Revenue Decoupling


What is revenue decoupling anyway?

Before we answer the big question let's acknowledge that every electric company has two kinds of costs: fixed and variable. Fixed costs include personnel, equipment and distribution lines. Variable costs are fluctuating costs such as the price paid for electricity and the amount of electricity used by the customer.

How do these costs affect my electricity bill from Delmarva Power and Light?

Under the current rate structure, Delmarva bills you for the amount of electricity you use - the "supply charges". The supply charges are the variable costs. Delmarva also bills you for distribution - the "delivery charges". The delivery charges are set so that Delmarva can recover its fixed costs. (There is also a charge for customer service and a small charge for transmission.) Currently both the energy supplied and the distribution charges are based on the fluctuating amount of electricity you use. A sample bill can be viewed on Delmarva's website at this link.

What is distribution?

Distribution is the delivery of electricity to homes and businesses. Substations take power from transmission-level voltages and distribute it to thousands of miles of lower voltage distribution lines. The distribution system is generally considered to begin at the substation and end at the customer's meter. Delmarva is responsible for building and maintaining the electric wires, poles, transformers and the entire infrastructure to insure reliability for its customers.

What is reliability?

Under the Delaware Public Service Commission standards, distribution reliability is designed to meet the electricity demand - typically a hot summer day when many of us run our air conditioners. Reliability is described as the degree to which safe, proper, and adequate electric service is supplied to customers without interruptions.

So what is revenue decoupling?

Revenue decoupling is just a way of separating the revenue to recover the fixed cost of delivery or distribution from the ups and downs of electricity consumed.

Why start revenue decoupling?

Distribution costs historically have been billed to consumers based on the amount of energy used. Revenue decoupling would enable Delmarva to support energy efficiency and its resulting environmental benefits without having to sacrifice financial stability.

Revenue decoupling would also stabilize the amount of delivery cost billed to customers. Customers would be billed a fixed amount for delivery costs rather than a variable amount that depends on the amount of electricity used each month and which can be impacted by factors such as weather.

Does revenue decoupling guarantee Delmarva a profit?

No. Revenue decoupling would not guarantee a profit for Delmarva. The Public Service Commission, based on careful and extensive review, determines how much cost Delmarva is entitled to recover for what it spends to build and maintain wires and poles as well as what it spends for personnel, equipment and other costs. This amount, determined by the Commission, is the amount that Delmarva is entitled to bill its customers. Ultimately, Delmarva makes a profit, or incurs a loss, depending on how well it controls its costs.

Would revenue decoupling support Delaware's goals for reducing energy use?

Revenue decoupling would support Delaware's ambitious goals of reducing demand for electricity, as specified in the Delaware's Energy Efficiency Resource Standards Act of 2009.

It is expected that revenue decoupling would allow the company to participate fully in energy efficiency measures designed by the Sustainable Energy Utility. These measures will enable customers to reduce their energy costs which are the most significant portion of their electric bills. (The SEU is a nonprofit entity tasked to operate and oversee programs that deliver comprehensive end-user energy efficiency and customer-sited renewable energy services to Delaware's households and businesses.)

Is there some agreement on what the proposed revenue decoupling rate design might look like, if approved by the Commission?

Under the proposed revenue decoupling implemented through rate design, customers would be charged a fixed amount for the cost to deliver their electricity.The charge would no longer vary month to month depending on the amount of electricity used. Under the proposed rate design method, Delmarva would implement a cap mechanism to mitigate the impact of the new rate design on customers who would otherwise have a more significant increase in rates.

This new design also reflects the fact that in order to prevent interruptions in service, delivery systems must be built to meet the highest levels of demand. It costs more to have a distribution system that is built to accommodate system reliability during peak periods in order to prevent interruptions in service than one designed to meet average usage.

Okay, bottom line, what would revenue decoupling mean to my monthly Delmarva electricity line?

Revenue decoupling only addresses the delivery portion, about 25%, of your total bill. The delivery portion could be higher or lower depending on how much electricity you used in peak periods in the past.

It is important to remember that the cost of the electricity, the actual energy consumption, makes up the majority of your bill - typically about 75%.Customers who reduce their energy use will see a decrease in the supply portion of their bill immediately.

What other states have approved or are considering revenue decoupling?

Many states are looking at ways to enable implementation of energy efficiency and a number have approved or are considering revenue decoupling. Just on the east coast Maryland, New York, Vermont, Massachusetts, Connecticut and the District of Colombia have adopted a form of electric revenue decoupling. New Jersey and New Hampshire, like Delaware, are considering revenue decoupling.

