In the landmark 2016 Colorado distributed energy settlement between Xcel Energy and solar advocates, a small provision about something called “decoupling” went somewhat overlooked.

Central to that settlement, which involved 26 stakeholder groups and resolved three proceedings, was an agreement by Xcel to withdraw its request for proposed fixed charges. In return, the parties agreed to not oppose Xcel’s request for decoupling in a parallel proceeding.

Given the persisting popularity of fixed charge increases, it is noteworthy that Xcel found decoupling worth the tradeoff. In just the first quarter of this year, U.S. utilities proposed 46 separate fixed charge increases, making it the most popular rate design reform option.

But interest in decoupling has been “on the rise,” according to a National Renewable Energy Laboratories report. Only 12 electric utilities used it in 2009, but 24 used it in 2013 and it is now in place at 33 utilities, according to the Natural Resources Defense Council.

But what is it?

“Decoupling is a tool intended to break the link between how much energy a utility delivers and the revenues it collects,” according to a primer from the Regulatory Assistance Project. It eliminates “incentives that utilities have to increase profits by increasing sales, and the corresponding disincentives they have to avoid reductions in sales.”

With decoupling, regulators authorize a utility that is facing revenue losses to reset rates between rate cases. The revenue loss can be due to weather, the economy, or shifts in customer behavior driven by technology advances or policy supporting energy efficiency and distributed generation.

The rate reset either charges or credits customers when the utility’s actual revenues are “less or greater than the revenues the mechanism calculates.”

Alice Jackson, Xcel vice president for strategic revenue initiatives, said decoupling will align the utility’s need to recover its costs with Colorado’s efficiency and distributed energy goals. The proposal, now before state regulators, would allow Xcel to add an interim per-customer charge to offset a decline in per-customer electricity usage until a rate case provides a rate adjustment.

Xcel was able to agree to last year’s settlement because solar advocates acknowledged that decoupling is "sound policy,” Jackson told Utility Dive, and the issue remains a key point of consensus between the two groups. But consumer advocates in the state continue to protest what they see as unnecessary customer charges, and some sector observers think deeper changes to the utility ratemaking model would better serve consumers.

Why Xcel wants decoupling

Xcel’s proceeding filing listed a range reasons the utility said support decoupling policy. Decoupling, it argued, would align the company’s financial interests with customer preferences for distributed generation and efficiency, and avoid or delay the need for utility rate cases.

Changing customer preferences are leading to lower per-customer usage and more difficulty in recovering “commission authorized fixed costs,” Xcel argued. A parallel Advanced Grid Intelligence and Security (AGIS) grid modernization proceeding could further erode per-customer energy use.

In addition, Colorado’s retail rate net energy metering and the time-of-use (TOU) rate pilot approved in the 2016 solar settlement add further “uncertainty regarding fixed cost recovery.”

Finally, Xcel argued, the state’s efficiency standards, new technologies and changing consumer behaviors “will continue to erode the company’s opportunity to recover fixed costs.”

“It’s a bit like asking an existing business to voluntarily reduce the number of units of a product that it sells, but they cannot change the price of that product,” Xcel’s Jackson said. “An appropriate decoupling mechanism addresses this.”

The decoupling ruling

On May 2, an administrative law judge for the Colorado Public Utilities Commission ruled that decoupling would “meet public policy goals and ensure the utility meets its fixed costs.” That ruling sent the final decision on the proceeding to state regulators.

Decoupling for residential customers is important because both energy efficiency “and a viable electric utility are in the interest of ratepayers,” he added. As modified in his ruling, decoupling “will align these interests without rate shock.”  

Garvey’s decision, a precursor to final regulatory review, did not rule in favor of Xcel on every question. He approved decoupling for residential customers but found evidence that did not support decoupling for commercial customers in the utility’s filings.

While Xcel argued for “partial decoupling,” which uses historical data to calculate the rate reset, Garvey agreed with the unanimous opinion of intervenors in the case. They argued for “full decoupling,” which uses actual sales information for the calculation, because it is “simpler” and “more transparent.” The ALJ also rejected Xcel’s argument that full decoupling was too big a change from traditional ratemaking practices.

Garvey ruled for a “soft” cap on decoupling revenues to be set at 3% of base revenues, rejecting the utility’s proposal for no cap on the rate reset amounts. He also rejected the PUC staff’s proposal for a “hard” cap on revenues, allowing the utility to “petition for recovery of costs above the capped amount as part of the next year’s adjustment.”

The ALJ rejected Xcel’s proposal that the rate reset mechanism be based on electricity use per customer, affirming DER advocates’ argument that it be based on revenue per customer. And he ruled against the utility in deciding Xcel should be required to “true up” its annual “over-or-under-recoveries.”

Finally, he accepted intervenors' requests that “the Tucson Model,” a protection for low income utility customers conceived in a Tucson Electric Power rate case, be included in the rate reset mechanism.

The Tucson Model applies charges only to upper rate tiers typically paid by higher usage customers on the assumption they are likely to have higher incomes. It applies discounts only to lower rate tiers.

Xcel argued the provision unnecessarily complicates the mechanism's calculation and would increase high-usage customers’ rates, but Jackson said decoupling is still workable with its inclusion.

The Tucson Model is about “customer equity,” she said. It “does not impact the effectiveness of the decoupling implementation.”

In ruling for the Tucson Model, Garvey ordered its limited use in conjunction with the TOU rate trial to add to the understanding of how decoupling impacts time varying rates.

New allies make the case

The debates about the use of full decoupling and the Tucson Model did not erode the new alliance formed last year between Xcel and DER advocates on the subject.

