In
public utility
A public utility company (usually just utility) is an organization that maintains the infrastructure for a public service (often also providing a service using that infrastructure). Public utilities are subject to forms of public control and r ...
regulation
Regulation is the management of complex systems according to a set of rules and trends. In systems theory, these types of rules exist in various fields of biology and society, but the term has slightly different meanings according to context. Fo ...
, decoupling refers to the disassociation of a utility's profits from its sales of the energy commodity. Instead, a
rate of return
In finance, return is a profit on an investment. It comprises any change in value of the investment, and/or cash flows (or securities, or other investments) which the investor receives from that investment, such as interest payments, coupons, cas ...
is aligned with meeting revenue targets, and rates are adjusted up or down to meet the target at the end of the adjustment period. This makes the utility indifferent to selling less product and improves the ability of
energy efficiency and
distributed generation
Distributed generation, also distributed energy, on-site generation (OSG), or district/decentralized energy, is electrical generation and storage performed by a variety of small, grid-connected or distribution system-connected devices referred to ...
to operate within the utility environment.
Ideally, utilities should be rewarded based on how well they meet their customers' energy service needs. However, most current rate designs place the focus on commodity sales instead, tying a distribution company's recovery of
fixed cost
In accounting and economics, 'fixed costs', also known as indirect costs or overhead costs, are business expenses that are not dependent on the level of goods or services produced by the business. They tend to be recurring, such as interest or r ...
s directly to its commodity sales.
In order to motivate utilities to consider all the options when planning and making resource decisions on how to meet their customers' needs, the sales-revenue link in current rate design must be broken. Breaking that link between the utility's commodity sales and revenues, removes both the incentive to increase electricity sales and the disincentive to run effective energy efficiency programs or invest in other activities that may reduce load. Decision-making then refocuses on making least-cost investments to deliver reliable energy services to customers even when such investments reduce throughput. The result is a better alignment of shareholder and customer interests to provide for more economically and environmentally efficient resource decisions.
As an added benefit, breaking the sales-revenue link streamlines the regulatory process for rate adjustments. Contention over sales forecasts consumes extensive time in every
rate case
Utility ratemaking is the formal regulatory process in the United States by which public utilities set the prices (more commonly known as "rates") they will charge consumers. Ratemaking, typically carried out through "rate cases" before a public u ...
. If the sales-revenue link is broken, these forecasts carry no economic weight, so the incentive to game forecasts of electricity sales is removed and rate cases become less adversarial.
While many environmentalists and conservation advocates support decoupling, many consumer advocates representing utility ratepayers have opposed decoupling as it attempts to guarantee revenue levels to utility companies. Decoupling mechanisms reduce a utility company's financial risk from reducing sales, due to conservation, weather and economic conditions. As a result, many consumer advocates have requested and state and federal regulators have required that utility companies profit levels (measured through a return on equity allowance) be reduced to reflect lower risk.
Decoupling plus
Decoupling plus is an economics term for the decoupling of higher profits for energy producers from higher energy use. Through government regulation, the energy producer makes a higher profit when
energy conservation targets are met.
See also
*
De-linkage, a proposed model for development of new pharmaceutical drugs where the profitability of a drug is isolated from its volume of sales
*
Resource productivity Resource productivity is the quantity of good or service (outcome) that is obtained through the expenditure of unit resource.Weizsäcker, E, and Jesinghaus, J. 1992. ''Ecological Tax Reform, Chapter 2: Increasing the Productivity of Natural Resource ...
*
Sustainability accounting
Sustainability accounting (also known as social accounting, social and environmental accounting, corporate social reporting, corporate social responsibility reporting, or non-financial reporting) was originated about 20 years ago and is considered ...
References
{{reflist
Public utilities