The Basics of Decoupling: A Superior Solution to the Throughput Incentive
Traditional revenue regulation motivates utilities to increase sales and to resist any measures that would reduce sales—this is also known as the throughput incentive. Yet this simple equation works at cross-purposes with public policy and energy efficiency goals. Jim Lazar spoke with the New Hampshire Energy Efficiency and Sustainable Energy Board about the benefits of implementing revenue regulation, or decoupling, to ensure that utilities have a reasonable opportunity to collect approximately the same revenues that they would under conventional regulation, independent of changes in sales volume, while continuing to send customers economic price signals. Mr. Lazar outlines the pressing considerations for regulators structuring a decoupling mechanism, such as the frequency of rate adjustments, whether to include industrial customers, whether to apply decoupling to non-power costs or all costs, and what to do with the earnings above and below the target return on equity. Properly implemented, decoupling can lower the financial burden placed on consumers and still provide the utility with more stable earnings and lower business risks.