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January 21, 2013 -- Not many people think about how electricity gets from a power plant to a home—it is utilities that generally perform this task for us. Utility companies play a huge role in America’s energy system, often running power plants, transmission and distribution lines, and the sale of electricity to consumers. Utilities provide the energy needed to heat our homes, cook our food, power our appliances, and illuminate our workspaces. Many utilities straddle the public-private divide—though state governments have a large say in how they run, like other private companies, utilities also need to make profits.

Currently, many utilities make their money by selling electricity to consumers. The more electricity a utility sells to consumers, the more money it gets. Yet this system disincentivizes energy efficiency and conservation. Why voluntarily enact a program that reduces energy consumption if it will reduce profits? Energy efficiency and conservation measures would cut into utility revenues.

Not all utilities get their money by selling electricity. Some policymakers have suggested that in order to reduce this conflict of interests, we need to revise our laws so that utilities get more money for reducing the amount of electricity consumed. Separating utility revenue from electricity sales volume—or “decoupling” as it is commonly called—is a regulatory technique that eliminates the disincentive for utilities to promote energy efficiency. Decoupling requires that utilities receive a fair compensation for their services regardless of sales, removing the need for utilities to sell higher volumes of electricity to remain in the black.

There are various ways to structure utility compensation—including revenue per customer formulas and flat monthly service fees. Yet it is important to note that simply separating sales from revenue might not be enough. A performance reward mechanism is a vital element of successful decoupling efforts. Performance reward mechanisms add an economic incentive for utilities to actually decrease consumption, and allow utilities to get returns on energy efficiency investments.

Decoupling measures are becoming increasingly popular. Many states have decoupling measures in place—some for both for electricity and gas—and many more are considering implementing them. It is easy to see why. Decoupling offers two major benefits: it introduces a more stable revenue stream for utilities and it dramatically expands the prospects for energy efficiency. The recession and more extreme weather events have resulted in lower per capita energy use in some regions, creating some degree of risk and uncertainty for the utilities operating there. The guaranteed revenues offered by decoupling measures may be more attractive than continued participation in unpredictable energy markets.

There is an increasing environmental and political interest in energy efficiency as a means of lowering energy costs and harmful emissions. Decoupling is a virtual prerequisite for large scale efficiency programs—without decoupling, the proliferation of efficiency programs would be seen as an existential threat to utilities and they would be inclined to oppose them.

Indeed, California was an early adopter of decoupling for the simple reason that the state wanted the utilities on board with more stringent appliance and building efficiency standards. Shrewd policymakers realized that the utilities would resist them at every step unless they had economic incentives that jived with efficiency goals. California is often held up as a paragon of energy efficiency, continually topping ACEEE’s State Energy Efficiency Scorecard. This would not be possible without decoupling—in fact, the top ten states in ACEEE’s State Energy Efficiency Scorecard all have some form of decoupling measures.

Surprisingly, many states have yet to initiate decoupling measures, despite the efficiency benefits such a move would confer. Decoupling utility revenues from the volume of electricity (or gas) sales is a vital step in making this country more energy efficient. It effectively turns utilities from enemies of energy efficiency into allies, and allow individuals and organizations to dramatically reduce their energy costs and their environmental footprints. Given the inherent benefits of this strategy, all states should make it a top priority to include decoupling measures in their energy policy.