• Home
  • Blog
  • Decoupling: Washington Muddles Toward a New Utility Model

Decoupling: Washington Muddles Toward a New Utility Model

July 15, 2014 posted by Eric Christensen

Several trends have converged in recent years to put traditionally-structured utilities under increasing stress. First, the growth rate of electricity consumption in the United States has steadily declined over the last several decades, to the point that the Energy Information Administration ("EIA") recently projected consumption in the future will grow at less than one percent annually. Second, limits on greenhouse gas emissions and other environmental regulations place increasing economic pressure on traditional central-station generation, especially coal-fired plants. Third, economic trends, including steady declines in prices for equipment and state policies favoring renewable generation, make distributed generation and other alternatives to power from traditional utilities increasingly attractive, especially in high-cost states. Because traditional utility rates are based on the amount of energy sold (e.g., cents per kWh of electricity sold to the end-use consumer), these trends put utilities in a difficult position. Utilities must finance huge infrastructure investments, including the transformation of the nation's generation fleet, especially aging coal-fired plants, to a low-carbon future and major updates and expansions of the nation's electric transmission system. At the same time, demand for their products is likely to be essentially stagnant, and they face increasing competitive pressure from non-utility alternatives. As a result, predictions of a "utility death spiral" abound. To address this problem, utilities and regulators alike are now fundamentally reassessing the traditional utility business model. For example, the Hawaii Public Utilities Commission recently issued a statement on a new utility business model, part of an ongoing dialogue between Hawaii's regulators and regulated utilities to address Hawaii's extremely high electricity prices, environmental concerns, and the proliferation of distributed solar energy on the islands. Similarly, the New York State Public Service Commission recently launched an initative, dubbed "Reforming the Energy Vision," which aims to rethink the traditional regulatory and industry models in light of rapid technological and economic changes in the industry. Most recently, Minnesota launched the "e21 Initiative," with similar goals. Here in Washington, reform efforts have focused on rate "decoupling," which aims to create new ratemaking models that separate the utility's revenue recovery from the volume of energy it sells. Decoupling has long been promoted by energy efficiency advocates, who believe traditional volume-based rates create a disincentive for energy conservation efforts because utility profits depend on the volume of energy sold, and conservation therefore tends to undercut utility profits. In recent years, regulators and utilities have also begun to examine decoupling as a way to address the economic stresses created by volume-dependent revenues in a world where the volume of energy consumed is essentially stagnant. Beginning in the early 1990s, when it adopted, and later abandoned, a decoupled rate mechanism for Puget Sound Energy ("PSE"), the Washington Utilities and Transportation Commission ("UTC") has flirted with decoupling. In recent years, the UTC again expressed enthusiasm for decoupled rates. For example, in 2010, it issued a "Decoupling Policy Statement" setting forth the principles it believed should guide decoupled rates. In the wake of the Policy Statement, PSE filed a decoupling proposal, but that was rejected by the UTC as too one-sided. Subsequently, negotiations between PSE and the public advocacy group Northwest Energy Coalition produced a settlement, which would adopt decoupled rates broadly across PSE's electricity and gas businesses and among most customer classes. On June 25, 2013, the UTC largely adopted the settlement proposal, making Washington the first state to adopt a full decoupling mechanism across both electric and gas utilities. Fundamentally, the UTC-adopted mechanism achieves decoupling of utility rates from consumption by shifting the cost basis for PSE's rates from a cost-per-unit sold basis to a cost-per-customer basis. Several important qualifications and adjustments are included in the UTC-approved mechanism. For example, the UTC-approved decoupling mechanism includes an adjustment factor (referred to as the "K factor"), allowing PSE to adjust the cost-per-customer to reflect, for example, changes in its non-energy costs, such as the cost of its distribution system and the number of customers it serves. Rates may fluctuate, but increases are capped at 3% per year. The UTC also allowed PSE an authorized rate of return on equity of 9.8%, but recoveries above that are to be split 50/50 between PSE and its ratepayers. Several parties, including the state consumer advocate and industrial power and gas customers of PSE, appealed the UTC's decision approving decoupled rates. In late June, the Thurston County Superior Court, which hears appeals of decisions by the UTC and other state agencies, rejected the UTC's decision in part, concluding that the UTC's decision concerning PSE rate of return on equity was not justified by the factual record and was also procedurally flawed in certain respects. While the decoupling decision was remanded to the UTC, the court appears to have left the field open for the decoupling mechanism to be fully approved if the evidentiary and procedural deficiencies identified by the court can be corrected. If you have any questions about energy regulation, natural gas or electric rates, complex regulatory appeals, or other matters involving the energy or environmental law, please contact a member of GTH's Energy, Telecommunications, and Utilities or Environment & Natural Resources practice groups. We're proud that our partner Jim Waldo was recently named 2013 Lawyer of the Year for Energy and Natural Resources Law, and six practice members were recently recognized as Washington Super Lawyers. We appreciate the assistance of GTH Summer Associate Dierdre Madsen, who provided substantial assistance for this posting.