Solutions to regulatory disincentives for utility DSM programmes

Abstract Regulation of investor-owned electric utilities is simple: the more electricity a utility sells, the more money it makes for its stockholders. This link between sales and earnings encourages utilities to sell more electricity, whether or not such increased sales benefit customers. For the same reason, utilities often find it difficult to conduct energy-efficiency programmes: these programmes reduce sales, and reduced sales cut earnings. Utilities and their regulators can adopt several mechanisms to deal with this conflict between the interests of customers and those of shareholders. These mechanisms include traditional command and control regulation, frequent rate cases, alternative rate designs, compensation to the utility for the revenues lost because of its energy-efficiency programmes, and decoupling of electric revenues from sales. In many situations, some form of decoupling may be the best way of resolving this conflict. Decoupling generally follows one of two paths. It tracks either fixed costs or actual revenues.