Decoupling for electricity and gas utilities: frequently asked questions

State Public Utility Commissions around the country are expressing increasing interest in energy efficiency as an energy resource. However, traditional regulation may lead to unintended disincentives for the utility promotion of end-use efficiency because revenues are directly tied to the throughput of electricity and gas sold. To counter this “throughput disincentive,” a number of States are considering alternative approaches intended to align their utilities’ financial interests with the delivery of cost-effective energy efficiency programs. “Decoupling” is a term more are hearing as a mechanism that may remove throughput disincentives for utilities to promote energy efficiency without adversely affecting their revenues.

In its July 14, 2004, resolution supporting efficiency for gas and electric utilities, the National Association of Regulatory Utility Commissioners (NARUC) resolved “to address regulatory incentives to address inefficient use of gas and electricity” (NARUC, 2004). In doing so, NARUC found that regulators are confronted with questions about what ratemaking mechanisms would be most effective in achieving commission objectives, satisfying the needs of utilities, and providing the greatest benefit to ratepayers. Decoupling represents a departure from common regulatory practice, and States that are considering decoupling should approach this with appropriate care. For States considering decoupling, this paper is intended to provide an introduction and answer some of the most frequently asked questions, and to help determine if and how decoupling might be used.