Growing populations will necessitate more energy, which will then cause more pollution. But is this dynamic inevitable and if so, what can be done about it?

One idea is to split utility rates from their sales volumes, known as decoupling. Utilities, of course, are rewarded based on the amount of electricity they sell and not what they can save. But decoupling allows utilities to earn returns on investments they make in energy efficiency while also ensuring that any customer savings don’t reduce their revenues.

The American Council for an Energy Efficient Economy says that the model is good for everyone: Utilities can implement energy efficiency for a third of the costs it takes to build traditional generation. Consumers, meanwhile, won’t foot the bill for that new infrastructure -- or the cost of regulation tied to fossil fuel production -- albeit they will pay for the energy efficiency tools.

“At the heart of the issue is the way that utilities currently make money by selling energy and building new power plants and transmission lines, instead of selling an energy service,” says Dan York, utility program director and lead author of a white paper produced by the American council. “This means that a utility is discouraged from investing in technologies and programs that reduce customer energy use through improved energy efficiency.”

The discussions are mostly occurring at the state level, where 26 states have enacted mandatory energy-efficient goals for utilities. The International Energy Agency says that the participating states’ per capita consumption is 31 percent less than otherwise.

But the Catch 22 is that unless something changes, utilities would be harmed financially. That is, the forced rules requiring energy savings would cut into the sales that utilities would otherwise make.

By allowing energy efficiency investments to be “recovered,” regulators can level the playing field and remove barriers to utility investment in such programs, says the American council. At the same time, utilities should not suffer because they would be selling less electricity, it adds. Such lost revenues should be allowed back into their regulated profits -- a move that is opposed by large electricity users.

Flip Side

Several utilities are discussing reforms with their state regulators. In some states, periodic adjustments called "true-ups" can move customers' rates up or down modestly to ensure that utilities recover their authorized fixed costs regardless of fluctuations in energy use. Decoupling would not change that.

To be sure, the details surrounding decoupling have not been fully fleshed out. Utilities are working with their state public utility commissions to quantify the value of energy efficiency projects that could be passed through to ratepayers. Is that worth the full value of the investment or some portion of it, or should such outlays be considered a separate business and therefore ineligible for recovery?

Meantime, many consumer groups are opposed to allowing utilities to recover their lost revenues from their investments in energy efficiency. They do not want to have to pay more for electricity that they are not using.

The Electricity Consumers Resource Council, which represents large industrial users, adds that an improperly devised decoupling system would "disrupt and distort" the core business function of utilities. If energy efficiency programs are allowed to be run by utilities -- as opposed to third parties -- it would be an ineffective way to encourage efficiencies.

“Utilities are not designed to implement efficiency – they are designed to plan and operate power delivery systems -- and they should not be tasked to do so,” says the consumers council in congressional testimony. “That responsibility is best given to a dedicated third party.”

While supporters of decoupling say that it is possible for some customers to pay more in the short run, they argue that it is ultimately destined to save billions while also helping to drastically cut harmful air emissions.

In California alone, advocates of decoupling say that the idea -- in conjunction with other energy efficiency measures -- will amount to $10 billion in energy savings over the next decade. The northeastern states have furthermore concluded that doubling efficiency investments in the region will radically cut pollutants while saving average consumers $100 per year.

“What we need to do is flip the century-old model on its head and change the financial motivations for utilities from selling energy and building power plants to helping customers use energy more efficiently,” says Marty Kushler, a fellow with the American council and the co-author of its paper.

If utilities can recover the cost of their investments while adding back in their lost revenues, they would be game. But that would irritate consumers who don’t want to be charged for power they don’t use. In the long run, though, the reduced consumption would lessen the need for infrastructure -- savings that would be good for both customers and shareholders.

EnergyBiz Insider has been been nominated in 2010 and 2011 for Best Online Column by Media Industry News, MIN. Ken Silverstein has also been named one of the Top Economics Journalists by Wall Street Economists.

Follow Ken on  www.twitter.com/ken_silverstein

energybizinsider@energycentral.com

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