Aligning Utility Interests with Energy Efficiency Objectives: A Review of Recent Efforts at Decoupling and Performance Incentives

Abstract

Electric utility industry experts have long recognized that under typical regulatory structures (e.g., traditional rate-of-return regulation, rate caps, etc.), utilities do not have an economic incentive to provide programs to help their customers be more energy-efficient. In fact, they typically have a disincentive because reduced energy sales reduce utility revenues and earnings. The financial incentives are very much tilted in favor of increased electricity sales and expanding supply-side systems. This report examines recent experience with two key regulatory approaches to overcome these structural disincentives: (1) decoupling of utility revenues and profits through periodic true-up of actual to projected sales; and (2) providing shareholder performance incentives for achieving energy efficiency program objectives.