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Decoupling for Fun and Profit

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When California utilities decoupled their rates, the state surged ahead of the nation in the productivity of its electricity use.

The cheapest way for Traverse City Light & Power to meet much of its customers’ future demands for electricity is, as I wrote last time, to flat-out buy them things that significantly reduce their demand for electricity.

That’s not a radical idea. It simply takes TCL&P’s current,successful policy of giving away high-efficiency light bulbs-something many utilities are doing-and puts it on steroids by paying customers or efficiency companies for measures that sharply cut electricity demand. (I list five ideas here.)

But why would a company trying to make a buck selling electricity ever pay folks to use less? Well, they won’t-unless they get into rate decoupling.

Decoupling unlinks a utility’s profits from the normal way of doing business-the more you sell the more you make-and links them instead to something entirely different: the amount of efficiency the company produces.

Sounds crazy, I know, but utilities in California, Oregon, Maryland, Idaho, New York, and Minnesota are decoupling, each in a slightly different way.

California is particularly interesting: It had great success with decoupling starting way back in 1982, then stopped doing it in favor of deregulation in 1996. The state promptly ran into a huge supply and demand disaster, and went back to decoupling in 2006, as part of an extremely aggressive efficiency drive. The results, according to a very recent report by the National Resource Defense Council, have been spectacular. Among other things, Californians now use about half the electricity, per capita, that we regular Americans use.

As a bonus, decoupling also eliminates a utility’s risk of losing money when demand for electricity falls sharply because of things like recessions or warm winters.

So, roughly speaking, here’s how decoupling works:

Let’s say TCL&P spends $10 million over 10 years buying its customers  (including the city) everything from vastly superior insulation (for the leakiest electrically heated buildings), to the latest low-watt street lighting, to those new ultra-efficient water heaters that cut electricity use in half.

Each year, the company adds up everything it spends-on printer ink, salaries, capital costs, fuel expenses, maintenance, and, yes, that cool one million on insulation, LEDs, and water heaters. It adds in an agreed-upon profit (in TCL&P’s case, that might be called a “surplus” that holds down borrowing costs, since it’s a non-profit), and divides the whole shebang by the amount of electricity it sold.

Presto! That’s the new rate for buying TCL&P’s power for the next year.

Now, if you’re paying attention, you should be wondering: “But, if efficiency has you selling less power, and you’re spending more money paying for insulation and lights and water heaters, plus a guaranteed profit, isn’t my rate going to go up?“

Yup! But maybe not your bill-and even if it does, the increase is slight, to the tune of tenths of a cent per kilowatt-hour. If you use 1,000 Kwhs a month, a fairly large amount, it might hike your monthly bill by two or three dollars.

But, if your household is now using much less electricity to heat water, cool or heat your house, dry your clothes, and cook your food, your electricity bill could fall by 20, 30, even 40 percent. That’s saves a lot more than two dollars.

Because it makes sense for TCL&P to buy efficiency for its biggest, most inefficient customers first, it also makes sense to juggle rates (utilities do this constantly with “rate classes”) so those big users see larger rate increases to help pay for those efficiencies than the rest of us. But they still enjoy significant savings on their bills.

And remember, we do, too, because buying efficiency is so much cheaper than buying a new power plant. That keeps everyone’s bills down.

Now, it might also makes sense to establish a fund that fronts very low-interest, long-term loans to those of us still waiting for TCL&P’s efficiency gravy train to arrive. That way, we could do our own efficiency thing now if we wanted to. And we would still save money, even as we paid back the loan.

In fact, local, member-owned Cherryland Electric Cooperative is doing exactly that today, working with a local credit union, construction firm, and energy auditors to make it happen.

And since decoupling can also be used to protect utilities from losses when electricity sales plummet due to non-efficiency reasons, the company always makes a profit. That’s subject, of course, to strict benchmarking and bonusing rules that assure best business and production practices.

Here’s one other nice upside: If customers somehow use more megawatts (rebounding economy, warmer summers, more customers), or the efficiency investments are all done, rates go down or we get efficiency dividend checks.

Yes, I’m really simplifying this. Rates, kilowatt-hours, financing, returns on equity and investment-it’s deep stuff . But the basic principles are already proven elsewhere, and they would surely work in highly inefficient Michigan-a state where the homebuilders association fought higher efficiency standards in homes for years.

The number of engineering, financing, selling, and installing efficiency jobs this would create around town would be tremendous. It is vastly superior to sending evermore dollars to downstate generators, outstate coal companies, and interstate railroads to keep inefficiently used megawatts coming our way. As I mentioned in TCL&P and the Invasion of the Negawatts, efficiency is the gift that keeps on giving.

And it might cost your household about the price of a half a pint at your local pub, once a month. Or it could buy you a case of the good stuff every month if you played your cards right. Are you ready to drink to that?

Next up-a look at some utility and municipal efficiency financing schemes that can help out, too.

Jim Dulzo is the Michigan Land Use Institute’s managing editor. Reach him at jimdulzo@mlui.org.

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