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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

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An Overview of Revenue Decoupling Mechanisms

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  1. An Overview of Revenue Decoupling Mechanisms Dan Hansen Christensen Associates Energy Consulting August 2012

  2. 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

  3. 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

  4. 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.)

  5. 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

  6. Illustrating the Issue (3) • Now add a customer charge (assume 1,500 customers)

  7. 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

  8. Basic Decoupling Concept • Basic concept of revenue decoupling (RD): RD Deferral = Allowed Revenue – Actual Revenue • A positive number means the utility under-recovered, and will lead to a future rate increase • A negative number means the utility over-recovered, and will lead to a future rate decrease

  9. 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)

  10. 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

  11. 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

  12. Revenue per Customer Decoupling • 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)

  13. 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

  14. 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

  15. Arguments for Decoupling • 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)

  16. 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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