Transcript An Overview of Revenue Decoupling Mechanisms

An Overview of Revenue
Decoupling Mechanisms
Dan Hansen
Christensen Associates Energy Consulting
August 2012
Purpose of Revenue Decoupling

Traditional regulated rates recover fixed costs
through volumetric rates

Provides utility with:
 An incentive to increase usage
 A disincentive to promote conservation and
energy efficiency

Problem: revenues and sales are directly
related

Solution? “Decouple” revenues from sales
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Purpose of Revenue Decoupling (2)

Revenue decoupling removes the link
between sales and revenues, thus making the
utility indifferent to the effects of
conservation

Decoupling does not provide an incentive for
the utility to promote conservation

Utility revenues are typically “recoupled” to
some other factor(s), such as the number of
customers
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Illustrating the Issue

Rates are set by dividing the revenue
requirement by the expected number of
billing units
 The utility is allowed to recover $1 million
 It expects to sell 20 million kWh per year
 Therefore, the rate is:
$0.05 per kWh = $1 million / 20 million kWh
(The rate includes only fixed costs, not variable
energy costs.)
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Illustrating the Issue (2)

Suppose customers conserve energy,
reducing usage by 10 percent
 If the utility sells 18 million kWh instead of 20
million kWh, the utility only recovers 18 million
kWh x $0.05 per kWh = $900,000

Lower sales lead to lower utility revenues
without a commensurate reduction in utility
costs

Utility revenues are reduced if they
successfully promote conservation or energy
efficiency
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Illustrating the Issue (3)

Now add a customer charge (assume
1,500 customers)
Customer Charge
$0 / mo.
$15 / mo.
$55.56 / mo.
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Rate
$0.0500
$0.0365
$0.0000
Shortfall @ 18 Shortfall as a
million kWh
% of Cost
$100,000
10.0%
$73,000
7.3%
$0
0.0%
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Where is Decoupling Used?

Electricity:
 CA, CT, DC, HI, ID, MA, MD, MI, NY, OR,
RI, VT, WI (Pending: DE, IA, MN, NH,
NM, OH, UT)

Natural Gas:
 AR, AZ, CA, CO, DC, IL, IN, MA, MD, MI,
MN, NC, NJ, NV, NY, OR, TN, UT, VA,
WA, WI, WY
Sources:
Electricity: Institute for Electric Efficiency, July 2012
Natural Gas: NRDC, June 2010
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Basic Decoupling Concept

Basic concept of revenue decoupling (RD):
RD Deferral = Allowed Revenue – Actual Revenue

A positive number means the utility underrecovered, and will lead to a future rate
increase

A negative number means the utility overrecovered, and will lead to a future rate
decrease
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Basic Decoupling Concept (2)

Typically every 6 or 12 months, the RD
deferral is rolled into rates as follows:
Rate change from RD = RD Deferral / E(Usage)
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What Decoupling Is Not

Save-a-Watt
 Duke Energy program that provides the utility
with an incentive to reduce usage levels
 Program pays the utility 90% of avoided
generation costs for verified usage reductions

Lost Revenue Adjustments
 Compensate the utility for lost revenues
associated with utility-sponsored conservation
and energy efficiency programs
 May or may not separately compensate the utility
for program costs
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What Decoupling Is Not (2)

Straight Fixed Variable (SFV) Rates
 Recover all fixed costs through fixed charges, such
as monthly customer charges
 Recover all variable costs through volumetric rates
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Revenue per Customer Decoupling



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Most common form of decoupling
Revenue per customer decoupling (RPCD) changes
base revenue with the current number of customers:
Deferralt = Ct x (RPCAllowedt – RPCActualt)
Ct is the number of customers at time t (the “current”
date) and “RPC” refers to revenue per customer
RPCAllowedt can be adjusted according to a formula
(e.g., including inflation and productivity
adjustments)
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Revenue per Customer Decoupling:
Pros and Cons

Pros:
 Provides an incentive to add customers,
which could be consistent with economic
development
 “Recouples” revenues in a comparatively
simple way

Cons:
 Changes in revenues may not be closely
related to changes in costs
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Decoupling Design and
Implementation Issues

Class-specific RD adjustments versus pooled

Which classes to include
 Large C&I may be excluded

Reduce the allowed return on equity (ROE)?

Cap the annual surcharges?

Earnings test?

Ties to specific energy efficiency goals?

Monitoring / reporting requirements
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Arguments for Decoupling

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Removes utility disincentive to promote conservation
and energy efficiency
Removes utility incentive to promote load growth
Does not alter fixed charges, so there are minimal
distributional effects (i.e., does not harm low-use
customers like SFV does)
Retains customer-level to conserve in “standard”
rates
Does not require measurement of DSM load
reductions
Expands the range of conservation activities that the
utility is likely to engage in (relative to LRAs)
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Arguments against Decoupling

“Too broad”: leads to rate changes that far exceed the
effects of utility-sponsored DSM programs

Single-issue ratemaking: focus is only on
conservation

Shifts normal business risks from the utility to its
ratepayers

Provides clear benefit to utility; no clear benefits to
ratepayers

Concern about rate impacts for customers who do
not conserve
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