Only Sunshine with Decoupling?

As discussed in class, decoupling is a method to get utilities away from having an incentive to sell more electricity towards being revenue neutral about the sell of electricity.  Former President Bill Clinton endorses this approach and believes the federal government should mandate it.  Before coming back to school, I worked for a utility that used decoupled rates in 3 of our 6 jurisdictions.  After reading up on decoupling and experiencing it at my utility, I started to see that decoupling is not all good and no bad; there is some down side to the method.

First, let’s define again what decoupling is.  In general, decoupling is when utilities get paid per customer instead of per kWh sold.  At my utility we calculated this by looking at the previous year and the revenue we made per customer and applied that rate going forward.  In our case, it was a very easy calculation to determine and implement.

In class we discussed the major benefit of decoupling, i.e. utilities being revenue neutral, I want to discuss one other positive and a few arguments against.  As a benefit to utilities, decoupling protects from a downturn in usage.  The first summer I was at my utility, we had to increase rates by 75% in one jurisdiction.  Usage dropped per customer there, and in turn, we lost revenue.  Utilities make money on a very thin margin and decoupling stabilizes the utilities revenue from big drops and big gains.  In was no coincidence that the next year we pitched decoupling in our rate case in that jurisdiction.

Decoupling does have some downsides.  First, utilities have to file more rate cases to adjust the decoupled rate so that they can earn their required rate of return on capital.  Rate cases are expensive.  The utility has to hire expert witnesses, lawyers for their side and for the consumer side, and spend months getting ready and defending them.  At my utility, they had not had a rate case for 6 years as the market deregulated and then hired five new people, out of a 15 person department, in a matter of months to prepare for one.  Some of rate case costs are passed on to customers with a rate increase; the rest is absorbed by the utility which hurts the bottom line and thus may make them file a new rate case earlier.  Utilities could build the decoupled rate such that it would adjust over time to reflect increasing costs, weather, and economic conditions; but this mechanism could become outdated, or not reflect the true cost, and thus would have to be changed in court.  Second, others have wondered if decoupling is even needed to promote conservation.  The Florida Public Service Commission believes that the current conservation programs in place in their state are working to reduce usage without the costs and burden of applying a new rate structure and the administrative complications that come with it.    In the end, I believe that decoupling is good platform to utilities to promote conservation, but utilities need to be aware of the costs.

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