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A Consumer Advocate's View: Decoupling and Energy Efficiency

Two sides of the same coin.

Fortnightly Magazine - June 2006

the barriers to utility participation in energy efficiency. Under revenue decoupling, the regulatory commission establishes a utility’s revenue requirements to ensure that the company can recover its fixed costs plus a reasonable return.

Several approaches can accomplish this objective. 10 For example, in a revenue-per-customer decoupling approach, the revenue requirement is then transferred into a revenue-per-customer amount. If, at the end of the year, the company under-collects on its weather-normalized, per-customer revenues, a surcharge is added to the customer’s bill to make up the difference. This approach protects customers from compensating a utility for lost revenues associated with a warm winter, or with customers leaving a service territory. It also maintains the utility incentive for economic development.

Upon hearing about revenue decoupling, a typical—and understandable—customer reaction is, “You mean I am going to pay the utility for not using gas?” Yes, but that decoupling creates a “win-win” solution because the customer still saves money and the utility still has the opportunity to recoup its revenue requirements. Striking a balance between customers and the natural- gas companies is important in making these programs sustainable, and is the best way to ensure customer savings in the long run (see Table 1).

Table 1 is premised on the fact that we are compensating a natural-gas company only for its lost revenues associated with its distribution service that already have been approved by the state commission. By approving a decoupling mechanism, the utilities gain a better opportunity to recover their commission-authorized revenues and nothing more. Decoupling does not increase rates above that already established revenue level. 11 Moreover, the distribution service under today’s rates represents approximately only 20 to 30 percent of a customer’s whole bill, because in most states, residential customers either can choose their natural-gas supplier, or the gas cost is a straight pass-through on which the company is not supposed to make a profit. Thus, while customers are paying essentially the same amount in revenues for distribution services (20 to 30 percent), they are saving on 70 to 80 percent of the bill through reduced supply costs. In the chart, the average customer who participates in energy efficiency will save $44.25 a year, due both to reductions in the customer’s consumption and an estimate of a conservative 5 percent decrease in commodity costs as a result of regional participation in energy efficiency.

Distribution Benefits

Decoupling benefits the natural-gas distribution companies by reducing their risk of not recovering their revenue requirements. It only should be permitted as part of a comprehensive energy efficiency program in which there is a commitment to spend at least 1 to 2 percent of revenues on hard-wire energy-efficiency programs.

No more than 5 to 10 percent of an energy-efficiency budget should be spent on customer education. Customers understand that with the high cost of gas, they need to conserve. Advertising dollars should not be spent to remind customers to turn down the thermostat and put on an extra sweater. Instead, those dollars should promote the actual programs of which customers can take advantage. Publicize the specific rebates—or whatever the