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Another Side to Decoupling: Share the Gain, Not the Pain

The New Jersey Board of Public Utilities finds incentive programs may be a better way.

Fortnightly Magazine - August 2007

occurred at electric utility systems in New York, California, Washington, Maine, Montana, and Idaho. New York and Washington discontinued these programs with the advent of electric-utility restructuring. The experiments in Idaho, Montana, and Maine proved generally unsuccessful as unforeseen events, e.g., economic turndowns, had unintended and adverse results for customers. Most of the recent emphasis on decoupling has been on the gas utility side, reflecting the large run up in wholesale-gas costs. 7

The decoupling mechanism in Oregon (on Northwest Natural’s system) has been in effect since 2002 and recently was extended (and expanded) through 2009. This program has been touted as a successful example of how such programs can work. It is interesting to note, however, that except for a small-scale existing conservation program, these conservation programs have been undertaken without any active involvement by the gas utility. Instead, the company has been required to transfer its energy conservation programs to a selected independent entity approved by the commission. The Oregon commission also required that the company submit annual integrated resource plans that address both demand-side and supply-side economic efficiencies.

Baltimore Gas & Electric (BG&E) is a utility where a form of decoupling has been in place for several years. The BG&E mechanism was intended primarily to offset the effects of attrition as opposed to a vehicle to promote conservation. Reports are that the program “works” in that it has helped to stabilize revenues between rate cases and has not been burdensome to customers. In that case, the utility initially was required to reduce its base rates to reflect a lower return on equity (50 basis points) in recognition of the lower risk to the utility. 8 Decoupling mechanisms adopted in most of the other states are of more recent origin and no track record exists on the benefits or deficiencies of each program.

Ken Costello, senior institute economist at the National Regulatory Research Institute, in his report on decoupling developments, 9 listed a total of 19 arguments that have been made in favor of rate-design decoupling in proceedings around the country. He also lists a total of 17 arguments that have been made against a decoupling mechanism. He pared these points down to 10 arguments in favor of decoupling and 8 against decoupling that he considered strong arguments.

The arguments posed in favor of decoupling generally are in the category of what it would enable the utility to do. There is the now-familiar argument that decoupling would remove the utilities’ disincentive to promote energy efficiency linked to the hope that, should the utility then promote energy conservation, the results would benefit customers. Another contention is that other alternatives to decoupling are administratively unwieldy (lost revenue mechanisms tied directly to conservation results) or politically unpalatable (shift all costs to the customer charge or take into account declines in use per customer in a base-rate case). Other arguments center around the fact that, for the most part, sales levels are outside the control of the utility and the effects of a given change in sales can have large effects on utilities’