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

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

6. Problem Alternative Solutions Revenue Decoupling SFV Proposed Solution Case studies Questions Conclusion The Throughput Incentive 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 Sales (% of assumed) Sales (kWh) Rate ($/kWh) Commission- authorized fixed costs ($) Revenue ($)Profits Profits (% above/ (below) assumed) 1001,000,000,000.10$90,000,000$100,000,000$10,000,0000 98980,000,000.10$90,000,000$98,000,000$8,000,000(20) 1021,020,000,000.10$90,000,000$102,000,000$12,000,00020

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

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

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

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

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

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

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

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

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

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

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

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

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

23. Problem Alternative Solutions Revenue Decoupling SFV Proposed Solution Case studies Questions Conclusion Does Decoupling Work in Partially Deregulated States? 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. Problem Alternative Solutions Revenue Decoupling SFV Proposed Solution Case studies Questions Conclusion Summary 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. Problem Alternative Solutions Revenue Decoupling SFV Proposed Solution Case studies Questions Conclusion But, Decoupling ≠ Energy Efficiency Decoupling only removes the throughput incentive Should be paired with other policies to promote energy conservation

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