Utility Incentive Reform: Decoupling

Adjusting the way utilities collect revenue is essential to achieving large increases in energy efficiency investments across the region. In many states, utilities’ earnings are linked to their volume of sales, so they make more when usage increases and lose money when customers conserve. Environmental groups like ENE, utilities, business leaders, consumer groups, and state officials to develop decoupling mandates that remove this disincentive to utility investment in efficiency programs.

Background

Traditionally, the formula for compensating utilities for delivery services has tied their revenues (and earnings) to the number of units of electricity (kWh) or gas (Mcf) used by consumers. This...
[Read full background]

Utility Incentive Reform: Decoupling

Adjusting the way utilities collect revenue is essential to achieving large increases in energy efficiency investments across the region. In many states, utilities’ earnings are linked to their volume of sales, so their revenues increase when customer usage increases but decrease when customers conserve. Decoupling removes this disincentive to utility investment in efficiency programs by allowing distribution utilities to earn no more and no less than an amount approved by the state’s public utility commission. ENE currently participates in rate cases and similar proceedings to advocate decoupling in Connecticut, Massachusetts and Rhode Island.

 

When implemented properly, decoupling is a win-win for utilities and consumers. Because decoupling makes utility revenues neutral to changes in customer use, it enables the utilities to make investments in strong efficiency programs that help customers reduce their energy usage. This translates to savings for customers, reductions in emissions, and a slight price reduction for all customers. .

 

By aligning utilities’ and consumers’ interests through decoupling, states can take full advantage of demand-side resources and their co-benefits–including greenhouse gas emissions reductions, lower energy costs, and decreased imports of fossil fuels, which spurs in-state and regional economic growth and new jobs. (See ENE's report: Energy Efficiency: Engine of Economic Growth.)

 

Decoupling mechanisms are also an important feature of the sweeping energy reforms currently taking place in the Northeast. Massachusetts' Department of Public Utilities issued a decision requiring decoupling for all gas and electric utilities. This decision complements the energy procurement reforms embodied in the Green Communities Act of 2008 and the state's effort to take advantage of clean and demand-side resources. (More about the Green Communities Act and MA Energy Reform.)


Rhode Island’s 2010 Act Relating to Public Utilities and Carriers – Revenue Decoupling accomplishes three key policy reforms that remove barriers to investing in cost-saving energy efficiency, including instituting decoupling for the state’s utility. (More about Rhode Island Energy Reform)


Decoupling for all of the state’s electric and natural gas distribution utilities is mandated in Connecticut’s comprehensive energy reform legislation, but it has not yet been fully implemented. So far, despite the statutory mandate, the Department of Public Utilities Control (DPUC) has only approved full decoupling for United Illuminating on a two-year pilot program basis, pending annual review. ENE continues to be active in dockets before the DPUC to fight for decoupling for Connecticut’s other electric and gas distribution utilities.