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Opinion: Decoupling Breaks the Mold of Utilities’ Business Model

Utilities no longer have an incentive to oppose strategies that stress energy efficiency over the sale of power

potter
Credit: Amanda Brown
R. William Potter

With each new warning of the catastrophic impacts of global climate change and sea-level rise -- including reports of the rapid melting of a massive Antarctic glacier -- more attention is paid to what must be done to prevent whole cities disappearing, Atlantis-like, beneath an advancing ocean.

“Goodbye,” Jersey Shore. “So long,” Atlantic City. “Hello,” beachfront property in Princeton -- or something like that.

One key reform that’s long overdue in New Jersey is “decoupling,” ending the traditional link between public utility profits and steadily increasing energy sales. Another way to think of this is as “throughput,” the “rent” utilities charge for transmitting kilowatts of electricity or therms of gas through utility power lines and natural gas pipelines.

Under the traditional model for ratemaking going back a century or more, energy utilities have a powerful economic disincentive against investing in or supporting policies that favor increasing reliance on energy efficiency and renewable energy instead of electric generating stations . The more electrons a utility sells or that pass through its power lines, the greater the likely profit. Conversely, the more successful an energy efficiency or renewable-energy program, the lower the sales of raw energy and the lower the profit.

In a decoupling reform model, state regulators at the Board of Public Utilities (BPU) would establish a specific “revenue requirement” that would not vary regardless of the net amount of sales. If the utility collects more than authorized, then it would have to refund or credit the excess back to consumers during an annual or biannual true-up proceeding. Or if the utility “under recovered” then it would be entitled to more revenue in a follow-up time period.

So why hasn’t New Jersey followed the lead of 25 other states as diverse as California, Idaho, and Minnesota that have implemented decoupling? There appear to be two main objections, neither of which is persuasive.

First, there is the question of what will be the rate impacts on consumers? This is an issue sure to rouse the ire of the office of the state ratepayer advocate, which seems to find fault with every reform measure or necessary investment strategy for promoting more investment in energy efficiency or renewable energy or in making the state more resilient to storms, such as Hurricane Sandy. The short answer to this question is that rate impacts have been minimal in states that have decoupled. The regular true up process sees to that.

Second, some skeptics have challenged the lack of evidence that decoupling actually leads to more energy conservation and solar energy development. A recent article in the Electricity Journal gives the lie to that concern.

The authors of the article, “The Link Between Decoupling and Success in Utility-Led Energy Efficiency,” examined the before and after data in three states, California, Idaho, and Oregon . What they found was compelling empirical evidence that decoupling works. Not only does it protect ratepayers, but also it incents utilities to invest far more of their “patient capital” -- a term PSEG’s president Ralph Izzo coined to describe utilities taking the long view over short-term returns -- in efficiency and renewables.

For example, prior to decoupling, Idaho Power Co. expended $4 million annually in energy-efficiency and renewable-energy development. After decoupling its investment rose to $21 million -- an increase of 425 percent. As for demonstrated energy savings, these were even more impressive. Before decoupling the utility programs were saving 25,000 megawatt-hours; after decoupling this figure rose to 133,000 mWh, a 438 percent change for the better.

Similar before/after gains were seen at Portland General Electric. Prior to decoupling the Oregon utility spent $24 million on efficiency improvements; after decoupling, this already impressive amount jumped to $62 million, an increase of 156 percent.  And as for energy savings, the utility programs were conserving 152,000 Mwh which jumped to 278,000 Mwh, an increase of 82 percent after revenues were decoupled from sales.

In the Golden State, where energy efficiency and renewable energy were already impressive, Southern California Edison increased conservation spending from $101 million to $255 million, a 152 percent jump in support for saving energy after decoupling. This led to an 80 percent increase in documented energy savings, going from 537,000 mWh to 970,000 mWh, an increase of 80 percent.

To be sure, decoupling is not a panacea. Mostly, it eliminates or reduces long-standing incentive for utilities to oppose innovative programs investment strategies that favor saving power over producing or transporting energy.

Even with decoupling, much-needed political leadership is still required to advance the pace of energy efficiency and renewable energy, such as the enactment of the Renewable Energy Transition Act (RETA). This legislation mandates substituting conservation and solar for 80 percent of our production and transmission needs by 2050. RETA has twice passed the state Senate, and now awaits action in the Assembly before facing an uncertain fate on the desk of Gov. Christie.

With this kind of a win-win track record, what is New Jersey waiting for? Consumers are protected by a regular true-up process; they also receive the economic benefits of saving energy over producing it through solar power . These include reduced wholesale electric rates -- which translate into reduced retail rates -- as solar substitutes for high cost peak-load power purchases on the sunniest and hottest days of summer.

Most importantly, with decoupling New Jersey can once again show leadership in the global campaign to save planet Earth, or at least to do our share in maintaining its habitat for the threatened and endangered species known as Homo sapiens, especially those residing in low-lying coastal areas that are sure to be underwater if current warming trends are not stopped, and fast.

R. William Potter is a partner in the Princeton-based law firm Potter and Dickson. The views expressed are his own and do not necessarily reflect the views of the firm or any client.

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