Decoupling: Not just for unhappy spouses, but utilities, too

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Five Guys is my guilty pleasure.

A big, juicy burger, expertly prepared by the friendly Five Guys staff and augmented with a generous helping of fries, is occasionally my indulgence after a long day of fighting for the interests of residential utility customers.  So, if my physician ever advised me to curtail my intake of fried foods, Five Guys is the last place I’d go for assistance.

I’m sure the folks who work at Five Guys know better than anyone why burgers in moderation is a good idea, but there is still the ineluctable reality that Five Guys as a business makes more money by selling more of its food.   That’s known among financial analysts as the “throughput incentive.”

So if you were looking to pay someone to promote the benefits of replacing beef with brussels sprouts, Five Guys would not be on your short list.  And, yet, when it comes to ratepayer-funded energy efficiency, we’re doing the equivalent of paying Five Guys to persuade people to eat fewer hamburgers.

Ratepayer-funded energy efficiency is a big deal.  On January 1, New Hampshire became the last state in New England to implement an Energy Efficiency Resource Standard (EERS), which commits the state to reduce electricity and natural gas sales by a specified percentage via measures that are supported in part by the System Benefits Charge (SBC) on everyone’s electric and natural gas bills.

This is fabulous from a ratepayer perspective.  Energy efficiency is the cheapest available way to meet the next kilowatt-hour of demand; the cost is roughly four cents per kilowatt-hour.  The next cheapest option is natural gas at six cents with renewable energy costing nine cents, according to 2017 data from the Energy Information Administration.

We rely on the utilities themselves – Eversource, Liberty, Unitil, and the New Hampshire Electric Cooperative – both to collect the SBC and to deliver the programs that use the money.   But for investor-owned utilities, the throughput incentive looms large: the more therms or kilowatt-hours they sell, the more money they make for their owners.

Thus, for exactly the same reason we don’t task Five Guys with proclaiming the evils of gluttony, Maine and Vermont rely on independent organizations to deliver ratepayer-funded energy efficiency programs.  And, yet, there are sound reasons for doing it our way – tasking the utilities themselves with delivering the programs.  Massachusetts uses this paradigm as well, and it is the top-rated state for energy efficiency according to the American Council for an Energy Efficient Economy.

To undermine the throughput incentive, our EERS plan includes a so-called “Lost Revenue Adjustment Mechanism,” or LRAM.  Basically, the utilities get to make up revenues lost to energy efficiency by increasing their rates.

Unfortunately, this is regulation of the heads-I-win-tails-you-lose variety.  The LRAM simply assumes the existence of lost revenue, based on predictions of how efficient the energy efficiency measures prove to be.  If declines in usage associated with the efficiency measures are offset by usage growth elsewhere on the system – due maybe to an unusually cold winter, warm summer, or a booming economy – the utilities would still be compensated for their projected ‘lost’ revenues even when experiencing net usage growth.  In short, under the LRAM, the utilities get the revenue adjustment regardless of whether any revenues are actually lost.

That concern drove my office in 2016 to insist the utilities agree to propose a different approach to this problem in the future.  The approach we prefer is called revenue decoupling.

Unlike the LRAM, revenue decoupling is a symmetrical mechanism.  In other words, rates can be adjusted either up or down depending on the changes in sales that the utilities actually experience.  The phrase means that the amount of revenue the utility receives – and secondarily its profits — are decoupled from the amount of energy the company sells.

The settlement agreement that led to Public Utilities Commission (PUC) approval of the EERS gives the utilities until at least 2021 to propose a revenue decoupling mechanism.  To the great credit of Liberty Utilities, the company got there three years early by agreeing to a comprehensive decoupling mechanism for its natural gas customers.  It happened in the natural gas rate case now under advisement to the PUC.

Eight years ago, the previous owner of this utility (National Grid) proposed a revenue decoupling plan in a rate case only to see it vociferously opposed by two key members of the PUC staff.  “Traditional cost of service ratemaking has been in place for decades, and it is based on the actual costs a utility incurs to provide service,” said division directors Thomas Frantz and Mark Naylor in written testimony.  “It is not a system that is broken.”

National Grid eventually withdrew its decoupling plan and left the state in frustration.

This time – in the face of a PUC directive for utilities to make decoupling proposals – the agency’s staff could not be so resistant to change.  They even embraced a limited form of decoupling.  Unfortunately however, that limited form of decoupling would likewise offer only limited benefits to New Hampshire ratepayers.  In the end, the agency staff, my office, and the utility were unable to agree on what form of decoupling would provide the greatest benefit to ratepayers and, as a result, the Liberty rate case was presented at hearing in an unprecedented posture.

My office, representing residential ratepayers, signed a comprehensive settlement agreement with the utility.  In other words, all of the parties to the rate case had agreed on an appropriate outcome.  We were forced to litigate against the PUC’s staff which is, by rule, treated as if it were a party.  Nobody could remember that ever happening before.

The decoupling plan to which we agreed is comprehensive, covering more than just revenue fluctuations due to energy efficiency.  We added a component known as “real-time weather normalization,” meaning that we proposed also accounting for fluctuations in revenue due to unusually cold or unusually warm weather.

We got the idea from the Regulatory Assistance Project, an independent nonprofit whose mission is to provide neutral but creative policy advice to utility regulators.  The idea is that customers get some delivery service rate relief when it’s cold – i.e., when they need it most – and the utility makes up some revenue when demand sags because it’s warmer than expected.

“It’s a win/win, it really is,” testified the OCA’s expert witness, economist Ben Johnson.  Customers benefit by seeing their delivery charges moderate when it’s cold; the utility benefits from a steadier and more predictable cash flow.  “It’s less costly for them and ultimately less costly for customers who pay the cost of running the business,” Johnson said.

The Staff’s witness nevertheless condemned the decoupling proposal as “totally confusing for the customer,” “ineffective” and “against the whole idea of a free market economy” because gas utilities compete with non-regulated fuel sources.

Change is difficult.  Many ratepayer advocates are as resistant to decoupling as veteran regulatory staffers tend to be.  But if we are to transform our energy system into something that maximizes energy efficiency and customer flexibility, ratepayer advocates and utilities must work together in quest of innovation.  That’s exactly what we did here.

And did I mention that our decoupling plan nests within a broader agreement to reduce the fixed monthly charges paid by Liberty’s gas customers?  Ratepayer advocates hate big fixed charges – they discourage energy efficiency and in some cases disproportionately impact low income customers – but utilities love them because they provide stable revenue streams.  Liberty’s gas heating customers, who currently pay among the highest monthly fixed charges in the country at more than $24 a month, would see those charges drop by almost $10 a month as a result of our negotiated settlement.

The PUC is expected to rule in the next few days.  I hope the Commission approves the decoupling deal we struck with Liberty Utilities.  If it does, I’ll be treating myself to a burger at Five Guys.

Views expressed in columns and opinion pieces are those of the author and do not reflect those of InDepthNH.org.