A Summary of Revenue A Summary of Revenue Decoupling EvaluationsDecoupling Evaluations

Dan HansenChristensen Associates Energy

ConsultingJuly 2014

July 2014 1

July 2014 2

OutlineOutline

Decoupling overview Description of mechanisms studied Risk issues

Weather risk Economic and price risk Should allowed ROE be reduced

Changes in utility behavior Effect on customer satisfaction

July 2014 3

Purpose of Revenue DecouplingPurpose of Revenue Decoupling

Traditional regulated rates recover fixed costs through volumetric rates

Provides utility with: An incentive to increase usage A disincentive to promote conservation and

energy efficiency

Problem: revenues and sales are directly related

Solution? “Decouple” revenues from sales

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Purpose of Revenue Decoupling (2)Purpose of Revenue Decoupling (2)

Revenue decoupling removes the link between sales and revenues, thus making the utility indifferent to the effects of conservation

Decoupling does not provide an incentive for the utility to promote conservation

Utility revenues are typically “recoupled” to some other factor(s), such as the number of customers

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Basic Decoupling ConceptBasic Decoupling Concept

Basic concept of revenue decoupling (RD):

RD Deferral = Allowed Revenue – Actual Revenue

A positive number means the utility under-recovered, and will lead to a future rate increase

A negative number means the utility over-recovered, and will lead to a future rate decrease

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Basic Decoupling Concept (2)Basic Decoupling Concept (2)

Typically every 6 or 12 months, the RD deferral is rolled into rates as follows:

Rate change from RD = RD Deferral / E(Usage)

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Description of Mechanisms Description of Mechanisms StudiedStudied

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Independent Evaluations of Independent Evaluations of Decoupling MechanismsDecoupling Mechanisms

NW Natural Gas Completed in 2005. Distribution Margin Normalization (DMN).

New Jersey Natural Gas & South Jersey Gas Completed in 2009. Conservation Incentive Program (CIP).

Portland General Electric Completed in 2013. Sales Normalization Adjustment (SNA).

July 2014 9

Decoupling Mechanisms:Decoupling Mechanisms:NW NaturalNW Natural

Revenue per customer decoupling (RPCD). Removes effects of weather from deferrals.

Separate WARM insulates NW Natural from weather.

Initially capped deferrals at 90% of the non-weather difference between allowed and actual revenue. Removed following our report’s

recommendation.

Low-income bill assistance and weatherization funding also approved.

Service quality standards imposed.

July 2014 10

Decoupling Mechanisms:Decoupling Mechanisms:New Jersey Natural Gas and South Jersey GasNew Jersey Natural Gas and South Jersey Gas

RPCD. Includes weather effects.

Separate weather normalization adjustment. ROE test: can’t recover more than

allowed ROE due to deferrals (excess can’t be recovered later).

Basic Gas Supply Service (BGSS) test. Non-weather component of deferral must be

off-set by BGSS savings. Commit shareholder funds to

conservation. Large customer count adjustment.

July 2014 11

Decoupling Mechanisms:Decoupling Mechanisms:Portland General ElectricPortland General Electric

RPCD for residential and small commercial.

Lost revenue adjustment for larger commercial customers.

Largest customers (over 1 aMW) excluded entirely.

Excludes effect of weather. Reduced ROE by 10 basis points. Decoupling includes fixed generation

costs. A proposal has been made to bifurcate the

mechanism such that G&T allowed revenue would be fixed and D allowed revenue would remain linked to the number of customers.

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Decoupling and RiskDecoupling and Risk

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Decoupling and Risk Shifting:Decoupling and Risk Shifting:Weather RiskWeather Risk

Does decoupling shift weather risk from the utility to its ratepayers?

No. A reduction in risk for one party does not necessarily mean that risk is shifted to another party.

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Decoupling and Risk Shifting:Decoupling and Risk Shifting:Coin FlippingCoin Flipping

Suppose I flip a coin Heads = I pay you $20 Tails = You pay me $20

This game exposes me to coin flipping risk. I gain or lose $20 every time we play.

If I decide to stop playing the game, I eliminate my coin flipping risk.

Did I shift the risk to you? No, your risk is eliminated as well.

This can happen when the risk is negatively correlated across parties (e.g., when something makes me better off, it makes you worse off).

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Decoupling and Risk Shifting:Decoupling and Risk Shifting:Coin Flipping (2)Coin Flipping (2)

This example is similar to the effect of weather on utility revenues (e.g., heads = hot summer and tails = cold summer).

Reducing utility weather risk can also reduce ratepayer weather risk.

Complications: decoupling deferrals affect rates paid next year, so weather risk is only eliminated over time and at the class level.