“Approval of a decoupling mechanism has support from most intervenors, including the Colorado Energy Office, the Southwest Energy Efficiency Project, Vote Solar, and Western Resource Advocates (WRA),” the utility reported in a filing.

Vote Solar supports Xcel’s proposal as modified because “it seems to be their way of avoiding being forced to push up volumetric sales to stimulate business,” said Policy Director Rick Gilliam.

Integrated volt-VAR optimization (IVVO) is an example of a positive that could follow from approval of decoupling, Gilliam added.

IVVO is a distribution system hardware-software technology that can reduce distribution line losses 2% to 5% through control of voltage and current fluctuations.

Xcel would likely not implement IVVO without decoupling because the kWh reduction at customers’ meters “would be revenue out of their pocket,” Gilliam said.

That the decoupling mechanism allows for alterations in customers’ rates without a rigorous rate case does not trouble Gilliam.

The rate reset calculation “is made through a simple formula,” Gilliam said. “But it is a trust and verify situation. We will review their filings and can inform the commission if we identify anything that needs attention.”

The approval of the Tucson Model was of special importance, Gilliam said. “This would be the first time this protection for low income customers has been approved by a commission.”

Gilliam also approved the ALJ’s decision to require Xcel to implement decoupling as part of the TOU rate trial. “Many policymakers realize that residential rate structures have to change,” he said. “Decoupling gets more complicated with TOU rates, especially if the Tucson Model is used. This essentially tests the concept.”

WRA Attorney Erin Overturf also supported the decoupling proposal in her filing because it “will remove an existing disincentive that hampers deployment of energy efficiency and distributed renewable generation.”  

Studies show “utilities spend more money on energy efficiency programs and achieve more energy savings for their customers in states that have adopted decoupling,” Overturf wrote.

She agreed with Gilliam that decoupling will likely enable Xcel to pursue IVVO “which is expected to reduce energy consumption for residential and small commercial customers by 1.4%.”

Finally, WRA backed decoupling because it is “a first step down the path of transitioning our energy system,” Overturf wrote. It raises the question of whether 21st century utilities are about “the sale of as much energy as they can get people to buy” or about “an infant energy services industry that may or may not blossom depending on our choices.”

The loyal opposition

The Office of Consumer Counsel (OCC) and PUC staff opposed the proposal. The OCC was the only stakeholder in the 2016 settlement that did not commit to supporting decoupling.

“The OCC is opposed to any of the forms of decoupling we have seen,” Executive Director Mindy Schonhaut said.

Xcel failed to show decoupling “is necessary” or “is supported by the evidence” or “is in the public interest,” an OCC filing argued.

Xcel wants to recover “$102 million from all Residential and Small Commercial class customers during a five-year period from 2017 to 2021,” the OCC reported. But Xcel has been “over earning in excess of $180 million since 2012” and therefore does not need further recovery through decoupling.

The numbers show residential per-customer usage has been declining and is expected to continue, Garvey wrote. But the same cannot be said for small commercial customers, so he sided with OCC and ruled against that part of Xcel’s proposal.

The OCC staunchly objected to the argument made by Xcel and supported by Vote Solar and WRA that this decoupling proposal is key to Xcel's deployment of IVVO.

Recovery of those IVVO costs is part of Xcel’s pending AGIS grid modernization proceeding, Schonhaut said. “OCC does not object to that revenue recovery mechanism but if the commission approves the grid modernization revenue recovery mechanism, there is even less need for decoupling.”

Xcel’s Jackson disagreed. “In the event the decoupling request is denied or insufficient to address IVVO, the parties agreed to provide the opportunity to recover those costs in the AGIS proceeding because the implementation of IVVO is in the public interest.”

Schonhaut said the OCC prefers traditional ratemaking. “They incur the cost, get rates approved based on those costs, charge those rates, and get the revenue from their customers.”

Commission staff amplified the OCC’s questions about Xcel’s need for decoupling, though an Xcel filing described the consumer advocate’s conception of the decoupling mechanism as “very limited.”

Staff argued the utility offered no “compelling evidence” of declining revenues or that decoupling “would provide any benefits for customers or advance public policy goals."

The decoupling proposal’s “increased complexity and reduced transparency” has “too many flaws” and “uncertain impacts” on other programs and investments, Staff wrote.

Staff did endorse a trial use for the 2016 settlement’s rate pilots, recognizing that “decoupling applied to a broader group of customers is an option that the commission could consider in the future.”

Is decoupling the optimal solution?

Karl Rabago, director of the Pace Energy and Climate Center, recalled that decoupling policy was accepted first in California because advocates saw its cost to customers as “a lot less than the cost of a new power plant.”

But now, despite the alliance between Xcel and Colorado’s distributed energy resources (DER) advocates, Rabago believes decoupling may be a barrier to the emerging new utility business model.

Early on, DER advocates did not see decoupling as “a transition mechanism” because the role of utilities as “platform providers” was not yet conceived, Pace’s Rabago said. “Now electricity sales are flat or declining, there is no need for new power plants, and DER is being built but not by utilities.“

The problem is that decoupling “partially but not completely corrects for the decline in recovery of fixed costs,” Rabago said. It does not address the loss of returns for fixed investment or the absence of any new driver for fixed investment.

More importantly, the decoupling-imposed charge to customers means their bills go up for taking steps to reduce grid electricity consumption through EE or self-generation.

“We need a new business model besides the growth model but decoupling is a mechanism that is addicted to the growth model,” Rabago said. “It taxes innovation to maintain the illusion the utilities are still in a growth model business.”

One alternative, Rabago said, “could be a new paradigm of utility regulation based not on returns for infrastructure deployed, but revenue based on performance."