The single most important policy change needed to promote broad-based, California-style energy efficiency is to “decouple” utility profits from sales — to allow utilities to profit from energy efficiency (see “How does California do it?” and “Why we never need to build another polluting power plant“).

Utilities are the most effective delivery channels for making homes, commercial buildings, and industry more energy-efficient, but the vast majority operate under a regulatory regime that penalizes utilities for promoting efficiency. Indeed, those regulations actually motivate utilities to encourage their customers to overuse electricity, because not only do they make more profits then, but if demand rises enough, they can get the Public Utility Commission to approve a new power plant and higher rates — and thus more profits.

I have been assuming that Democrats would wait until the mother of all energy bills later this year to make their big push toward decoupling. But it turns out that Dems have decided to make it one of the conditions for the multi-billion-dollar energy efficiency block grants in the stimulus (see “Details of Obama’s green stimulus plan released“).

That is an outstanding idea. E&E Daily ($ub. req’d) has the details:

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States that accept federal energy efficiency grants from the economic stimulus package will have to ensure utilities recover the revenue lost when consumers use less energy, thanks to an amendment the House Energy and Commerce Committee approved yesterday.

The controversial “decoupling” provision was offered as a part of Chairman Henry Waxman’s (D-Calif.) substitute amendment during the committee markup of the House Democrats’ $825 billion economic stimulus bill that includes billions of dollars for energy efficiency, smart grid technology and renewable energy.

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The House is scheduled to vote on the stimulus bill Wednesday, according to the office of Majority Leader Steny Hoyer (D-Md.) …

“We do appreciate the opportunity to have some debate on this,” said ranking member Joe Barton (R-Texas) “I respect the right of a new president to have his or her agenda but … it is truly an insult to this committee and I would say to the committee system, that we didn’t have a few weeks to get a hearing on this,” he said.

The constrained time limit squeezed the amount of amendments members could offer, so Barton offered only an amendment that would have gutted the “decoupling” measure. “This is probably the most important consumer protection amendment in this markup,” Barton said. “I think the last thing we want to do, is to do all these great energy efficiency ideas in the bill … and not have their cost go down,” he said.

Rep. John Shimkus (R-Ill.) said the best way for people to adopt energy efficiency measures is for them see their costs go down. “This is the first time I have heard Democrats trust an electric utility in my 12 years,” he added.

But supporters say “decoupling” allows utilities to promote energy efficiency and still maintain a viable business structure as they would no longer rely on revenue made from how much electricity or gas they sell.

“Decoupling … has been the single most important policy to reduce usage of electricity in America,” said Rep. Jay Inslee (D-Wash.). California adopted decoupling and has successfully maintained a level electricity consumption for the past 20 years, he said.

(I’m sure he said level electricity consumption per capita for the past 30 years.)

Inslee explained that while the rates may stay at a higher level, the ratepayers’ overall bill would likely decrease as efficiency measures considerably cut their energy consumption. “Once we free utilities … to sell energy efficiency you know what they do? They sell energy efficiency services,” Inslee said. Efficiency programs — usually implemented through the utilities — also creates thousands of jobs including energy audits, changing doors, insulation and other efficiency upgrades, Inslee said.

The Alliance to Save Energy, the American Gas Association, the Edison Electric Institute and the Natural Resources Defense Council all endorsed the provision, Waxman noted. Democrats tried to put a similar measure requiring decoupling in the 2007 energy bill, but it was eventually watered down to only require state regulators to consider adopting decoupling policies — most of which have not yet done so.

In addition, states that receive the additional energy grants given in the stimulus would also be required to adopt recent and more stringent residential and commercial building energy codes and should prioritize grants toward existing energy efficiency and renewable energy programs — this last provision adopted as an additional amendment offered by Inslee and passed by voice vote.

Outside of the state energy grant programs, Waxman’s substitute amendment would require smart grid demonstration projects to be public knowledge and raise the federal matching grants to 50 percent; allows the energy secretary to encourage states to give priority of Weatherization Assistance funding to the “most cost-effective” efficiency activities; and mandates the assumptions for the required renewable electricity transmission study be made public. An amendment by Rep. Fred Upton (R-Mich.), adopted by voice vote, would also make the energy secretary study to what extent legal challenges are delaying the construction of transmission necessary for renewable energy.

Kudos to Waxman for the decoupling provision.

This post was created for, a project of the Center for American Progress Action Fund.