Sep 13 - McClatchy-Tribune Regional News - H.J. Cummins Star Tribune, Minneapolis

Imagine a company where, no matter how much business falls off, revenue never does.

Those are the terms for a growing number of utilities around the country charged with helping consumers save energy. Because conservation doesn't make good business sense for power companies -- the more power people buy, the more money the company makes -- some states have decided to put business' most basic equation on its head.

The strategy is called "decoupling," and it lets utilities hold on to the same level of revenue even as their customers use less of their product -- presumably through higher rates.

Minnesota legislators last year passed a law authorizing the Public Utility Commission to set up decoupling programs -- at the same time that they mandated an annual 1.5 percent cut in consumer consumption. Commissioners are accepting public feedback through this month, and utilities are expected to submit pilot proposals by the end of the year.

But decoupling is igniting controversy within the energy industry and the state agencies that regulate it. Utilities and environmentalists call it fundamental to making the energy marketplace earth-friendly. They cite California as proof that it works: Since that state began decoupling in the early 1980s, per-capita energy consumption there has stayed flat as it increased an average of 50 percent in the rest of the country.

Consumer advocates, on the other hand, call it a windfall for utilities -- at consumers' expense -- and maintain that there are better, more direct ways to reward conservation efforts by power companies.

"Decoupling basically holds utilities harmless no matter what happens to sales," said John Howat, energy policy analyst at the National Consumer Law Center in Boston. "This is really an insidious thing, in my view, and it's taking the country by storm."

Industry consultants described the changes decoupling bring: Traditionally, utilities go before state regulators every few years with projected costs and sales, and based on that, regulators tell them what rates they can charge their customers -- to cover those costs and reach a reasonable rate of return -- and what rate of return the company is authorized to earn. A bitter winter or hot summer could force up energy consumption, and the added sales will be a boon for the utility. Or, in mild weather the utility could take a hit.

Under decoupling, utilities and regulators basically do the same projections. But then every year they "true up" the actual figures, and if the utility sold more than expected it has to give the extra money back to ratepayers. If it sold less, it gets to charge more to make up the difference. And under the new mandates, the utility's total annual income will hold stable over time, even as consumption drops 1.5 percent a year -- so a profit motive does not stand in the way of promoting energy efficiency.

"Essentially, you put utilities on a budget and then you hold them to it," said Burl Haar, executive director of the Minnesota Public Utilities Commission.

The revenue guarantee sounds counterintuitive, except that utilities already are monopolies with guaranteed territories and some level of investor return in exchange for regulation, said Scott Dibble, DFL-Minneapolis, chief Senate sponsor of the broad energy bill last year that included the mandated conservation and introduced decoupling.

Environmentalist Bill Grant said the rate of return serves a crucial function: It lets utilities raise capital to build new infrastructure. "Do we want to pare it down so much that they can't really afford to invest in new transmission lines or new wind farms?" said Grant, Midwest director of the Izaak Walton League, a conservation group.

Utilities argue that consumers ultimately save because of all the power plants that won't have to built, construction that's billed back to ratepayers.

But Howat, at the National Consumer Law Center, maintained it's no accident that decoupling is locking in profits at a time when utilities' rates are relatively high.

Gas, electric or both

As evidence of self-interest, Howat pointed out that it's gas companies that support decoupling. For them, consumption is dropping. At electricity companies, it's still rising slightly. CenterPoint, Minnesota's largest natural gas distribution utility, is one supporter. "As a company, we're continuing to pursue rate strategies that take us away from volume-based revenue," said spokeswoman Becca Virden. Xcel, a utility with both gas and electricity sales, told Minnesota regulators that it finds decoupling more suitable for gas than electricity.

Washington state came across another difference when it set up decoupling. Regulators approved pilot decoupling projects at two utilities but denied one proposed by the gas and electric utility, Puget Sound Energy. The state's Utilities and Transportation Commission decided Puget Sound had done so well on its own it didn't need the benefits of decoupling, said Mike Parvinen, assistant director for energy for the commission.

Asked if that's fair, Parvinen said, "That's a good question."

Howat prefers specific rewards for specific conservation efforts by utilities, because decoupling lets them profit from developments they have nothing to do with, such as warm winters or stricter building codes. "Decoupling is not an energy-efficiency guarantee of any kind; what it is is a utility-revenue stabilization program," he said.

The National Association of State Utility Consumer Advocates also is worried about the spread of decoupling -- now in more than half of U.S. states. "We're not necessarily opposed to decoupling, but we haven't seen any we like so far," said association executive director Charles Acquard in Washington, D.C.

Risk-free

Minnesota's relatively progressive energy policies make decoupling unnecessary, some consumer advocates maintained. The state simply can keep going down its current path of requiring energy conservation from the utilities, they said. Also, power companies hardly bear any risk now, because utilities already pass rising fuel prices directly through to customers; adding decoupling will do the same for all their other costs.

At the very least, these consumer advocates want the state to reduce a utility's rate of return after decoupling, because reward is supposed to follow risk.

To Grant, at the Izaak Walton League, those points bolster his support for decoupling: He's convinced it promotes conservation, and it's not shifting much new risk to ratepayers, anyway.

"I think it's the customers currently bearing the risk, with very little of it falling to gas or electric companies now," Grant said. "I'm not sure you can reduce risk any further than it already has been."

H.J. Cummins --612-673-4671

Copyright © 2008The McClatchy Company