are recovered through charges based on how much people use. This creates little incentive for utilities to promote energy efficiency or distributed energy resources (small, modular energy technologies that can provide energy where needed) -- or alter long-established rate designs and experiment with new service and price models. 

Decoupling changes that because it helps keep the utilities “whole” when their customers are saving energy (and money) by making positive changes such as weatherizing their homes and businesses, upgrading to more efficient appliances and changing to better light bulbs. Because it’s the cleanest, cheapest energy resource available, efficiency helps avoid dirty power plants and fights climate change.

In her study for the American Council for an Energy-Efficient Economy (ACEEE), the Regulatory Assistance Project, and NRDC, industry expert Pamela Morgan reviewed how many states and utilities had moved to adopt this vital reform over the past decade, how it affected utility rates, and how often regulators combined decoupling with earnings adjustments for the utilities involved (as some have advocated).  She also asked important questions about the future role of utilities, some of which I’ve touched on before. Her most important findings include: 

• As of December 2012, 25 states had adopted revenue decoupling for at least one electric or natural gas utility, involving 49 natural gas utilities and 24 electric utilities. (The totals from just three years earlier were 17 states, 28 natural gas utilities and 12 electric utilities);
• Based on 1,244 separate rate adjustments produced by all the decoupling mechanisms since 2005, Morgan concluded annual rate changes were “small to miniscule” and did not exceed 2 percent for 85 percent of the electric and 75 percent of the gas rate adjustments, with 38 percent involving refunds to utility customers. Put another way, the typical electric rate adjustment under decoupling averaged about seven cents a day (up or down). For natural gas utilities, it was less than five cents a day.
• Overwhelmingly, state regulators have rejected claims that decoupling somehow shifts utilities’ overall attractiveness as investments, and those utilities adopting it should have their authorized earnings cut to compensate. Morgan found no evidence supporting this claim, and determined that almost four-fifths of the 72 regulatory decisions addressing the issue ordered no such reduction.  

Morgan concludes, and I agree, that the debate over decoupling is “not about the money.” Rather, it’s an argument over whether we want our utilities to be about more than maximizing sales of electricity and natural gas. 

For the sake of the planet, we need the trend toward decoupling to accelerate, and not just in the United States. A heartening early sign is the news is the Province of Quebec is the latest jurisdiction to embrace revenue decoupling for natural gas utilities. Quelle bonne idee!