Ratemaking for Conservation: The California ERAM Experience

The Electric Rate Adjustment Mechanism (ERAM), adopted by the California Public Utilities Commission for the major investor-owned utilities in the state, represents a major departure from traditional rate-of-return ratemaking. ERAM removes the anti-conservation bypass of ratemaking by ensuring the utility will fully collect its authorized revenue requirement irrespective of the level of sales. Over or under collections of revenues accrue to a balancing account and are amortized into future rates. This mechanism protects the utility from the risk of sales deviating from expectations for all reasons. Shielding the utility in this way can confound other policy goals which rely on the utility facing incentives other than those created by ERAM.