Weather risk can be reduced at the customer level through weather normalization mechanisms, as are found in the natural gas industry.

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Decoupling and Risk Shifting:Decoupling and Risk Shifting:Economic and Price RiskEconomic and Price Risk

Decoupling may shift two types of risk from the utility to ratepayers: Economic risk: recession may cause

customers to use less energy, which decreases the current bill but increases future rates.

Price risk: high commodity prices may cause customers to use less energy.

In an RPCD, these risk shifts can only occur when economic conditions and/or prices affect use per customer (UPC).

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Decoupling and Risk Shifting:Decoupling and Risk Shifting:Economic and Price Risk (2)Economic and Price Risk (2)

In each study, I conducted a statistical analysis of UPC as a function of: Weather Economic conditions Price Time trend

Findings: Very strong relationship between UPC and weather

across all utilities and customer groups. Very limited evidence of price response. Somewhat limited evidence of a relationship

between UPC and economic conditions.– Stronger for commercial than residential customers.

– Stronger in PGE study, which contained much more severe recession than other studies.

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Decoupling and Risk Shifting:Decoupling and Risk Shifting:ConclusionsConclusions

Argument that decoupling shifts risk from utilities to ratepayers may be exaggerated. Doesn’t occur for weather. Limited evidence of shifting price

risk. Some evidence of shifting economic

risk.– Could be mitigated by capping

decoupling adjustments.

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Decoupling and Risk:Decoupling and Risk:Reduce Allowed ROE?Reduce Allowed ROE?

In the PGE study, we conducted a statistical analysis of the effect of decoupling on the variability of utility returns.

Used FERC Form 1 data from 1993 through 2011 for 44 utilities.

Approximated utility rate of return as annual operating income divided by book assets.

Calculated the 3-year standard deviations of this measure as the dependent variable (also examined 5-year SDs).

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Decoupling and Risk:Decoupling and Risk:Reduce Allowed ROE? (2)Reduce Allowed ROE? (2)

Estimated a panel regression model to determine whether decoupling is associated with less variable returns.

Did not find any statistically significant effects.

Caveats: Did not distinguish types of decoupling

mechanisms. Relatively short time period, many

decoupled utilities did not have it in place for very long.

Effect may be small compared to “noise” in the data.

July 2014 21

Decoupling and Risk:Decoupling and Risk:Utility Credit ReportsUtility Credit Reports

Also examined PGE credit reports. Mostly favorable toward

decoupling, but effects are limited. Does not cover all customers. Not as important as the fuel cost

adjustment mechanism approved shortly before decoupling.

Appears to have contributed to improved credit rating.

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Effect of Decoupling on Effect of Decoupling on Utility BehaviorUtility Behavior

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Changes in Behavior:Changes in Behavior:Employee MessagingEmployee Messaging

NJ Natural and SJ Gas trained all employees on how CIP changed corporate incentives. Tent cards, posters, laminated cards,

intra-office messages emphasizing change in incentives.

Description of CIP programs being introduced.

Expectation that all employees help spread conservation messages.

E-tips provided to employees before public.

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Changes in Behavior:Changes in Behavior:Employee IncentivesEmployee Incentives

NJ Natural and SJ Gas: Replaced incentives based on burner tip

counts with incentives based on enrolling new customers.

CSRs provided incentives for including CIP messaging in calls.

– $50 drawings for 8% increasing to 15%

– Changed union contract to include bonuses for 20%+

NW Natural had incentives based on conservation objectives, customer satisfaction, and cooperation with ETO.

PGE: no compensation changes reported.

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Changes in Behavior:Changes in Behavior:StaffingStaffing

NW Natural reallocated staff away from sales positions and toward customer service (some of this was due to time study, the remainder could perhaps be attributed to decoupling).

PGE hired several employees to work on conservation and energy efficiency.

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Changes in Behavior:Changes in Behavior:Home AnalyzersHome Analyzers

All utilities implemented on-line systems to allow customers to audit their usage. Provides recommendations based on

customer-specific circumstances. Can serve as a referral mechanism to

specific conservation programs. Provides CSRs with a tool to help

with high bill complaints. Helps the utility work with customers.

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Changes in Behavior:Changes in Behavior:Customer MessagingCustomer Messaging

NJNG: Prior to CIP, 75% of articles in NJ Living

Times devoted to load growth (gas grills, patio heaters, gas fireplaces).

After CIP, 0%.

SJG: When working with potential conversion

customers, previously provided materials on gas fireplaces, snow melt systems, patio heaters, gas grills, garage heaters, gas lighting, pool and spa heaters.

Stopped that practice once CIP was implemented.

