The Theory and Practice of Decoupling

Decoupling revenues from sales is an important regulatory option under consideration by regulators seeking to transform utilities from sellers of a least-cost energy commodity to providers of least-cost energy services. This report examines decoupling from three perspectives. First, the authors consider threshold issues for decoupling, including characterization of the ratemaking practices addressed by decoupling which make incremental sales profitable to utilities, the role of rate case frequency in limiting the consequences of this incentive, and finally the existence of other incentives to sell electricity, which are not addressed by decoupling. Second, they examine the operation and performance of decoupling, including the mechanics of decoupling as a between-rate-case modification to the traditional ratemaking process, the ability of revenue-per-customer decoupling versus traditional ratemaking to recover nonfuel costs accurately, and a comparison of the profit implications of various decoupling approaches. Third, they review the rate impacts of decoupling for California`s electric utilities, which have had the longest experience with decoupling.