1. Decoupling Utility Revenues and Sales: Anti-consumer...anti-poor Presented by: Roger D. Colton Fisher, Sheehan & Colton Public Finance and General Economics National Low-Income Energy Consortium (NLIEC) June 2008

2. Four types of decoupling: Sales (or full) adjustment charge Conservation and load management (CLM) adjustment charge Margin-per-customer (revenue-per- customer) adjustment charge Rate design changes

3. Problems with Sales Adjustment Charge Guarantees a utility its profit. Allows for recovery of reduced sales completely unrelated to efficiency investments. Reduces customer incentive to pursue energy efficiency w/o utility. Ignores matching principle.

4. Sales Adjustment Charge: Two fundamental regulatory problems Purpose of ratemaking is not to allow recovery of particular expenses. –Purpose of ratemaking is to allow a reasonable opportunity to earn return on investment. –For example, postal rate increase does not yield utility rate increase. Sales adjustment charge does not remove disincentive to energy efficiency. –Rate of return is based in large part on growth in earnings. –K = D / P + g (ROE = dividends/price + growth)

5. Problems with C&LM adjustment charge Disputes are almost guaranteed: –what savings have been generated (incentive for utility to over-estimate). –What savings are attributable to the utility program. Removes part (but not all) of disincentive, but creates no affirmative incentive. Creates an incentive to cream skim (and to avoid hard- to-serve customers, high cost efficiency). Classic case of single-issue ratemaking Impedes cost-effectiveness of non-utility efficiency investments.

6. C&LM adjustment charge: Example of lack of matching Energy efficiency reduces consumption to payment- troubled low-income customers. Utility receives lost revenue adjustment based on estimated energy savings. Utility experiences other changes that positively affect earnings but that are not accounted for: –Lower bad debt (but no expense adjustment). –Lower arrears (working capital) (but no expense adjustment). –Higher off-system sales due to freed-up capacity (but no revenue adjustment)

7. Problems with margin-per-customer adjustment charge Allows utility to triple-dip –Utility keeps added revenue through new customer growth. –Utility keeps revenue through higher sales. –Utility is given revenue through lost revenue due to conservation. Margin per customer over-compensates utility for customer growth given decreasing use per customer. Margin per customer looks only at revenue, not at expenses.

8. Customer adjustment charge: Example of triple dipping Utility adopts incentive program to promote increased efficiency of new air conditioners. Utility receives: –New revenues from increased use of air conditioners. –More profit due to increased investment in plant to serve new air conditioners. –Recovery of lost revenue attributable to reduced usage had the new air conditioner been energy inefficient.

9. Problems with rate design changes Reduces risk without reducing rate of return. Regressive: most adverse impact on low- use, low-income customers. –Increases bills by cost allocation –Moves capacity costs caused by high-use (high peaking) customers to low-use usage tiers. Anti-conservation

10. Recommendations Absolute opposition to: –Sales adjustment charge. –Margin-per-customer adjustment charge. –Increased fixed charges. –Increased charges on first usage tiers (multiple ways for this to happen). If a C&LM charge, only allow if ROE is below authorized ROE. Independently operated energy efficiency utility (e.g., Energy Efficiency Vermont). Mandated low-income programs.

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