Skip to content
Business
Link copied to clipboard

Enabling utilities to favor conserving

The idea is to "decouple" sales from profits so energy firms' financial health doesn't depend on fuel use.

Should utility customers pay higher rates for gas, electricity or water if conservation cuts into utilities' sales? How about if customers' savings from conservation will far outstrip the higher costs?

Those questions lie at the core of a debate about utility financing and conservation stirred by concerns over global warming and energy prices. They are behind a pilot program by South Jersey Gas and similar trials in a dozen other states.

The programs are based on an idea called "rate decoupling," or the disconnecting of utilities' sales from profits. The concept was pioneered in California in the 1980s, then largely forgotten during the deregulation era that followed.

Now, decoupling is back, driven by what backers say is simple logic: that to effectively encourage conservation, policymakers have "to break the link between utilities' financial health and their energy sales," said Ralph Cavanagh, co-director of the energy program at the Natural Resources Defense Council.

Proponents such as Cavanagh say that utilities, unlike other businesses, are often pressed - for the public good - to push customers to buy less of their product.

Droughts force water rationing. Pollution and global warming prompt pressure for energy conservation. At times, turmoil in the Middle East, or Gulf Coast hurricanes, have sent oil and gas prices soaring and made conservation a national obsession.

The rub is that what's good for the public is not necessarily good for a particular company. And for any business, selling less of its products is generally a problem, not a path to success.

Decoupling, in essence, enables a utility to share in the benefits of conservation savings. For instance, South Jersey Gas estimated that if a household cut $160 from its annual bill, the customer would keep $144 of the savings and return $16, or 10 percent of the total, to the utility.

California came to decoupling after the oil-price shocks of the 1970s laid bare the basic conflict between conservation and utilities' ordinary financial incentives.

The state was an early leader in recognizing the benefits of conservation and in pushing its utilities to encourage customers to use less. But as Cavanagh recalls it, '70s-era utilities typically spoke out of both sides of their mouths.

They would offer energy audits, recommend buying high-efficiency refrigerators and other appliances, even distribute insulating blankets for hot-water heaters.

But at the same time, many continued to at least subtly encourage consumption. In some parts of the country, they gave away high-wattage light bulbs, or encouraged installation of electric water heaters and other appliances.

To address the problem, Cavanagh and other advocates urged the state to rethink utility-rate design so that utilities and their customers both had incentives to conserve.

"Some people think that utilities have an inherent conflict of interest when it comes to saving electricity," Cavanagh said. "That's not true. But you do have to change the rules under which utilities operate."

The current interest in decoupling has centered on the natural gas industry, in part because increasing efficiency has caused a long-term decline in gas usage.

Last year, the New Jersey Board of Public Utilities approved a pilot program for two utilities, including South Jersey Gas Co., based on decoupling proposals they submitted in December 2005.

Jerry May, a BPU staffer who helped fashion the program, said the result was not a simple decoupling of sales from profits. Instead, it requires the utilities to actively encourage conservation, using shareholders' money to do so, while allowing them to pocket some of the systemwide savings that result from reducing overall demand.

"It's a sharing of the costs and benefits of conservation," May said. "It's basically a way of making them whole - to remove any disincentive they have to pushing conservation."

What does it mean for South Jersey Gas customers' bills? With the program in its first year, it's too soon to say.

Last month, South Jersey Gas said that lower gas expenditures would reduce customers' rates 3.7 percent, but that after adjustments under the pilot "Conservation Incentive Program," the net effect would be a reduced rate of about 1 percent.

Dave Kindlick, South Jersey's chief financial officer, said customers could also benefit directly from the conservation program by cutting consumption - the overarching goal. And he said giving utilities incentives to push for conservation was the best way to get results.

"When nobody's pushing conservation, or just these small energy-service companies are pushing, it's just not happening," Kindlick said. "If you hear it from your utility, and the utility keeps on banging it home, you will see some reductions in usage."

Still, decoupling stirs some skepticism, especially among consumer advocates who say it could protect poorly run companies from the consequences of mismanagement.

Irwin A. "Sonny" Popowsky, Pennsylvania's official consumer advocate in utility-rate cases, said such concerns were a main reason the state Public Utility Commission recently rejected a decoupling proposal by a northwest Pennsylvania gas utility.

"People felt they would basically be charged more for using less," he said. "If it's not done correctly, then it's really just a way of shifting risk from the utilities to the customers for lost energy sales."

Mark Cooper, of the Consumer Federation of America, goes further.

"We certainly do want utilities to give efficiency and conservation a fair chance, because it's good public policy," Cooper said. "But why I have to bribe them and insulate them from their own problems is beyond me."

To Cavanagh, such criticism misses the point. He said the key objective was setting the right incentives for utilities, so that they shared customers' interests in saving energy and in saving money.

"Would you trade a slightly higher rate for a significantly lower bill? I don't know a single human being who would turn that proposition down," Cavanagh said.

"My fundamental goal is to ensure that utilities that help their customers save energy are more profitable than utilities that don't."