Abstract
Distributing electricity to users has been covered through the charge per kilowatt-hour for electricity used. Conservation advocates have promoted policies that “decouple” distribution revenues or profits from the amount of electricity delivered, claiming that usage-based pricing leads utilities to encourage use and discourage conservation. Because decoupling separates profits from conduct, it runs against the dominant finding in regulatory economics in the last 20 years—that incentive-based regulation outperforms rate-of-return profit guarantees. Even if distribution costs are independent of use, some usage charges can be efficient. Price-cap regulation may distort incentives to inform consumers about energy efficiency—getting more performance from less electricity. Utilities will subsidize efficiency investments, but only when prices are too low. If consumers fail to adopt energy efficiency measures that would be individually beneficial, decoupling can increase welfare, but only if all energy revenues are separated from use, not just those associated with distribution.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Baltimore Gas and Electric. (2007). “Demand Side Management Programs: Energy Efficiency/Conservation, Demand Response, Advanced Metering Infrastructure,” Stakeholders Meeting, Baltimore, MD, February 7, (2007). Accessed July 29, 2008, from http://webapp.psc.state.md.us/Intranet/CaseNum/NewIndex3_VOpenFile.cfm?filepath=//Coldfusion/EWorkingGroups/DRDG//BGEAMI-DR-Conservation%5CBGEAMI-DSMforPSCStakeholders2-2007.ppt.
Becker G. (1983) A theory of competition among pressure groups for political influence. Quarterly Journal of Economics 98: 371–400
Brennan T. J. (1989) Regulating by ‘capping’ prices. Journal of Regulatory Economics 1: 133–147
Brennan T. J. (1990) Cross-subsidization and cost misallocation by regulated monopolists. Journal of Regulatory Economics 2: 37–51
Brennan T. J. (1996) Is cost-of-service regulation worth the cost?. International Journal of the Economics of Business 3: 25–42
Brennan T. J. (2001) The California electricity experience, 2000–2001: Education or diversion?. Resources for the Future, Washington, DC
Brennan T. J. (2004) Market failures in real-time metering. Journal of Regulatory Economics 26: 119–139
Brennan, T. J. (2008a). ‘Night of the Living Dead’ or ‘Back to the Future’? Electric utility decoupling, reviving rate-of-return regulation, and energy efficiency. Resources for the Future Discussion Paper 08-27.
Brennan, T. J. (2008b). Generating the benefits of competition: Challenges and opportunities in opening electricity markets. Commentary 260, Toronto, ON: C.D. Howe Institute.
Brennan, T. J. (2009a). Optimal energy efficiency policies and regulatory demand-side management tests: How well do they match? Resources for the Future Discussion Paper 08-46.
Brennan, T. J. (2009b). Energy efficiency: Efficiency or monopsony. Resources for the Future Discussion Paper 09-20.
Brennan T. J., Boyd J. (1997) Stranded costs, takings, and the law and economics of implicit contracts. Journal of Regulatory Economics 11: 41–54
Brennan T. J., Boyd J. (2006) Political economy and the efficiency of compensation for takings. Contemporary Economic Policy 24: 188–202
Canine, C. (2006). California illuminates the world. OnEarth (National Resources Defense Council), Spring, 22–27. Accessed July 29, 2008, from http://www.nrdc.org/onearth/06spr/ca.pdf.
Carter, S. (2001). Breaking the consumption habit: Ratemaking for efficient resource decisions. Electricity Journal, 14, 66–74. Accessed July 29, 2008, from http://www.nrdc.org/air/energy/abreaking.asp.
Center for Energy, Economic, and Environmental Policy (CEEEP) (2005). Decoupling White Paper, no. 1, Strategic Issues Forum, Edward J. Bloustein School of Planning and Public Policy, Rutgers University, New Brunswick, NJ, October 25, 2005. Accessed July 29, 2008, from http://www.policy.rutgers.edu/ceeep/images/Strategic%20Issues%20Forum%20Whitepaper%20on%20Decoupling%20(Oct%2020%202005).pdf.
Clinton, B. (2007). Plenary: Economic growth in the face of resource scarcity and climate change. Clinton Global Initiative, September 27, 2007. Accessed July 29, 2008, from http://www.clintonglobalinitiative.org/NETCOMMUNITY/Page.aspx?&pid=1734&srcid=1612.
Crandall R. W., Waverman L. (2007) Talk is cheap: The promise of regulatory reform in North American Telecommunications. Brookings, Washington
Darbee, P. (2007). Commentary: It’s time to rebalance America’s electricity strategy, Power, September 2007. Accessed July 29, 2008, from http://findarticles.com/p/articles/mi_qa5392/is_200709/ai_n21295891/print.
Edison Electric Institute (EEI). (2007). Rate Case Summary. Q2 2007 (Quarterly Report). Accessed July 29, 2008, from http://www.eei.org/industry_issues/finance_and_accounting/finance/research_and_analysis/quarterly_financial_updates/Q2_2007_Rate_Case_Summary.pdf.
Electricity Consumers Resource Council (ELCON). (2007). Revenue decoupling. January 2007. Accessed August 8, 2008, from http://www.elcon.org/Documents/Publications/3-1RevenueDecoupling.PDF.
