Frequently Asked Questions on Current Issues - Revenue Decoupling
- What is Revenue Decoupling?
- How does a utility company currently ‘earn revenue’?
- Why would the Public Service Commission want to alter the way a utility company earns revenue to operate?
- How would Revenue Decoupling work?
- What are some of the benefits of Revenue Decoupling?
- Does Delaware currently have a Revenue Decoupling mechanism in place?
- Is there any issue that could serve to foster support opposing a Revenue Decoupling mechanism for Delaware?
- Does Delmarva Power support Revenue Decoupling?
- What is the DPA position?
Revenue Decoupling refers to the separation of a utility company’s (electric or gas) sales and profits. It would be an order issued by the Public Service Commission, or a law enacted by the legislature, that would alter the way a utility earns revenue.
How does a utility company currently ‘earn revenue’?
A utility company earns ‘profit’ when they sell their commodity (electricity or natural gas). The more they sell, the more ‘profit’ they make.
Why would the Public Service Commission want to alter the way a utility company earns revenue to operate?
This would be done in the name of promoting energy efficiency programs throughout Delaware. As it is now, a utility company has no incentive to help their customers conserve energy. This is because if a business, or household, reduces their energy consumption, the utility company would make less money from that customer from the reduced amount of energy consumed. This structure is viewed as providing a ‘disincentive’ to utility company involvement in promoting, and participating in, energy efficiency programs.
How would Revenue Decoupling work?
A utility company’s profits would be disassociated from its sales. They would be guaranteed a minimum amount of ‘return’, or profit, from the sale of their commodity (electricity or gas). The company would not be penalized for selling less of their product. There are different types of Revenue Decoupling mechanisms, each particular to the jurisdictions’ public policy initiatives.
What are some of the benefits of Revenue Decoupling?
The main benefits would be that the utility company would not be hurt financially when a customer reduced their energy consumption through conservation measures. This would protect the utility companies’ stockholders from financial loss. Another benefit is that the utility company would be ‘on the same page’ as everyone else when it came to promoting energy efficiency programs. The utility companies, being large energy industry entities, could be leaders in the field of energy conservation. Many people feel this is a prudent course of action for public policy goals.
Does Delaware currently have a Revenue Decoupling mechanism in place?
No. However, later in 2009, the Public Service Commission will begin the process to develop one for Delaware.
Is there any issue that could serve to foster support opposing a Revenue Decoupling mechanism for Delaware?
Yes. There are some problems with Revenue Decoupling, however, it would depend on the particular type that was implemented. For example, a utility company would be guaranteed a minimum rate of return, or profit, from their sales. If conservation efforts are successful, and the company’s profits decline, under decoupling they would be permitted to ‘recover’ from the rate-payer what they lost (or at least recover to a pre-determined minimum amount of revenue required). This sends a very confusing signal to the rate-payer; it tells them that they should reduce their energy use by conserving, or spending money on solar panels or a higher efficiency appliance, while simultaneously penalizing them through an increase in their utility bill to allow the company to recover for the decreased usage!
In addition, it would be difficult to determine with certainty why the company experienced a decrease in sales; for example there might be weather abnormalities or a decrease in population over a certain period of time.
Finally, some people are concerned that Decoupling would move the ‘risk’ that a shareholder takes when investing in a utility company, and sending it to the rate-payer. All of these concerns will be thoroughly addressed when the PSC takes up the issue later in 2009.
Does Delmarva Power support Revenue Decoupling?
As of now, DP&L does support instituting a Revenue Decoupling mechanism.
The DPA supports a modified version of a RD mechanism. Separating the supply and delivery components of the rate-payers electric utility bill would be one way we can ensure that the rate-payer does not ‘reimburse’ the utility company for weather abnormalities, bad decisions by DP&L’s management, and decreases in energy use from decreases in population. The DPA supports utility company involvement in promoting energy efficiency initiatives; however, we believe the rate-payer needs certain safeguards for the mechanism to be fair.
