Decoupling

Decoupling is a regulatory mechanism designed to adjust future rates so that actual utility revenues match the revenues used to set rates. Decoupling removes the incentive for utilities to sell more energy or, alternatively, to discourage energy efficiency. 

The following illustrates the difference between traditional and decoupled ratemaking:

Traditional:

Revenue = fixed rate x amount (therms or kWhs) sold 

Here revenues go up or down depending on how much gas or electricity is delivered. For example a cold winter results in more gas sales and more revenue, whereas a mild winter results in lower sales and revenues. 

Decoupled:

Rate = fixed revenue ÷ amount (therms or kWhs) sold

Here revenues over time stay the same regardless of how much is sold.

Under decoupling, frequent rate adjustments are often required to ensure the utility is not over- or under-collecting. For example, if a utility’s revenues are higher than the forecast used to set rates, the extra revenue is tracked in a balancing account and is returned to customers through lower rates in the next rate cycle. Alternately if the utility’s revenues are lower than the forecast, rates will be increased in the next cycle to return the lost revenue to the utility. 

Decoupling is considered to offer multiple benefits. It reduces utility revenue and earnings volatility due to factors outside the utility’s control and encourages the utility to foster energy efficiency and distributed energy resources (DERs) without risking loss of revenues and earnings (at least in the short term). 

Decoupling is similar to – but more comprehensive than – regulatory mechanisms that stabilize revenues based on one specific factor such as weather (weather normalization) or lost revenue adjustments which compensate the utility for successful energy efficiency programs.