August 4, 2008
It's counter-intuitive. But utilities must be rewarded for selling less electricity. It's all in the name of encouraging energy efficiency and reducing air pollution.
The idea is to separate utility rates from their sales volume. Such "decoupling" allows utilities to promote energy efficiency while still recouping their allowable expenses. Under traditional regulatory structures, utility earnings are tied to the volume of electricity and natural gas that customers use. So, even a small reduction in consumption can make a large cut into a utility's profitability. This presents a strong financial disincentive for those companies to push energy efficiency.
Several electric and natural gas utilities are working with their state regulators to reform the way their rates are set up -- in essence, separating the utility's recovery of its fixed costs from the volume of power and gas delivered to customers. In some states, periodic adjustments called "true-ups" can move customers' rates up or down modestly to ensure that utilities recover their authorized fixed costs regardless of fluctuations in energy use. Decoupling would not change that.
"Decoupling allows utilities to profit from doing the right thing," says Steve Heins, vice president of government affairs for Orion Energy Systems in Wisconsin that specializes in energy efficient solutions. "How can we expect investor-owned utilities to sell less of their product without giving them some reward for doing it? Decoupling will become inevitable but it must be properly structured."
Utilities are evenly divided. But at the recent National Association of Regulatory Utility Commissioners' meeting in Oregon, those officials were said to be warm to the idea. That's because energy efficiency can be implemented for a third of the costs it takes to build traditional generation.
According to Paul Waide, senior policy analyst for the International Energy Agency, 22 U.S. states promote energy efficiency through the public apparatus. As such, their per capita consumption is 31 percent less than otherwise -- leading supporters of decoupling to conclude that such projects easily pay for themselves. Some utilities manage their own energy efficiency projects. Others, such as those in Oregon and Wisconsin, are run by independent parties. In Oregon, the public utilities commission has voted unanimously to renew its Conservation Tariff. That tariff breaks the link between a company's earnings and the quantity of energy consumed. The new tariff covers all residential and commercial gas use by customers.
"Since coming on the books in 2002, the Conservation Tariff has proven its value to the public by promoting conservation," says Northwest Natural Gas Co.'s CEO Mark Dodson. "An independent study ... found that it was working well for customers, promoting conservation and stabilizing NW Natural's earnings ..."
Key Characteristics
To be sure, decoupling is not universally embraced. Utilities are working with their state regulatory commissioners to quantify the value of energy efficiency projects. Duke Energy's CEO James Rogers says that utilities which are able to avoid expensive capital build-outs should be wholly compensated for doing so. Companies such as Duke would like to pass through the cost of energy efficiency plans in the same manner they do power plant and transmission expenditures.
The Electric Consumers Resource Council, meanwhile, adds that an improperly devised decoupling system would "disrupt and distort" the core business function of utilities. If ill-founded and energy efficiency programs are allowed to be run by utilities - as opposed to third parties -- it would be an ineffective way to encourage efficiencies. The group, which represents large industrial users, says that under such a regime, utilities would be placed in roles in which they are not well-suited.
"If a utility's earnings are held constant and consumption is reduced, that translates into higher rates for consumers," says John Anderson, president of the resource council. Such efforts must result in reduced energy bills for all consumers, he adds.
While supporters of decoupling say that it is possible for some customers to pay more in the short run, they argue that the concept is ultimately destined to save billions while also helping to drastically cut harmful air emissions. In a carbon constrained society, emissions credits would become a value asset for industrial users.
Eventually, utilities would lead the charge and assist commercial, industrial and residential customers in the effort to cut consumption. In California alone, advocates of decoupling say that the idea -- in conjunction with other energy efficiency measures -- will amount to $10 billion in energy savings over the next decade. The northeast states have furthermore concluded that doubling efficiency investments in the region will radically cut pollutants while saving average consumers $100 per year.
The key to success, supporters say, is for regulators to authorize the recovery of fixed costs regardless of sales. That type of system would provide the subsequent funding needed to implement more energy efficient practices. By the same token, they say that those utilities that don't live up to minimal expectations should be penalized.
The more projects that are executed, the greater effect it will have on demand. Reduced consumption, in turn, should lessen the need to construct an ever-expanding infrastructure. The savings could be passed through to both customers and shareholders. "Instead of increasing profits by increasing sales, utilities will only be able to increase profits by improving performance, specifically by reducing total energy costs and improving reliability and service," says Ralph Cavanagh, senior attorney for the Natural Resources Defense Council.
Setting energy efficiency standards is not without controversy. But, overall, the concept is an effective and relatively inexpensive way to cut energy costs and pollution. Decoupling is one such mechanism. Many states are now trying it out, giving them a potentially powerful arrow in their overall energy arsenal.
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