Aim higher, reach further.

Less Demand, Same Great Revenue

With decoupling, utilities can promote efficiency and not fear losing money


The Journal Report

  • See the complete Energy report.

Now states are trying to get past this stumbling block with an idea called decoupling. It usually works like this: Utilities start programs to promote efficiency, such as helping consumers upgrade to more-efficient appliances. States let the utilities make up some of the lost revenue if consumers use less power. For instance, states might let utilities raise rates if their revenue falls below a certain point, or charge a flat monthly fee to cover some of their costs.

Gaining Strength

Currently, at least a dozen states, including New York, North Carolina and California, have decoupling measures in place, while 26 others -- from Maine to Idaho and Nevada -- are reviewing or implementing them. The efforts will likely gather strength under the Obama administration, which has indicated it will strongly back efficiency efforts. A provision of the economic-stimulus bill would require states to take steps to decouple electricity rates if they want certain federal grants. The rule faces considerable opposition from some utilities and state officials who think grants and decoupling should be separate.

Still, utilities are generally warming up to decoupling because it offers them protection at a tough time. Electricity usage is already falling, due to the recession and weather fluctuations -- and decoupling helps utilities make up for the lost revenue. It wasn't designed to do that, of course, but since it's difficult to pinpoint the cause of lower demand, decoupling plans usually end up covering more than was intended.

"We're at a critical moment," says Ralph Cavanagh, a senior attorney and co-director of the energy program for the Natural Resources Defense Council in San Francisco, a promoter of decoupling measures. "The prospect of flat to declining sales has profound consequences for utilities," and it's forcing them to confront the new reality of lower per capita use.

Historically, utility rates have been set high enough to cover expected costs, based on past experience or projections. When revenue falls short due to mild weather or a bad economy, utilities have had to bear it until rates were adjusted or conditions improved.

California was one of the first states to embrace decoupling, three decades ago, as a way to buy peace with utilities that otherwise might have opposed tougher appliance and building standards.

Today, decoupling takes several forms. The simplest method guarantees utilities that if they promote efficiency, they will be compensated with appropriate rates that cover fixed costs. Sometimes, this guarantee is enough to strengthen a utility's credit ratings.

Some states add other types of incentives to get utilities to promote efficiency. California, for one, is allowing utilities to spend $2 billion of ratepayer money on energy-efficiency programs -- and is offering them up to $450 million in rewards if they run the programs well. For instance, the utilities are supposed to demonstrate that their efforts motivated customers to use less power.

Harry Campbell
Boosting Efficiency

Other states are also using a mix of methods. Idaho, for example, is two years into a three-year test of a decoupling program with Idaho Power, a unit of IdaCorp. Once a year, the utility can raise residential and small-business bills up to 3% if its revenue fails to cover $188 million in certain fixed costs. But if the utility collects more than that amount, within certain guidelines, customers get a credit on future bills.

So far, it collected a little too much the first year and slightly less than it needed the second year. "I'm happy it looks like there aren't any glitches, and it's doing what was intended," says Ric Gale, vice president of regulatory affairs for Idaho Power, which has 480,000 metered accounts. "We're starting to see a drop" in energy use, "which is what we want."

In addition, the utility gets rewarded if it satisfies goals for construction of EnergyStar homes in its territory. If the percentage of housing starts meeting this standard exceeds 7% in 2007, 9.8% in 2008, and 11.7% in 2009, Idaho Power is eligible for $120,000 in incentive pay, drawn from ratepayer bills.

To motivate builders, the utility is offering a $400 payment for each home built to EnergyStar standards, which include using efficient insulation, windows and appliances. The payments come from ratepayer bills. "It's not a lot of money, but we wanted to put a toe in the water to test the mechanism," says Mr. Gale.

Marsha Smith, Idaho utility commissioner, says she thinks the program is "working extremely well in that it's increased the company's enthusiasm and commitment to energy efficiency."

Meeting Resistance

Other forms of decoupling have met opposition. One controversial method, for instance, covers some or all of a utility's annual costs through a flat monthly service fee charged to each customer.

Utilities sometimes prefer this approach because it's simpler than methods like Idaho's -- and they typically don't have to give money back if they collect more than they need. But some consumer advocates regard the system as regressive because it levies the same fee on poor households that use little energy as on wealthy ones that use lots of electricity or natural gas.

Consider the situation in Ohio, which is implementing this method. Under the plan, customers of Duke Energy in Cincinnati will see a monthly fee for gas service jump to more than $25 in June from $6 in 2008, in addition to a charge based on the amount of gas consumed, to make up for reduced gas usage. At other Ohio gas-distribution utilities, the service cost will jump to as much as $18 from about $5, plus the charge for gas consumed.

The monthly fees are "anti-conservation and a step in the wrong direction," says Janine Migden Ostrander, the state consumers' counsel. She thinks it's better to have consumers pay for each unit of energy they use, with per-unit costs rising as people consume more, so they see direct savings for reducing use.

Duke Vice President Ted Schultz, who manages the company's energy-efficiency programs, says gas utilities have been rolling more of their costs into fixed fees "because volumes have been going down quite dramatically" in recent years and fees ensure that utilities' costs are covered. What's more, the structure accomplishes "a basic objective of decoupling, which is to remove disincentives for efficiency" on the part of utilities.

Ms. Ostrander's office has failed in attempts to have the method repealed, but it reached a settlement in a case involving Columbia Gas Co. NI -1.81 % Outside consultants will analyze the consumer impact of the monthly fees, and Ms. Ostrander's office will be able to ask the utility commission to reconsider its decision based on the new data.

Meanwhile, in January, Duke's electricity business implemented a program that allows it to get reimbursed by the state if it loses revenue for encouraging energy efficiency. For example, if the utility helps a family install a heat pump that cuts electricity use, it gets to recover lost revenue for three years of the heat pump's expected 15-year lifespan.

—Ms. Smith is a Wall Street Journal staff reporter in San Francisco.

Write to Rebecca Smith at

Show More Archives

Popular on WSJ

Editors’ Picks