Unlikely bedfellows, the Edison Electric Institute (EEI) and the Natural Resources Defense Council (NRDC), recently issued a joint statement to state utility regulators on distributed generation and its impacts on utility cost recovery. Commenting in Forbes, Frederick Weston, RAP principal, said the joint statement’s arguments for “non-volumetric compensation are, on their face, an argument for revenue-based regulation, what we now call decoupling, and I am a proponent of it.” Decoupling, a regulatory policy aimed at matching actual revenues with allowed revenue, regardless of sales volume, breaks the link between utility revenues and energy sales.

Mr. Weston warned, however, against decoupling mechanisms that do not protect the customer, including straight-fixed-variable pricing, which makes an electricity bill look more like a cable bill. Under this scenario, customers pay a high, fixed monthly charge for access to the grid, and low volumetric rates for their electricity consumption. “It discriminates against low-volume users and it distorts (dilutes) the economic signal that prices should send,” said Weston.

Instead, he suggests a decoupling approach “in which most or all costs are recovered in consumption (kWh and non-ratcheted kW) charges, but allowed revenues, which reflect the “fixed” nature of non-fuel costs in the short run, are determined according to a non-sales-influenced formula.”

This approach is more effective because, “customers still see the economic costs of their consumption, but utilities are no longer worried about the integrity of their revenue stream. They lose both the threat of revenue erosion from any and all causes—energy efficiency, customer-sited generation, conservation, economic downturns, weather—and the bottom line benefits of higher-than-expected sales,” said Weston. “Moreover, revenue true-ups under decoupling needn’t wait for annual reviews, nor semi-annual or even quarterly, but rather can be handled in “real time,” that is, month to month, so that there’s never a true-up out of time. Baltimore Gas & Electric does it in this fashion.”

RAP’s Revenue Regulation and Decoupling and Designing Distributed Generation Tariffs Well offer detailed guidance on retail rate design and the issues related to net energy metering.