In a traditional utility regulatory structure, utilities earn more money when they sell more energy to their ratepayers. However, this creates an economically inefficient market: the supplier (the utility) has a direct incentive to oversell the demand side (ratepayer), such that there is no incentive for utilities to provide energy at the lowest cost possible. Decoupling is a regulatory tool that addresses this conflict by severing the tie between increased energy sales and revenues.
Under decoupling, regulators set a target revenue level for utilities and electricity rates automatically adjust if sales are increased or reduced. The rate of return for the utility in a decoupled system is typically based on the number of customers that they sell electricity to, rather than the total amount of electricity sold. This mechanism incentivizes utilities to efficiently use the energy produced or to decrease the overall amount of energy consumption in their territory, while still maintaining a stable flow of revenue.
The first step needed to make this a reality is to grant state utility commissions the authority to implement decoupling for electric utilities. Once this authority is in place, they can work with electric utilities and other stakeholders to determine whether decoupling is appropriate for the local conditions. Close to half of the states have adopted some form of decoupling for their utilities, and efforts in Idaho and Wisconsin offer helpful examples of how it can be implemented and open the door for increased energy savings.
Decoupling, while certainly not a small undertaking, can be beneficial for all parties involved: utilities, customers, and ratepayers when approached the correct way.