Since its formation over a hundred years ago, the electric utility industry in the United States, and the regulatory framework that governs it, has traditionally operated under the core principle that if you sell more electrons, you earn more money. This is also called the “throughput incentive.” It’s the same with businesses from lemonade stands to automobile companies.
However, the energy crises of the 1970s stimulated interest in energy conservation. As the concept of energy efficiency started to take hold over the course of the next decade, the notion that states could break the link between utility sales and revenues through regulation also began to gain currency.
Known as revenue regulation, or “decoupling,” the idea was also seen as a way to increase the efficiency of utility operations, insulate both utilities and customers from the effects of weather and economic cycles, and remove utility disincentives to invest in the customer side of the meter.
In the broadest sense, decoupling is a foundational regulatory approach—one that can and should be supported by additional, complementary policies—that can help ensure utilities are economically efficient, nimble, and acting in ways to better promote the general good.
Today, a rapidly-changing power sector presents additional challenges, and we are reminded that decoupling can help utilities, states, and customers maximize the new opportunities that this transformation presents. Continued drives for energy efficiency, the growth in customer electricity generation, and customer choice suggest that the decoupling can add even more value because it supports these objectives, too. States without revenue regulation mechanisms might do well to consider how decoupling can protect and enhance utilities’ ability to deliver, even in changing times, what customers really want: electricity services.
Been There, Done That
Some states have already embraced decoupling and have adapted a specific version of the mechanism to fit the unique circumstances in their states. Regulators have shown that decoupling is neither a monolithic, nor impossibly rigid policy concept, given that revenue regulation is not a one-size-fits-all solution.
In RAP’s recent publication Decoupling Design: Customizing Revenue Regulation to your State’s Priorities and related webinar, we highlight the flexibility states have and also lay out options and decision points that policymakers may want to consider.
In a related RAP publication on the subject, Revenue Regulation and Decoupling: A Guide to Theory and Application, we demonstrate how states have tailored decoupling specifically for their needs, and offer case studies of a wide variety of different types of utilities operating under decoupled systems.
Who, What, When, Where, How?
When considering revenue regulation, policymakers must first determine who is covered. Pacific Gas and Electric’s decoupling mechanism, for example, covers all customer classes. Idaho Power Company and Baltimore Gas and Electric, in contrast, chose to cover only residential and small general service customers.
Regulators must also decide how to handle rate adjustments. Wisconsin adjusts rates annually through a rate case, while Baltimore Gas and Electric implements small adjustments to prices monthly.
Another question is whether to cap adjustments. Some states do, some don’t. Idaho Power Company has a three percent rate cap, and Baltimore a 10 percent rate cap. Wisconsin stipulated a cap of $14 million per year, and Hawaiian Electric Company has no rate cap at all.
Revenue regulation isn’t cookie-cutter. It’s flexible and it’s been done before, so there are models to choose from. During the gradual but sure power sector transformation now underway, states are trying to make room for innovation and flexibility. Decoupling can help utilities to be aligned with and support evolving customer, societal, and state policy goals.
Photo Credit: Ian Muttoo via Flickr