Why the much-ballyhooed utility decoupling is inadequate
I meant last week to note the extremely promising fact that Dems are talking about using the stimulus to funnel substantial money to states for energy efficiency projects — and tying that money to utility decoupling. Rep. Earl Blumenauer (D-Ore.), in comments to the Northwest Energy Coalition earlier this month, said this is how it should work:
If some states choose not to enact such [decoupling] standards by the end of 2009, he added, "The money will go to states that do."
Oh noes! Mandates!
As a crypto-socialist naturally I would love to see the heavy hand of the federal government used to force a positive change like this, and it’s great that utility regulations are back in the public conversation, but now more than ever it’s important to note that there’s decoupling and there’s decoupling. The details matter a great deal.
To wildly understate things, I’m not an expert on utilities. (Few people can truly claim to understand the intricacies of U.S. utility regs, including most of the regulators and the regulated.) But common sense can get us a ways.
The point of decoupling is to change the disastrous state of affairs that most U.S. utilities make more money the more power they sell. That presents a glaring incentive not to implement efficiency initiatives, which are, after all, meant to reduce power use. It biases utilities toward increasing supply.
How should that state of affairs change? Here’s where things get tricky. One common way is to implement a common rate for all ratepayers based on fixed utility costs. That way utility revenue won’t fall when ratepayers use less electricity. That’s the kind of decoupling described in the NYT blog piece:
Under a decoupling scheme, customers pay for electricity more or less like they pay for their cable bill: a pre-determined rate every month, even if they never turn on the television. If overall revenues fall below a utility’s fixed costs, the rate is adjusted accordingly across the entire customer base — though some states are establishing rate caps, to protect consumers. The overall result, however, is that a utility’s revenues are no longer tied directly to the amount of energy it sells.
Maybe I’m missing something, but this seems like a horrible solution. For one thing, while it removes utilities’ incentive to push power consumption up, it gives them no incentive to push power consumption down. And utilities are among the few large institutions capable of developing and implementing efficiency programs on a wide scale. It squanders a potentially powerful ally.
To boot, it removes ratepayers’ (already meager) incentive to conserve! Why should ratepayers seek to trim their own power use if they play a flat rate every month no matter what? Why wouldn’t this bias them toward using more power?
A final thing to note is that utilities will be indifferent to power use because it will pose no risk to them. Their revenues stay steady regardless. All the risks — from storms, heat waves, cold waves, grid accidents or attacks — will be bourne by ratepayers. Progressive economic policy should shield low-income and middle class families from risk, of which they already have plenty. (All this is explained much better in this post from Sean, from which most of this is ripped off.)
What’s a better way to decouple? That’s not entirely easy to answer, particularly given the reigning regulatory model. Utilities are profit-making entities shielded almost entirely from risk by the government (read: the public). That’s a fish on a bicycle, not a recipe for innovation. Either utilities should get out of the profits game entirely, via nationalization, or be thrown into it in earnest, via real privatization (with competition on the supply and demand side alike).
Decoupling inside the current regulatory paradigm amounts to telling the fish to pedal faster.