Missouri regulators looking into decoupling utility revenues and profits

While Missouri’s largest utility intimates that it may terminate its efficiency program, the state’s utility regulator has begun considering whether to institute a “decoupling” policy that could address utility concerns about shrinking power sales.

Last week, the Public Service Commission formally opened a proceeding to consider decoupling sales from profits, and it issued an invitation for feedback on the matter.

“There’s a general trend of flat to decreasing load for all utilities,” said the commission’s retiring chairman, Robert Kenney. “But they still need to provide service and to make capital investments. We have to look at different ways of regulating our utilities.”

Decoupling is in effect, among gas and/or electric utilities, in about two dozen states, including a few in the Midwest.

Broadly speaking, decoupling has been more warmly embraced by purveyors of natural gas than by electric companies, largely because gas consumption began to fall in recent years when electricity use was continuing to climb, according to Martin Kushler, a senior fellow with the American Council for an Energy-Efficient Economy (ACEEE).

Decoupling has some supporters in Missouri, among people who don’t always agree on matters of utility regulation.

Ashok Gupta, a senior energy economist in Kansas City with the Natural Resources Defense Council, sees it as a way to keep utilities invested in encouraging their customers to reduce their use of power and natural gas through efficiencies.

“We’re excited about this happening,” he said. “It’s one of our highest priorities. In order to really encourage energy efficiency, we have to deal with this issue of the impact of sales on revenues.”

At Kansas City Power & Light, Chuck Caisley, vice-president for marketing and public affairs said, “In a world where energy efficiency and distributed generation and things of that nature are becoming more important and more prevalent, we think decoupling is a very wise thing to look at, and see if it makes sense.”

In an emailed statement, Ameren Missouri said that it “remains interested in discussing decoupling and other policy approaches that could support greater energy efficiency efforts in Missouri.”

There’s no real consensus as to exactly what decoupling means and how it would be structured. But the need, according to Gupta, is to ensure utilities that they will not lose money as a result of encouraging efficiency on the part of their customers.

Utilities establish their profits in advance in rate cases. When one comes up, Gupta explained, the utility establishes an amount of revenue it thinks it needs to earn. It then projects how much electricity or gas it thinks it will sell, and then calculates how much it will need to charge per unit. The state regulator must approve of the scenario.

If, as the months go by, demand exceeds the projection, the utility would need to adjust the per-kilowatt hour rate down so as not to earn more than the amount approved by the regulator. If sales drift below projections, the utility would need to hike the per kilowatt hour charge. Either way, the idea is to put the utility back on track to earn the amount of revenue approved by the regulator.

“Once you do that,” Gupta said, “the utility will be indifferent to energy efficiency. Many jurisdictions have gone to it, and it appears be a lot cleaner and easier formula for folks to understand.”

Since the recession, said the ACEEE’s Kushler, “We’ve seen many more electric utilities willing to consider true decoupling, because there’s less feeling out there that they’re going to win on the upside.” Utilities haven’t always been required to cut their prices when revenues come in over projections, according to Kushler.

“Another factor is that many states have put in place more aggressive energy-efficiency requirements,” he said. “If a state tells a utility it must save 1 or 1.5 percent, decoupling helps management because they are protected on the down side.”

So has decoupling reduced utility resistance to sales losses due to efficiency programs?

“I would say yes,” Kushler said. “I base that on many conversations with people in the utility industry as well as data we look at.”

States with only the efficiency standard on average reduce electricity use by 0.9 percent, Kushler said, while in states that also have decoupled their electric companies, electricity use is reduced on average by 1.4 percent

“We find by far the most effective state policy in producing efficiency savings by utilities has been the energy efficiency resource standard (EERS), which is setting a target for utilities to meet. In terms of other policies that are available, I’d say decoupling is next most effective. We see states with decoupling have higher savings versus those that don’t.

“The best-performing states tend to have a strong EERS and a strong decoupling policy to help utilities deal with that. A little sugar to go with the medicine – it helps utilities to be more comfortable living with an EERS.”

One thought on “Missouri regulators looking into decoupling utility revenues and profits

  1. Decoupling seems to be a win:win with efficiency goals, but economically a guaranteed total $ return is same a Treasury note, which has a much lower % rate than what utilities are typically earning now. Any decoupling agreement should include a significant % rate of return reduction to coincide with the elimination of risk.