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“De-coupling” – de-linking profits from sales in the energy utilities


Decoupling sales from volume can help utilities embrace energy efficiency and solar power, while ambitious targets can give them a reason to do so In 1976 I was a rookie attorney with the newly formed Department of the Public Advocate — later abolished by Republican governors Christy Whitman in 1991 and (after brief resurrection under Gov. Jim McGreevey) by Chris Christie in 2008.

One of my first cases was to oppose plans by the state’s electric utilities to encircle New Jersey with a flotilla of “floating nuclear plants” anchored on barges along the coast, including two within sight of Atlantic City and another in Bayonne Harbor.

While these plans may seem absurd in hindsight, at the time many state officials praised the idea of barge-mounted nukes as the only way to meet ever-rising consumer electric needs without polluting New Jersey’s degraded air quality.

In response, we petitioned the state Public Utility Commission — now called the Board of Public Utilities (BPU) — for an order compelling those utilities to invest enough in energy conservation to reduce demand for power, which would eliminate the need for the floating nukes or, for that matter, many land-based power plants, thereby saving ratepayers billions of dollars while also protecting the environment.

Needless to say, the utilities opposed the idea of saving energy on the customer side of the meter as the better way of meeting ratepayer needs, an idea I had picked up from a small band of alternative energy innovators, such as Amory Lovins (author of “Soft Energy Paths”). I can recall the utility witnesses in the PUC hearings testifying that conservation has the effect of “penalizing” utilities and their shareholders. Conserve more, earn less summarized their positions.

And here’s the rub, they were right. This is because traditional rate-base/rate of return regulation — going back to Woodrow Wilson’s era — ties utilities’ profits to the amount of power sold from a fixed set of capital investments (rate base) in power plants, power lines, and other hard assets.

In other words, “the financial health of most gas and electric utilities was tied directly to retail sales because their fixed costs are recovered through charges based on how much people use,” as summarized in a blog by an attorney for the Natural Resources Defense Council (NRDC), one of the premier environmental organizations in the nation.

As a result, utilities could not be blamed for promoting increased sales, even as they paid lip service to saving energy. And they could not be blamed for pushing ever-more-ambitious capital construction programs, such as the ill-fated floating nukes project, which eventually were canceled largely due to mounting technical problems and soaring cost overruns.

Fast-forward to 2014: After all these years there is now a practical way of delinking profits from sales volume and rewarding utilities for investing their dollars — called “patient capital” by PSE&G’s visionary president, Ralph Izzo — in “energy efficiency and renewable energy, notably solar photovoltaic systems.”

“Decoupling” is the name for the process of ending the historic linkage between electric and gas sales volume and the ability of the utility to earn profits on its capital investments in the infrastructure — power plants, wires, poles, substations, and the like. (Note: a decade ago, New Jersey’s electric utilities split off their power generation function into standalone “nonutility” companies that compete for contracts to sell to consumers and deliver through utility power lines.)

As it turns out decoupling is remarkably simple to implement: To de-link profits from sales or “throughput,” the utilities would be allowed to earn a given level of revenues set by the BPU based on the number of customers served, regardless of actual sales to those customers. And if profits fall short of targets set by the BPU or if the utilities over-earn in a given period, the BPU would hold a “true-up” proceeding to reset rates and revenues up or down.

Now for the big question: What is the likely impact on consumers of decoupling revenues from sales? Not much. According to another NRDC report, “25 states had adopted some form of decoupling for at least one electric or natural gas utility by the end of 2012, and the rate impacts for consumers have been ‘small to minuscule.” Moreover in nearly 40 percent of the true-up cases the NRDC studied, the ratepayers received refunds as part of periodic true-ups.

The beauty of decoupling is that it “helps keep the utilities’ profits ‘whole’ while their customers are saving energy,” as the NRDC report summarizes. That’s because there is no longer an economic incentive for utilities to boost power sales and oppose effective energy efficiency and renewable energy programs that would cut into those sales. In fact, with decoupling, utilities will have an incentive to get into the energy-efficiency and renewable energy business, by dispatching crews to install home insulation and building solar projects that could reduce electric power sales.

But “a decoupling mechanism alone” is not enough; “it only removes the utilities’ disincentive to support energy efficiency and solar energy,” according to the Solar Energy Industries Association (SEIA) in a recent posting. “To be most effective in promoting [energy-efficiency and renewable-energy] policies, decoupling should be linked with specific targets and also create rewards for utilities for achieving environmental targets beyond their mandates,” SEIA concludes.

In short, there is a pressing need to couple decoupling reforms with vibrantly pro-energy-efficiency and pro-renewable-energy policies such as those contained in the proposed “Renewable Energy Transition Act” (RETA), which sets enforceable targets and timetables for using energy efficiency and renewable energy to meet 80 percent of New Jersey’s power generation needs by 2050.

With this two-pronged approach — decoupling revenues from sales volume and setting ambitious targets for saving energy and developing solar power — New Jersey can show the nation how to curtail global warming by reducing the pollution emanating from fossil-fuel power plants. It’s also a kind of insurance policy protecting us against the perceived need to build risky power plants like the failed floating nukes efforts of yesteryear.

September 16, 2014 - Posted by | business and costs, USA

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