Utility Decoupling Approaches and Terminology

There are three generalized approaches to rate decoupling that have been followed by a number of U.S. states, commonly categorized as:

• Full Decoupling,
• Partial Decoupling, and
• Limited Decoupling.

Regulatory frameworks in the United Kingdom (UK) are also based on a decoupling strategy. Decoupling is playing an increasing role in utility rate making to promote wider energy efficiency and conservation objectives.

Full Decoupling

Full decoupling, the simplest form of decoupling, protects a utility’s revenue from any deviation between actual and expected energy sales. Any deviation in the utility’s energy sales —e.g., increased investment in energy efficiency, unexpected deviations from normalized weather, change in regional economic activity—regardless of cause, will have no impact on the near-term revenue of the utility. Deviations, regardless of their source, will ultimately result in an adjustment (called a “true-up”), but will typically occur periodically (e.g. annually or at the end of a rate case period), and be applied to future revenues. The most common form of full decoupling is “Revenue per Customer” (RPC) decoupling, where allowed revenue requirements between rate cases is changed only as the number of customers served changes.

Full decoupling provides the following outcomes:

• Utilities applying full decoupling are indifferent to changes in energy sales, regardless of cause. In eliminating the “throughput” incentive revenues are no longer a function of sales, and  profits cannot be affected (positively of negatively) by changes in sales. Only changes in expenses will impact profits.
• Full decoupling eliminates a strong disincentive to invest in energy efficiency. By itself, however, it does not provide the utility with a positive incentive to invest in efficiency.

Partial Decoupling

Partial decoupling protects only a portion of the utility’s ability to realize and collect revenue based on deviations of actual from expected sales. When applying partial decoupling, any variation in sales will result in a partial true-up of utility revenues (e.g., 90 percent of the revenue shortfall may be recovered).

Limited Decoupling

Under limited decoupling, only pre-specified causes of variations in energy sales will result in adjustments to revenue. Examples of theses limited approaches could include:

• Variations due to Weather are subject to the true-up where the actual year revenues (sales) are adjusted for their deviation from weather-normalized revenues. This is simply a weather normalization adjustment clause.
• Successful implementation of energy efficiency programs could, in this context, result in reductions in sales and revenues from which the utility would not be insulated—that is, all else being equal energy efficiency can adversely affect the company’s bottom line.
• Variations due to some or all other factors excluding weather (e.g., economy and end-use efficiency) could be included in a true-up process. In this instance, the utility and, necessarily, the customers will bear the revenue risks associated with changes in weather.
• Some combination of the above could be applied on a utility specific basis..

Limited decoupling often requires the application of more complex mathematical calculations than either full or partial decoupling and these calculations depend in part on data whose reliability are sometimes vigorously debated among a variety of stakeholders. Even more important than the manner in which limited decoupling is calculated is the fundamental question that the choice of approaches to decoupling asks:

• How are risks borne by utilities and consumers under decoupling, as opposed to traditional regulation?
• What are the expected benefits of decoupling, and what, if anything, will society be giving up when it replaces traditional price-based regulation with revenue-based regulation?