The Theory and Practice of Decoupling Utility Revenues from Sales

Decoupling has emerged in the US as an important regulatory strategy for insulating utility revenues from sales fluctuations. Breaking the link between revenues and sales, it is argued, is an important prerequisite for transforming utilities from sellers of an energy commodity to providers of energy services. We characterize the cost and regulatory conditions that underlie these arguments and, thereby, provide guidance on the applicability of decoupling to other regulated utilities. We describe how decoupling works in practice and then, using historic information on utility costs, examine the cost-tracking assumptions inherent in traditional rate-making and current decoupling approaches. Finally, we report on the actual rate impacts of decoupling examining the three US utilities with the longest history of decoupling.