For more than a century, the utility price model has remained the same. The more energy consumers use, the more money the utility makes. Wasted energy was pure profit. But now, more than 100 years later, customers are all about saving energy and cutting down on their energy bills. With widespread knowledge of energy efficiency and a large number of green products on the market, the traditional utility is at risk of losing profits.
The idea of changing the utilities' price model has been gaining widespread traction. By 2012, a reported 25 states had already adopted revenue changes for at least one electric or natural gas utility. In total, about 49 natural gas and 24 electric utilities in the United States have opted to participate in decoupling, according to a study by the Natural Resources Defense Council, the American Council for Energy-Efficient Economy and the Regulatory Assistance Project. These numbers have almost doubled since the last study in 2009, when a reported 28 natural gas and 12 electric utilities opted for revenue decoupling.
What is decoupling and why do utilities want it?
In an effort to avoid the risk of profit losses and support energy efficiency initiatives, many utilities have implemented revenue decoupling procedures. Essentially, decoupling removes the link that makes a utility's profits dependent on how much energy it sells. Decreased utility revenue, due to lower energy sales, makes it harder for the company to cover its fixed costs, such as power line maintenance or meter reading. Without its expected funding, a utility could have a difficult time providing the reliable service its customers deserve. For these reasons, it's not likely that a utility would promote programs that help customers save energy.
As more energy efficient appliances and eco-conscious consumers flood the market, many utilities are looking to decouple their profits in favor of a financial cushion. In the most common form of decoupling, utilities that offer energy-efficiency programs are allowed to adjust energy rates to make up for lost revenue. This way, a utility can generate the income it needs to operate regardless of how much energy its customers consume.
The process of decoupling is simple. If customers consume less energy than the local utility's projected revenues, it can raise customers' rates, as approved by the governing public utility commission, to make up for the difference. On the other hand, if customers use more energy than the utility was expecting, they will be reimbursed through a decoupling adjustment mechanism on their next energy bill.
How does this affect deregulated states?
Many states have opted to modify their energy industry through deregulation legislation. Deregulation separates the supply and delivery of energy. Utilities retain the responsibility to transport energy and maintain the infrastructure of power lines and pipes capable of delivering it. However, retail energy suppliers were introduced to the market, competing with local utilities to sell natural gas and electricity to consumers.
Like all other areas of the United States, deregulated utilities have to worry about customer energy efficiency eating away at their profit margins. But deregulated utilities could be even more at risk of sales lost to the competition from retail energy suppliers. A lack of customers and minimized energy use leave deregulated utilities particularly vulnerable.
A deregulated utility has fixed costs that cover maintenance to the infrastructure and facilities necessary to transport energy to homes and businesses. It's true that deregulated utilities are allowed to make a small profit from delivering energy, which it does for all customers regardless of which supplier they use. However, when these utilities sell energy supply, they can only charge what the public utility commission approves, much of which is based on the cost of wholesale energy and the utility's maintenance expenses.
The hang-up occurs between what a utility estimates its sales will be and what they actually are. For example, a utility may predict that it will sell energy to 5 million people and buy enough energy to supply its customers. The utility commission would look at that estimation, compared to the utility's operating costs such as the price it paid for wholesale energy and determine a rate that's fair for consumers.
However, if the utility only sells energy to 3 million people there is a huge gap between its sales and expenses. It purchased more electricity than it needed and ultimately charged a rate that's too low to cover its expenses.
Decoupling could serve as the biggest benefit to these utilities, allowing them to meet profit projections regardless of their customer base or energy sales through an adjustment charge in each billing cycle. If the utilities' sales are higher than its expenses, customers will be reimbursed. But if the utility has lower sales than anticipated, the utility can charge all of its customers a small fee to recoup its operating costs.
It's important to note that purchasing energy from a retail provider doesn't necessarily harm your utility, since it can't make a profit from the sale of energy. It's the possibility of an unanticipated number of consumers leaving the utilities supply that makes it vulnerable. However, the act of revenue decoupling could protect the utility from an unforeseen drop in energy usage, when it's likely to purchase more energy than it sells. It can also help add a cushion for additional utility maintenance expense — such as a natural disaster destroying dozens of power lines.
Texas is possibly the only deregulated state where decoupling wouldn't benefit the electric utilities. When the state deregulated its energy market in the early 2000s it stripped away the utilities' ability to sell energy altogether. Instead, retail energy providers sell energy, and the local utility delivers it. Without the ability to sell electricity in the first place, decoupling a Texas utility's revenue from its energy sales would be pointless. However, it's important to note that only the electric market in Texas has been deregulated. Natural gas utilities in the state could benefit from decoupling.