Utility Revenue Decoupling

Local Market
Energy Efficiency

Challenge: Under standard rate structures, utility companies have a strong incentive to increase electricity sales. The traditional system causes utility revenues to be dependent on the amount of electricity that is sold and delivered to customers. Because energy efficiency and distributed energy generation can lower customers’ energy demand and thus a utility’s sales, this structure can create a disincentive for utilities to establish energy efficiency programs.

Solution: State regulators should consider enacting a decoupling policy to encourage energy and cost savings. Under decoupling, regulators set a target revenue level for utilities. If electricity sales are reduced due to energy efficiency or distributed energy generation, electricity rates automatically adjust without a lengthy or expensive rate case process. This mechanism can keep utilities on track to meet their revenue requirement and reduce the volatility in their earnings. Because a utility’s profits are “decoupled” from its sales, decoupling reduces the disincentive to implement energy efficiency programs.

Examples: In 2009, the Oregon Public Utilities Commission approved a decoupling mechanism for Portland General Electric. This updated structure allowed both efficiency program spendings and savings to skyrocket. Based on data from 2003 and 2014, the utility increased its average annual expenditures by 156 percent and its average annual program savings by 82 percent.

Approved in 2007, Idaho Power Company’s decoupling policy only applies to residences and small commercial businesses that consume 2,000 kWh or less per month. Between 2002 and 2014, the utility’s annual average energy efficiency savings and expenditures increased by over 400 percent.