Gottron, F. (2001). Energy efficiency and the rebound effect: Does increasing efficiency decrease demand? CRS Report for Congress, Congressional Research Service, Library of Congress, Order Code RS20981, July 30, 2001. Accessed July 29, 2008, from https://www.policyarchive.org/bitstream/handle/10207/3492/RS20981_20010730.pdf?sequence=1 .
Griffin J. M. (1982) The welfare implications of externalities and price elasticities for telecommunications pricing. Review of Economics and Statistics 64: 59–66
Hirst E., Goldman C. (1990) Integrated resource planning for electric utilities. IEEE Transactions on Power Systems 5: 1105–1111
Independent Electricity System Operator (IESO). (2007). 2007 Ontario Market Outlook. http://www.ieso.ca/imoweb/pubs/marketReports/OMO-Report-2007.pdf.
ISO New England. (2006). Electricity Costs White Paper (June 1, 2006). Accessed May 18, 2009, from http://www.iso-ne.com/pubs/whtpprs/elec_costs_wht_ppr.pdf.
Kihm S. (2009) When revenue decoupling will work . . .and when it won’t. Electricity Journal 22(8): 19–28
Laffont J.-J., Tirole J. (1993) A theory of incentives in procurement and regulation. MIT Press, Cambridge, MA
Maryland Energy Administration (MEA). (2008). Strategic Electricity Plan. Annapolis, MD: Maryland Energy Administration. Accessed July 29, 2008, from http://www.energy.state.md.us/documents/MEASTRATEGICELECTRICITYPLAN.pdf.
Mufson, S., & Rein, L. (2007). Maryland adopts plan for energy efficiency. Washington Post, July 21, 2007: D01. Accessed July 29, 2008, from http://www.washingtonpost.com/wp-dyn/content/article/2007/07/20/AR2007072002110_pf.html.
Noël, E. (2007). Letter to the Editor, Office of the People’s Counsel, District of Columbia, July 24, 2007. Accessed July 29, 2008, from http://www.opc-dc.gov/newopc/uploads/contents/pdf/CT296.pdf.
Office of People’s Counsel (OPC). (2003). Initial comments in the matter of the electric service interruptions due to hurricane/tropical storm Isabel and the thunderstorms of August 26–28, 2003. Case No. 8977, Public Service Commission of Maryland, November, 2003. Accessed July 29, 2008, from http://webapp.psc.state.md.us/Intranet/Casenum/NewIndex3_VOpenFile.cfm?ServerFilePath=C%3A%5CCasenum%5C8900-8999%5C8977%5C022.doc.
Peltzman S. (1976) Toward a more general theory of regulation. Journal of Law and Economics 19: 211–240
Perkins, J. R. (2007). Policy options for energy efficiency programs: Decoupling, incentives, and third-party administrators. NARUC (National Association of Regulatory Utility Commissions) Summer Meeting, New York, NY, July 17, 2007. Accessed July 29, 2008, from http://www.narucmeetings.org/Presentations/Policy%20Options%20for%20Energy%20Efficiency%20Programs.ppt.
Regulatory Assistance Project (RAP). (2005). Regulatory reform: Removing the disincentives to utility investment in energy efficiency, Regulatory Assistance Project Issues letter, September 2005, pp. 1–6. Accessed July 29, 2008, from http://www.raponline.org/Pubs/IssueLtr/RAP2005-09.pdf.
Sheshinski E. (1976) Price, quality, and quantity regulation in monopoly situations. Economica 43: 127–137
Sotkiewicz, P. M. (2007). Advantages and drawbacks of revenue decoupling: Rate design and regulatory implementation does matter. Presented to the Florida Public Service Commission, Workshop on Energy Efficiency Initiatives, University of Florida, Public Utility Research Center, Tallahassee, FL, November 29, 2007. Accessed July 29, 2008, from http://bear.cba.ufl.edu/centers/purc/DOCS/PRESENTATIONS/Sotkiewicz/P1107_Sotkiewicz_Advantages_and_Drawbacks.pdf.
Spence A. M. (1975) Monopoly, quality and regulation. Bell Journal of Economics 6: 417–429
State of Maryland Public Service Commission (MDPSC). (2006). Ten Year Plan (2006–2015) of Electric Companies in Maryland. Prepared for the Maryland Department of Natural Resources. Baltimore, MD: State of Maryland Public Service Commission, December 2006. Accessed July 29, 2008, from http://www.psc.state.md.us/psc/Reports/2006-10YrPlan.pdf.
Tschirhart J. (1995) Incentives in utility conservation programmes. Pacific and Asian Journal of Energy 5: 175–186
Weisman D. (2005) Price regulation and quality. Information Economics and Policy 17: 165–174
Author information
Authors and Affiliations
Corresponding author
Additional information
This paper is adapted from RFF Discussion Paper 08-27 (Brennan 2008a) with parts of RFF Discussion Paper 08-46 (Brennan 2009a) incorporated into it.
Rights and permissions
About this article
Cite this article
Brennan, T.J. Decoupling in electric utilities. J Regul Econ 38, 49–69 (2010). https://doi.org/10.1007/s11149-010-9120-5
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11149-010-9120-5