The connection between blackouts and electricity 'decoupling'

In Maryland, utilities have to incentive to make storm-related repairs a priority.

February 02, 2011|By Tim Brennan

Yet again, the aftermath of a storm has left large segments of the public disgusted with a slow restoration of power. We saw this following Hurricane Isabel a few years ago and after the February blizzards and severe thunderstorms last year. The time it has taken to restore power has led to calls for fines and penalties on the utilities that provide the wires, poles, transformers and substations that bring us electricity.

Under these circumstances, you might think the silliest thing we could do would be to promise these utilities the same profits regardless of how much electricity they deliver. Could there be a better way to discourage managers from getting their businesses up and running than to guarantee the same returns regardless of whether they sell anything?

Well, that's what we've done with utilities in Maryland. We've adopted a policy called "decoupling," which refers to separating the earnings of utilities from the amount of electricity they sell. If you use less electricity — as many of us did after last week's storm — the utilities are kept whole. This doesn't sound like a recipe for getting them to repair downed lines and blown transformers with due speed.

Why would we do this? On the 350 days of the year when most of us aren't thinking about storms, reliability gets kicked to the back burner and energy efficiency gets priority. Energy efficiency means getting the same service from electricity but using less of it. For homeowners, the usual examples include "high efficiency" refrigerators, air conditioners and fluorescent bulbs.

Greater energy efficiency might be an appropriate way to reduce environmental harms from producing electricity. It could help avoid the need for expensive generators and transmission lines solely to meet demand on those few really hot summer afternoons when air conditioners are running full bore. Many believe that if consumers understood how much electricity they'd save, they'd pay for more efficient lights and appliances.

What does any of this have to do with utilities and decoupling? One might think, not very much. If electricity is too cheap because its price doesn't include environmental harm or reflect high summer peak costs, we should take steps to get the prices right. If that's politically unpalatable, we could institute subsidies or tax breaks to encourage consumers to reduce electricity use. If people don't understand the benefits of energy efficiency for their wallets, get them the information.

None of this requires the involvement of utilities. However, these solutions cost money that the state legislature doesn't have and isn't willing to raise taxes to fund. This leaves paying for them by having utilities agree to support energy-efficiency programs, with their costs covered through rate increases. But this only works if we abandon the century-old system of utilities making money based on how much electricity they sell. Otherwise, they "would be in the awkward position of promoting energy efficiency programs that reduce revenue," as BGE told the Maryland Public Service Commission.

So, to get utilities to carry out energy-efficiency programs that the legislature lacks the political will to fund, we've adopted decoupling. Utilities like it because it guarantees their profits; environmentalists like it because it defuses utility opposition to energy-efficiency programs, and legislatures like it because they can avoid raising taxes by shifting the burden to electricity regulators.

But consumers? In addition to having to pay for energy-efficiency programs through higher rates, the predictable if unintended consequence is slower outage repair. If we make utilities indifferent to how much electricity they distribute, can we expect them to try as hard to restore power as they would if their revenues depended on how much electricity we use? Regulators can take utilities to task for poor performance after the fact, but that's not the same as losing money right away. Decoupling advocates can't simultaneously argue that incentives matter for energy efficiency but not for power restoration.

There may be solutions. Ideally, paying for the distribution of electricity should be independent of use because the cost of the distribution system is largely independent of how much electricity we use. Those costs, however, depend on how many customers a utility has. For now, we might consider reducing each customer's electricity bill based on the time his or her power is out, to provide incentives to restore power that decoupling takes away.

Over time, perhaps we can get prices right and place responsibility for energy policy where it belongs: with the legislature rather than the utilities. I'm not holding my breath.

Tim Brennan is a professor of public policy at UMBC. His e-mail is brennan@umbc.edu.

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