For some time, energy utilities in Minnesota and elsewhere have been evolving to keep pace with customer expectations and increased targets for energy savings and renewable energy. And as utilities continue to seek the right balance between energy efficiency and a robust infrastructure, traditional business models for cost recovery are increasingly challenging and may no longer fit the (monthly utility) bill. Enter decoupling.
Designed with customers and conservation in mind, decoupling — otherwise known as “Utility Revenue Decoupling” (but that’s just so nerdy!) — is a regulatory tool that lessens the impact that changes in utility energy sales have on utility revenues.
For an investor-owned utility like Xcel Energy or CenterPoint Energy, regulators traditionally set rates so the natural gas or electricity forecasted to be sold to customers would allow utilities to recover all costs for providing reliable service as well as reasonable shareholder returns. The rate is based on a pretty simple formula: forecasted costs divided by forecasted sales. Whenever a utility sells more than was forecasted, however, it recovers more than regulators deemed necessary for reliable service, which allows for greater shareholder returns. With rates set this traditional way, utilities are motivated to sell more in order to earn more.
Revenue decoupling limits that motivation. Under decoupling, regulators settle on the specific amount that a utility must recover with regard to the fixed costs of providing reliable service and reasonable shareholder returns, and then they build a rate to hit that specific target. But when sales deviate from the forecast (as they always do), the decoupled rate is adjusted up or down to account for the deviations. Rather than a utility over or under collecting, it recovers only the revenues that regulators have determined to be needed for operations and returns. No more, no less.
By “decoupling” utilities’ forecasted sales from necessary revenues, we limit their motivation to sell more, freeing them up to focus on energy conservation without doing damage to their bottom lines. Decoupling makes the fixed cost portion of utility revenues more predictable, protecting them from dips in energy consumption. And when utilities can count on a more predictable income, they no longer need to sell more to earn more.
In Minnesota, CenterPoint Energy was one of the first utilities to dig into decoupling. About three years ago, the Minnesota Public Utilities Commission approved CenterPoint’s request to start a multiyear pilot program. Annual revenue decoupling adjustments under that program will start showing up on customers’ bills this fall. The adjustments will grant CenterPoint fiscal flexibility to help its customers cut energy use without cutting into revenues that pay for high-quality service. Xcel Energy is also engaged in a decoupling pilot program of its own right now, with related adjustments headed for monthly bills next summer. And other Minnesota utilities are watching closely.
So what does this mean to all of us Minnesotans who are served by utilities that embrace decoupling? For starters, research by our friends and allies Fresh Energy and the Natural Resource Defense Council suggests that utilities employing decoupling are already putting more money into energy efficiency and achieving greater energy savings. The tool works.
As a decoupling leader among utilities, CenterPoint’s approach affirms Minnesota’s national track record as a frontrunner with regard to regulatory frameworks and business models to promote clean energy achievements. This summer CenterPoint is working to inform its customers about the plans to move forward with decoupling.
Specific to Minnesota’s hundreds of thousands of utility customers, revenue decoupling:
- Stabilizes utility revenues, ensuring our utilities have resources to invest in their infrastructure and provide us service;
- Aligns customer desires for energy saving with our utilities’ requirement for a reliable energy system;
- Clears a path to key investments in carbon reduction that we need utilities to make; and
- Preserves opportunities for customers to keep cutting costs — which means you can still save money by saving energy.
Increasingly guided by goals for energy stewardship that reward efficiency and cut carbon, the utility world is shifting away from systems that reward utilities for selling as much energy as possible. In replacing outdated business models, we’ll need balanced approaches that help us continue to limit environmental impacts while also allowing utilities to adapt to new customer and community expectations in economically sustainable ways. And although the “old model” (i.e., reliant on sales, disincentivizing efficiency) remains popular, we’ve seen an upswing nationally from just 40 gas and electric utilities using decoupling in 2009 to 73 adopting it by 2013.
It seems likely that our next-generation utility models will be service-based, rather than sales-based —“serve well to earn well” will eventually supplant “sell more to earn more.” Decoupling offers a transition tool to those new utility business models, and it will help ensure that CenterPoint, Xcel Energy, and all other utilities that embrace this tool continue to help their customers reduce energy use.
Although it is catching on here and nationally, separating energy revenues from usage is still a fairly fresh idea and represents a notable change for our region. There are bound to be questions. I hope you’ll join us for the August 24 Twitter chat to chime in and ask yours.
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Mike Bull is director of policy and communications at the Center for Energy and Environment. This post originally appeared on CEE’s blog.