This is the fifth in a five-part series exploring the details of the Lieberman-Warner Climate Security Act. See also part 1, part 2, part 3, and part 4.

I close out this series with one small, specific thing that Lieberman-Warner gets wrong — not necessarily because it’s the biggest or most important thing it gets wrong; rather, because it illustrates the challenge faced by big and complicated legislation: it’s really hard not to mess up the little stuff. Not out of malice, necessarily, but simply because it’s hard to get that much right. And sometimes — as in this case — the little things you get wrong can have big consequences.

When all is said and done, good government policy isn’t that much different from good human resources policy. If your employer makes it clear to you how your actions convert into your salary, you tend to work well together. On the other hand, if your employer gives you a 10-page incentive compensation plan with individual, department-wide, and corporate-level targets, bonus points for how many team-building sessions you go to, credit for attending various training seminars … you get my point.

In a nutshell, that’s the crux of the problem with Lieberman-Warner. Rather than starting simple and adding on complexity only as needed, it starts really complicated and virtually ensures that lots of those little details are wrong, misdirected, and/or in conflict with one another. In this final post, I’ll look at just one of those details: utility decoupling.

Decoupling 101

The idea behind utility decoupling is a good one. Led by the good folks at The Regulatory Assistance Project, it is a policy idea designed to fix the fact that the interests of a regulated utility (namely, selling more energy) conflict with the public interest (namely, energy conservation). Enter decoupling, which at its core is simply an algebraic reformulation of the way that utilities get paid so that their revenues are “decoupled” from their volumetric sales. Done perfectly, utilities then become essentially agnostic with respect to sales and therefore no longer have any incentive to act against the public interest.

(By way of background, existing utility rate schedules are rife with really bad ideas — from discounts for “all electric service” provided to customers who agree to replace their efficient gas heaters with inefficient electric heaters, to special discounts to anyone who agrees never to cogenerate their own heat and power. The fact that utilities have an incentive to ask for such rates is all the evidence one needs that the system is broken.)

On balance, decoupling is a good thing. But — like most things in public policy — the details are pretty important. For example, there’s one really easy way to decouple: simply convert all your customers’ variable (e.g., $/kWh) rates to fixed (e.g., $/month) rates. Presto! Utility revenues are decoupled. But on the other hand, you’ve just given your customers absolutely no incentive to conserve energy — and worse, an incentive to use as much energy as possible, since on the margin, every extra unit they use is free. Bad as that sounds, I have actually sat in meetings where electric utilities suggested that would be the best way to decouple.

Another detail: While a decoupled utility no longer feels pain when kilowatt-hour sales fall, that doesn’t necessarily mean that they have any incentive to encourage conservation. The best decoupling models I’m aware of combine decoupling with performance incentives so that utility profits can increase as their customers’ energy efficiency rises. But such approaches are the rare exception. More common is simply to decouple, shifting utilities from one of hostility to efficiency to one where they just don’t give a damn. Directionally, I suppose that’s positive, but it’s far from ideal.

There are many more details, but the important point is that details matter.

Why this matters to Lieberman-Warner

Tucked in the allocation section of the Lieberman-Warner bill is this line:

EPA [is directed] to allocate 2 percent of that year’s [Emissions Allowance] Account to states that have adopted “decoupling” regulations for any electric and natural gas utilities in the state. Decoupling policies enable energy utilities to recover just as much money for investments in demand reduction measures as they recover for investments in satisfying demand.

Details matter. Details are not here. So if a state shifts their customers to fixed monthly electric bills, thereby removing any incentive to conserve energy (and undoubtedly driving up CO2 emissions in the process), we’ll give them a prize.

Now maybe you argue that this $/month bill is so clearly stupid that it wouldn’t happen. But let’s skip to Subtitle D of the bill, which says the following:

EPA [is directed] to allocate 9 percent of that year’s [Emissions Allowance] Account to the load serving entities that have a regulatory or contractual obligation to deliver electricity to retail consumers. EPA is directed to distribute the allocated allowances to each individual load serving entity in proportion to the amount of electricity that the entity sells.

(Subtitle E provides mirroring language for natural gas utilities.)

In fairness, the utilities are only permitted to use these proceeds to mitigate the economic impacts on low- and middle-income energy consumers and/or to promote energy efficiency on the part of their consumers. But even still, this is a rather bizarre bit of logic. States have incentives to decouple. Utilities get pollution allowances as a function of how much energy they sell … which in turn they can use either to mitigate energy costs or promote energy efficiency.

My head hurts just thinking about how one would respond to such a convoluted set of incentives. But going to $/month payments doesn’t seem like such a bad option if I’m a utility executive. My state-level regulators like it because they get some money. My top-line revenue growth likes it because it’s likely to increase kWh consumption, and therefore increase my allowance (not to mention letting me go back to the commission and increase the $/month payment). And my PR department loves it because they get to use proceeds to do all sorts of good deeds in the community.

I’m not guaranteeing that will happen, of course, nor suggesting that this is the only way we can decouple. But the fact that such behavior is even incentivized under a bill that is supposed to be encouraging GHG reduction is bizarre. And indicative of the many details that Lieberman-Warner gets wrong.

As I said at the start of this series, our goal ought not be to throw out Lieberman-Warner, but rather to unpack it, fix what’s broken, and put it back together before we start to sing its praise (or, God forbid, try to enact it into law). This particular item, thankfully, is pretty easy to fix — but it’s far from the only one, all of which result from the massive complexity of this bill.

I leave you with Thoreau: Simplify, simplify.