Izaak Walton League Publications

Getting Utilities To Work for Their Customers

by Eric Jensen, IWLA Energy Coordinator

It’s hard not to be annoyed each month when the gas or electric bill shows up. If the list of certainties had been extended to three, it would surely be death, taxes, and utility bills. Water heaters and furnaces run as they are programmed. The lights go on when we flip a switch. And the fridge, microwave, and other appliances keep whirring away. All of that activity costs money and uses energy.

We can improve our energy use practices, and we should. But try telling that to a teenager alternating between a computer screen and the latest video game or a spouse afflicted with energy apathy. Wouldn’t it be great if the same company that sold us the energy on which we rely had a reason to help us use less of it?

This sounds a bit like a pipe dream – contrary to how a typical business model works. But is it really? First, it’s important to understand how the utility business works. Most consumers don’t get to choose their utility companies. Thankfully, these companies are regulated by a state-level utility commission, and one thing the commission is charged with is ensuring a fair rate to customers. The cost per kilowatt hour (kWh) for electricity or per therm for natural gas is set in such a way that the utility company’s expenses are covered. Generation (the power plants), distribution (the poles and wires), metering, repairs, fees and taxes, and even customer service are all calculated during a representative “test” year. On top of the cost of doing business, the utility is given a fair rate of return – its profit – as determined by the state’s utility commission. The total dollar amount to run the utility is divided by how many kWhs or therms the company expects to sell, and that’s what customers pay per unit of energy they consume. Cooperative and municipal utilities function similarly but on a slightly smaller scale.

If you spotted the flaw in this equation, you’re already ahead of the game. What if the utility sells more or less power than they expected in a given year? Well, if they sell more, sure it costs more to produce that extra energy, but both economies of scale and the profit factor mean they earn more than what was determined to be fair. If they sell less, the opposite is true and the utility doesn’t make as much money, possibly not enough to run their business. So the standard business model a utility operates within is that selling more is good and selling less is bad.

Which brings us back to how to improve this equation and get the utility on the side of the customer. Of all the variables in the rate calculation, the utility cares the most about its profit, as any business would. So why not guarantee that profit, as long as the company is doing a good job? The technical term for this fee structure is “revenue decoupling.” Basically, rates are designed so a utility is indifferent to whether it sells more or less energy. It’s not magic. The company’s prices are simply “trued up” – prices are adjusted to cover the “true” cost of doing business every year through a small rate adjustment. For example, if a company earns less than the cost of doing business (plus profit), a small rate increase kicks in the following year. On the flip side, if the company earns more than they estimated to cover the cost of doing business, customers get a refund.

This means improved efficiency and conservation are no longer at odds with the utility company’s business model. In fact, it doesn’t matter to the company how little energy you use. And with the way Wall Street works, more stable profits mean the company could actually see some business benefits such as a better credit rating. Add on a reasonable incentive to help customers conserve energy, and all of a sudden even your utility’s accountants want you to use less energy.

But what is your benefit? For starters, decoupling rates doesn’t hurt your cost savings if you conserve energy. You still pay less each month for using energy responsibly – taking shorter showers, turning off lights when you leave the room, and opting for a fan over air conditioning. The benefit to you is that the utility company is now in your corner. This means improved CFL and LED light programs; better rebates for adding insulation, energy-efficient appliances, and other energy improvements; affordable home energy audits; and rates designed to reward you for using less energy. With a business model aligned to help you save, the utility becomes a huge resource to help you reduce your energy use.

This doesn’t even begin to account for the environmental benefits inherent with improved conservation and energy efficiency. Fewer pollutants detrimental to our health, wildlife habitat, and the climate get released. Even the mountains benefit with reduced demand for strip mining.

Revenue decoupling might sound pretty obscure, but the concept is fairly simple. It is a key tool in getting your utility to shift from simply selling you energy (and encouraging you to buy more) to helping you manage and lower your energy use. And when you can manage your energy use better, we all save – and the planet is in a better position for the future.

– Eric Jensen is Energy Coordinator for the Izaak Walton League’s Midwest office in St. Paul, Minnesota. He holds a Bachelor’s degree in Chemical Engineering from University of Wisconsin-Madison.

Back to Winter 2011 issue of Outdoor America


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