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Changes in Behavior:Changes in Behavior:Customer Messaging (2)Customer Messaging (2)

NW Natural shifted from promotional advertising toward conservation messaging.

NJNG field staff Carried larger pads with

conservation tips to distribute, but often left in the truck due to size.

Feedback from field staff led to smaller materials and door hangers being provided.

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Changes in Behavior:Changes in Behavior:Customer Messaging (3)Customer Messaging (3)

NJNG has a difficult mass media market in which to operate, so they focused on grass roots efforts. Community Rewards: $5 to the

school for every referral to the Conserve to Preserve Dashboard (very cost effective compared to mass mailers).

Outreach to realtors to increase program awareness.

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Changes in Behavior:Changes in Behavior:Customer Messaging (4)Customer Messaging (4)

SJG used more mass media than NJNG. CEO message: “Your partner in

energy efficiency, comfort, and savings.”

CEO emphasized that decoupling is important to larger corporate mission, as unregulated divisions sell energy-efficient technologies.

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Changes in Behavior:Changes in Behavior:Home Analyzers, EffectsHome Analyzers, Effects

Shares of NJCEP Audits

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Changes in Behavior:Changes in Behavior:High Efficiency Furnace (HEF) ProgramsHigh Efficiency Furnace (HEF) Programs NW Natural:

Improved program by working more directly with distributors.

Interviews with distributors indicated increased sales of HEF to NW Natural customers compared to customers of other utilities.

New Jersey: Emphasized HEF for new

conversions. Pre-CIP HEF rates = 30 to 35% Post-CIP = 50%

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Changes in Behavior:Changes in Behavior:Third-Party Provider of EEThird-Party Provider of EE

Oregon has a third-party provider of energy efficiency programs, the Energy Trust of Oregon (ETO).

I interviewed the Executive Director of the ETO (Margie Harris) as part of both the NW Natural and PGE evaluations.

She conveyed the importance of utility cooperation in meeting ETO objectives.

She was not opposed to decoupling, but could not say definitively whether it affected utility behavior regarding conservation (relative to other factors such as legislation or least-cost planning as part of the IRP).

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Effect of Decoupling on Effect of Decoupling on Customer SatisfactionCustomer Satisfaction

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Effect on Customer Satisfaction:Effect on Customer Satisfaction:NW NaturalNW Natural

No complaints regarding DMN registered with OPUC (DMN deferrals are not itemized on the bill).

Internal customer service ratings were quite stable before and after DMN.

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Effect on Customer Satisfaction:Effect on Customer Satisfaction:NW Natural JD Power Rank Among 55 UtilitiesNW Natural JD Power Rank Among 55 Utilities

Question 2003 2004

Ability of utility to help reduce bill

26 14

Familiarity w/ programs to help use less gas

6 6

Overall customer satisfaction index

10 9

Customer service index 4 5

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Effect on Customer Satisfaction:Effect on Customer Satisfaction:New JerseyNew Jersey

President of the New Jersey Board of Public Utilities Jeanne M. Fox:

“I believe that the high level of customer satisfaction for South Jersey Gas and New Jersey Natural Gas is largely attributable to their respective customer incentive programs.”

July 2014 38

Effect on Customer Satisfaction:Effect on Customer Satisfaction:PGE, Customer ComplaintsPGE, Customer Complaints

Three complaints registered with OPUC: Don’t want to pay for energy they

don’t use. Unethical to charge customers for

conservation given PGE’s corporate waste.

A clarification of the program, not a complaint.

July 2014 39

Effect on Customer Satisfaction:Effect on Customer Satisfaction:PGE, JD Power SurveyPGE, JD Power Survey

Table 6.5.2: PGE’s Rank among Large West Region Utilities, Residential

Year Overall CSI Power

Quality & Reliability

Price Customer Service

2006 6 of 12 4 of 12 10 of 12 3 of 12 2007 3 of 13 2 of 13 4 of 13 1 of 13 2008 3 of 13 2 of 13 5 of 13 2 of 13 2009 3 of 13 3 of 13 5 of 13 1 of 13 2010 3 of 13 2 of 13 4 of 13 2 of 13 2011 3 of 13 2 of 13 7 of 13 4 of 13 2012 3 of 13 2 of 13 5 of 13 2 of 13

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Other Effects of Decoupling?Other Effects of Decoupling?

No evidence of reduced service quality (i.e., outages).

Possible distributional effects. Customers who do not conserve may

experience bill increases. Small effect with decoupling

compared to Straight Fixed Variable rates.

Not quantified in the evaluations.

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Questions?Questions?

If you have questions, please contact Dan Hansen at dghansen@caenergy.com