Who Cares About the Consumer?

Electricity consumers beware! The so-called-stimulus bill includes provision for something called “decoupling.” E&E Daily reports:

Also included in the final version is a requirement that governors who want additional state energy efficiency grants ensure that their state regulators guarantee revenue to utilities to support efficiency programs.

State regulators and consumer advocates strongly opposed the provision, saying it ties regulators’ hands and is not the best tool to promote efficiency.

The National Association of Regulatory Utility Commissioners said many regulators cannot assure that “decoupling” requirements will be met. “These ambiguous conditions will create confusion and legal uncertainty and will likely delay or preclude the release of these critical funds,” NARUC said in a statement. “This benefits neither the States the utilities, nor, most importantly, the citizens they serve.”

“Decoupling” is a mystifying-sounding name for an economically terrifying concept. This is how it is described in government/regulatory jargon:

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.

Now, in English: the laws of supply and demand mean that if the quantity demanded goes down, you sell less of the product you supply. In energy supply terms, this means that if conservation works, energy utilities see their profits decline, because in general they are regulated so tightly that they cannot raise their prices, which is the usual response to declining demand. Therefore, if there is a policy goal of increasing energy conservation, then utilities are likely to stand in the way, because their profits depend on selling more energy; they are unlikely to install technologies that reduce the need for energy, for example. Accordingly, the link between quantity sold and profits must be broken, or “decoupled.” This is normally done by regulating rates such that if more energy is sold, the marginal rate goes down and, if less is sold, the marginal rate goes up.

Now, to some this may sound like supply and demand at work, but it is actually a market manipulation aimed at achieving a policy goal. In fact, it most resembles a supply-side reform designed by someone who doesn’t understand supply-side economics. The utility remains regulated and the incentive structure is designed such that the utility is more inclined to respond to the regulator rather than the consumer. When profits are essentially guaranteed at a certain level, the utility will be more likely to spend money pleasing the regulator and delivering service improvements to that body than to the consumer. The consumer may end up paying more money for less electricity and the utility and regulator will both be happy. The dangers here are obvious; insulating the supplier from the consumer is a terrible idea.

Here is a useful paper from the Electricity Consumers Resource Council that raises several further objections to decoupling, which it says is a blunt instrument. They are:

  • 1. Decoupling Promotes Mediocrity In The Management Of A Utility.
  • 2. Decoupling Shifts Significant Business Risk From Shareholders To Consumers With
    Only Dubious Opportunities For Net Increases In Consumer Benefits.
  • 3. Decoupling Eliminates A Utility’s Financial Incentive To Support Economic
    Development Within Its Franchise Area. This Includes The Incentive To Support The
    Well Being of Manufacturers And Their Workforce.
  • 4. Revenue Decoupling Mechanisms Tend To Address ‘Lost Revenues’ And Not The Real
    Issue, Which Is Lost Profits.
  • 5. The First And Most Important Step Regulators Can Take To Promote Energy
    Efficiency Is To Send The Proper Price Signals To Each Customer Class.
  • 6. Several States Have Successfully Used Alternative Entities—Including Government
    Agencies—For Unselling Energy. This Creates An Entity Whose Sole Mission Is To
    Promote Energy Efficiency, And Retains A Separate Entity Whose Responsibility Is To
    Efficiently Sell And Deliver Energy.
  • (Not sure about that last one, but if there’s a policy goal to reduce energy consumption, that’s certainly a better way to go about it than decoupling).

    A true supply-side reform would actually reduce regulation to the basics (reasonable safety requirements etc) and thereby not only allow but encourage the best conservation measure of all – demand-based pricing. This would allow rates to increase and decrease not according to some bureaucrat’s assessment of whether a policy goal is being met, but hourly, according to whether the system is being over- or under-used. Less energy will be consumed at peak times, thereby reducing the need for back-up energy generation, and more will be used at off-peak times, reducing the amount of wasted energy then. Overall, as long as the consumer responds to the price signal, consumers will probably use less electricity but also see their bills drop, while the utilities will save in lower production costs. Decoupling-style rate regulation actually stands in the way of this win-win goal.

    Image by Skagit Information Management Systems, used under Creative Commons License.