1. Wisconsin Public Utility Institute Exploring Revenue Decoupling For The Energy Industry -A Utility Perspective James F. Schott November 6, 2007

2. Objective of Decoupling  To remove the utility’s incentive to increase sales between rate cases and the disincentive to support/encourage energy efficiency

3. Two Fundamental Questions  Do the existing incentives work?  I. e., without decoupling, do utilities try to encourage sales/discourage efficiency?  Are they effective?  Are the “side effects” of decoupling worse than the “cure”?

4. Do Incentives work?  “Neither [Peoples Gas or North Shore] has any history of promoting or designing significant energy efficiency programs for its residential customers.”  Initial Brief of Illinois Attorney General, ICC Docket No. 07-0241, p. 71.  Difficult to prove  No utility wants to admit that it is not a good corporate citizen  Most utilities are already doing some energy efficiency

5. Decoupling: Lite, Full or just right  Decoupling lite  Rates are adjusted to recover lost revenues from verified energy efficiency due to specific programs  Full decoupling  Rates are adjusted to recover actual costs over actual sales volumes (e.g., “formula rates”)  True decoupling  Rates are adjusted to recover authorized margin from last rate case

6. Decoupling light  Pros  Ties “benefits” of decoupling to actual actions of utility or specific programs – a true quid pro quo  Cons  Costly and time consuming to determine savings due to specific programs  Narrow application

7. Full decoupling  Rates are adjusted to recover actual costs over actual sales volumes  “Actual” costs includes return on equity  Pros  Minimizes rate cases  Achieves decoupling objectives  Cons  Essentially a “guarantee” of return on equity

8. True Decoupling  Pros  Achieves decoupling objectives  Continued incentive to control costs  Cons  “Side Effects”

9. Decoupling variations  Fixed Decoupling lite  Adjust rates based on “locked in” agreed annual “energy efficiency”  Weather normalized decoupling  Factor out impact of weather on sales before adjusting rates

10. What are the “side effects”?

11. “Side Effects” of “True Decoupling”  Normalizes for weather  All energy efficiency is recognized  Eliminates need to forecast sales  Including need to determine correct normalization period  “Phantom” side effects  ROE is guaranteed – NOT  No incentive to save costs - NOT

12. Decoupling is good public policy and sound ratemaking. The “side effects’ are either not harmful or immaterial.