When the Pennsylvania Public Utility Commission (“PUC”) announced its interest in alternative ratemaking methodologies, it incited a debate among members of the energy community on the benefits of one particular alternative ratemaking mechanism: revenue decoupling.

Like the current ratemaking process, revenue decoupling begins with a base rate case at the PUC.  With revenue decoupling, however, the Commission determines a utility’s revenues for the next couple of years after analyzing data over a certain time period.  An automatic adjustment mechanism is then established in order to regularly adjust rates to ensure that the utility generates its allotted revenue.  In other words, revenue decoupling severs the connection between an electric utility’s profits and its volumetric sales to retail customers.  Thus, as customers consume less electricity, the rate per kilowatt-hour increases to make up the difference in a utility’s revenue.  Likewise, if customers consume more energy, the price per kilowatt-hour falls.

Proponents of revenue decoupling argue that this automatic adjustment mechanism incentivizes utilities to adopt additional energy efficiency and conservation programs because it guarantees that the utility will earn a certain revenue regardless of retail sales.  Supporters also believe that revenue decoupling would facilitate more gradual rate increases because it would enable utilities to recover the costs of energy efficiency and conservation investments through the automatic adjustment mechanism instead of annual base rate cases.

Conversely, opponents of revenue decoupling argue that the current regulatory framework sufficiently promotes energy efficiency and conservation efforts.  Opponents note that the Commonwealth’s legal framework would need substantial overhaul in order to implement a decoupling methodology.  The opposition also argues that revenue decoupling would promote intra- and inter-class cost shifting among consumers, because the rate per kilowatt-hour would be determined by the total amount of electricity delivered by a utility to a broader group of customers.  Under such an arrangement, some rate classes would end up subsidizing others.  On a customer-specific basis, those customers that invest in energy efficiency for their homes and businesses may not see the benefit of their investments because of the automatic adjustment mechanism would adjust the rates paid by customers.

Will the PUC adopt revenue decoupling as an alternative ratemaking methodology?  What other alternative ratemaking methodologies may be incorporated into the future regulatory framework?  Numerous stakeholders submitted Comments to the PUC on this issue on March 16, 2016.  The PUC’s Final Order on this issue is pending.

We will continue to monitor the progress of this proceeding and provide updates accordingly.  However, if you have any questions regarding revenue decoupling, or wonder how it might impact your business, please contact us.