Other states are trying other solutions to enable electric utilities to fully participate in energy efficiency programs. North and South Carolina have adopted a lost recovery mechanism to help insure that the utility is a willing partner in implementing energy efficiency.

Some states even provide incentive payments to utilities that achieve energy efficiency goals. Regionally, Connecticut, Massachusetts, New Hampshire, North Carolina, South Carolina and Vermont have incentive programs and New York is considering an incentive program.

This information about state activity is based on a report developed by The Edison Foundation, Institute for Electric Efficiency, The report is available here.

Is there interest on the federal level?

There is interest in revenue decoupling at the federal level as well. For example, the American Recovery and Renewal Act of 2009 (ARRA) requires certain assurances from state governors as a condition to receiving a portion of a $3.1 billion grant. Among other things, governors must notify the Secretary of Energy that they have received assurances from state regulatory authorities that the authorities will seek to implement proceedings for electric and gas utilities that ensure that the utilities' financial incentives are aligned with helping customers use energy more efficiently.

What are the current PSC proceedings where electric revenue decoupling is being examined?

On September 18, 2009, Docket No. 09-414, Delmarva Power & Light filed with the Commission an application seeking an increase in its electric base rates and for miscellaneous changes. On September 9, 2009, the Delaware Public Service Commission opened Docket No. 09-276T to examine the adoption of a modified fixed/variable rate design, a form of revenue decoupling, for Delmarva Power's electric business. Since the issue of the appropriate revenue decoupling mechanism would be addressed in both dockets, the Commission consolidated Docket No. 09-276T into Docket No. 09-414.

The Commission began investigating whether to implement a revenue decoupling mechanism for the electric and natural gas distribution utilities subject to its jurisdiction in Regulation Docket No. 59 dated March 20, 2007 (Order No. 7153).

What is the status of the proceeding for Docket No. 09-414 & 09-276T?

On January 18, 2011 the Commission deliberated on the combined dockets. The Parties entered into a proposed settlement agreement with respect to certain issues contained in the combined dockets. Minute Order No. 7897 details the Commission decisions; Exhibit A of the Order contains the proposed settlement. The parties agreed that Docket No. 09-276T should remain open for the purpose of conducting workshops and future determination by the Commission on the implementation of the MFV rate design. An implementation plan that describes the consumer benefits from the MFV rate design and the programs that will be initiated to maximize energy conservation and reduce customer costs will be developed through the workshops. A workshop will be held on October 25, 2011 at 10:00am in the Delaware Public Service Commission Hearing room (see public notice for more information). The purpose of this workshop is to participate in discussion related to the development of the Modified Fixed Variable Rate Design, also known as Revenue Decoupling, for Delmarva's electric customers.

On October 25, 2011, Commission Staff, Delmarva and the DPA presented information on rate design and the specifics of the modified fixed variable rate design also known as revenue decoupling for electric. Click here to view the presentation.

What are the PSC proceedings where gas revenue decoupling is being examined?

On September 9, 2009, the Commission entered Order No. 7619 opening PSC Docket No. 09-277T (filed June 25, 2009) to examine the adoption of a modified fixed/variable rate design for Delmarva Power's natural gas business. See Order No. 7731 for more information. On December 21, 2010 Order No. 7882 was approved by the Commission. The order grants Delmarva Power & Light Company's Motion to consolidate PSC Docket No. 09-277T, the Company's application to institute a modified fixed variable ("MFV") rate design for gas customers, and 10-237, its gas base rate case.

What is the status of the proceeding for Docket No. 10-237 and 09-277T?

On February 10, 2011 the Parties entered into a proposed settlement agreement, which among other things, outlines the steps that will be taken in regards to implementing decoupling. On May 13, 2011 the Findings of fact, Conclusions of Law and Recommendations of the Hearing Examiner was issued for the Commission's consideration. On June 21, 2011 Order No. 7990 was signed which adopted the Findings of Fact, Conclusions of Law and Recommendations of the Hearing Examiner and approving the Proposed Settlement Agreement, in its entirety, submitted by Delmarva Power & Light Company, the Commission Staff and the Attorney General's office. A workshop will be held on August 29, 2011 at 10:00am in the Delaware Public Service Commission Hearing room (see PSC calendar for more information). The purpose of this workshop is to participate in discussion related to the development of the Modified Fixed Variable Rate Design, also known as Revenue Decoupling, for Delmarva's natural gas customers.

On August 29, 2011, Commission staff, Delmarva and the DPA presented information on rate design and the specifics of the modified fixed variable rate design also known as revenue decoupling for natural gas. Click here to view the presentation.