Tuesday, July 24, 2007

Decoupling and Sound Energy Policy

In a little-noticed decision on July 20, 2007, the Maryland Public Service Commission took what appears to be an important step in improving our state’s energy policy. On the one hand, there is no doubt we need to remove unreasonable regulatory and legal disincentives to producing more energy. And we need to recognize that it is not only important to produce more energy, but also to be able to construct the facilities needed to transport the energy efficiently to those who need it.

But energy conservation plays a role in establishing overall policy as well. And this is why the PSC’s July 20 action is significant. The Commission approved a “decoupling” mechanism that allows electric utilities to increase the distribution rates that recover the utilities' fixed costs for maintaining lines and poles if consumers conserve more electricity and demand drops. In other words, utilities’ revenues are, at least to some extent, “decoupled” from customer usage so the utilities do not have disincentives to encourage conservation. Absent decoupling, if utilities encourage conservation, they risk not covering costs that remain fixed regardless of the amount of usage.

The Maryland PSC’s action regarding decoupling applies to electric utilities operating in the state. But this ratemaking concept seems to make sense with regard to the regulation of other utilities as well, for example, natural gas providers, and in other jurisdictions.