Investments in energy efficiency and distributed generation reduce electric utility retail sales. Regulatory mechanisms that “decouple” utility revenues from sales are intended to help make the utility indifferent to energy efficiency and distributed generation by ensuring the utility is able to collect an allowed level of revenue each year regardless of its sales. However, noticeable and consistent surcharges over time may create the perception of an incorrectly designed or implemented decoupling mechanism. To determine the size of retail rate adjustments associated with decoupling mechanisms and whether they have a tendency towards bill surcharges or credits, we analyzed a large dataset of historical annual decoupling rate adjustments for 21 electric utilities in 11 states between 2005 and 2017. We found that decoupling mechanisms adjusted rates, both up and down, between rate cases, and the majority of those adjustments (54 percent) were small (within a range of -1 to 1 percent). However, we also found that 64 percent of the rate adjustment observations in our sample showed a positive rate adjustment. Importantly, once a surcharge was applied, there was an 86 percent chance that there would be a surcharge in the next year as well. While our analysis did not seek to understand the root causes for such results, some possible factors include the accuracy of revenue requirement forecasts, emerging structural changes in customer use and production of energy, misaligned financial motivation, and other factors that influence sales (e.g., economic recession).
Year of Publication
A journal article published in The Electricity Journal is available here.