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The Truth Is Out There

We all like to get the talking points from the Big Guys. It makes those of us farther down the food chain feel important, sort of like we have a seat at the table, or are at least in the room, when decisions are being made. In that sense, we bloggers are like your garden variety journalists.

Free State Politics has obviously received theirs from the O’Malley administration.

More below the fold.

As a budding energy policy wonk, and a Maryland politics blogger, Gov. O’Malley’s recently convened energy summit has been like manna from nerd heaven for me. So far the big topic has been the Public Service Commission’s backing of revenue decoupling a few days ago, where utilities earn money based on the number of customers they have, not how much energy they sell, giving them incentives to promote efficiency and conservation. This idea has been used by California for a number of years, and it’s helped the state increase efficiency and lower consumers’ overall energy bills. Other states — New York and Idaho — have adopted decoupling as well.

Let’s look at these claims.

Not to quibble but the definition provided here of decoupling is misleading. What it allows utilities to do is to bill the customer for the cost of electicity (or gas) and for the cost of maintaining the distribution system. The utility is still guaranteed a return on its investment regardless of the amount of electricity used which means that we, as consumers, will pay more per kilowatt-hour (kWh) used if everyone conserves energy. According to the California state fact sheet on decoupling:

California’s long-standing “decoupling” policy is designed to remove the disincentives for utilities to promote energy efficiency and conservation among energy customers. Decoupling ensures that utilities retain their expected earnings even as energy efficiency programs reduce sales.

The EPA has this to say:

Decoupling profit and sales volume is an option for overcoming utilities’ built-in incentive to increase shareholder profits by selling a greater volume of electricity (a.k.a. “throughput incentive”) and disincentive to implement energy efficiency and demand management programs that reduce sales. Typically, when profits are decoupled from sales, the utility is entitled to revenues needed to cover its fixed costs, including profits. If sales exceed projected levels, the revenue in excess of the allowed revenue is returned to customers by adjustments to the next year’s rates. Similarly, if sales are below anticipated levels, the customers make up for lost revenues in the next year’s rates. The cost of fuel and purchased power are generally treated separately and are passed on to customers though needed increases or decreases in prices.

Now this may be a laudable public policy goal if you buy into the whole global warming hysteria but from the standpoint of a person on a moderate or a fixed income this is not a good deal in any way shape or form.

But does it lower our energy bill?

If we look at the data provided by the Energy Information Administration between 1990 and 2005, inclusive, the price of electicity per kWh increased from 7.83 cents to 9.45 cents, about 21%. If we consult an inflation calculator we can see this is less than the rate of inflation which would have resulted in a cost of 11.7 cents.

How did California, which instituted this decoupling in 1982, make out? Their costs increased by 25% from 9.98 cents to 12.51 cents per kWh. How did Maryland do? Our costs increased by 17%.

They mention some other states that have tried decoupling. Idaho apparently only started in 2006. New York experimented with it between 1993 and 1997 and then abandoned it. In 2004 their public utiliites commission recommended against reinstating it.

There are some other states which have used it but seem to have been conveniently forgotten.

Washington state decoupled in 1991. Their electicity costs have gone up by a whopping 49%. Oregon decoupled in 1992 and has seen prices rise by 53%. Maine abandoned decoupling in the mid 1990s when an economic downturn slammed residential consumers with a huge rate increase to make up for lost revenue from commercial customers.

What decoupling does is achieves the utilities’s goals in energy deregulation (spinning off the risk of power generation and the unprofitability of transmission) while allowing the utilities to continue to be guaranteed a profit and otherwise operate as a monopoly.

The goal of decoupling is not to provide cheaper or more reliable power to the consumer. It can’t do that. The best it can do is create a feel-good as you spend a lot of money on energy efficient appliances to attempt to reduce your electic bill which, in a best case scenario, is going to continue to go up slowly.

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