Articles by Sean Casten

If it walks like a tax and quacks like a tax … then it’s called cap-and-trade?

In an otherwise solid post, David said something that made me cringe: In a cap-and-trade system where the pollution permits are auctioned, the money goes to gov’t, and the gov’t decides what to do with it. Poorly paraphrasing James Joyce: no and my heart was beating like mad and no I said no I NO. […]

Don’t make too much of current energy prices; they are disconnected from fundamentals

There is a fair amount of hand-wringing over the recent collapse in energy prices which — while academically interesting — is largely irrelevant to larger macro forces. Here then a quick observation that is critically important and horribly misunderstood throughout our current energy, environmental, and economic conversation: current energy prices have very little to do […]

AEP wants rate increase to make up for revenue loss

Remember when Mike Morris, CEO of American Electric Power, said this?

[he] said "I'm not a decoupler. If my revenues go down, they go down."

The West Virginia arm of his utility is now asking for a series of rapid rate increases: 18.5 percent this year, 14.5 percent next year and 13.2 percent in 2011.

Why, pray tell?

In part, because:

The company had predicted it would sell $248.5 million in power to other electric utilities between July 2008 and this June, but those sales have almost disappeared. Revenue generated from those sales -- electricity unused by AEP customers -- keeps rates down.

So if AEP's revenues go down, they go down. But then they file a three-year, double-digit rate increase to make up for lost ground. "Not a decoupler" indeed.

Why electric utilities like coupling

Writing from the Eco:nomics conference last week, David noted that at least one utility CEO is pretty down on decoupling:

Michael Morris, CEO of American Electric Power ... said "I'm not a decoupler. If my revenues go down, they go down."

David appropriately questioned whether AEP is really so agnostic with respect to falling revenues. But Morris does raise a larger, quite accurate point. Namely, many electric utilities aren't decouplers. Given the prominence that decoupling has come to play in many state and federal policies, it's worth taking the time to understand why.

Decoupling is often framed as a way to get rid of the utility disincentive created by energy efficiency. With large fixed costs, small reductions in revenue can have big impacts on equity returns. This has historically made many utilities work really hard to incentivize inefficient use of their services, from special all-electric rates to exit fees, declining-block pricing schedules, and standby tariffs. (Don't worry about the jargon -- the unifying feature of all of the above is that they penalize any customer who has the temerity to invest in energy efficiency.) It has also made the regulated electricity industry the biggest opponent of sensible energy use.

Eliminate the "coupling" of revenues and equity returns -- so the theory goes -- and you eliminate utility hostility to efficiency.