The Effects of Utility Revenue Decoupling on Electricity Prices

RESEARCH PAPERS ARE PRELIMINARY MATERIALS CIRCULATED TO STIMULATE DISCUSSION AND CRITICAL COMMENT. THE VIEWS EXPRESSED ARE THOSE OF THE INDIVIDUAL AUTHORS. WHILE RESEARCH PAPERS BENEFIT FROM ACTIVE UHERO DISCUSSION, THEY HAVE NOT UNDERGONE FORMAL ACADEMIC PEER REVIEW.

Revenue decoupling (RD) is a regulatory mechanism that allows adjustments of retail electricity rates for the regulated utility to recover its required revenue despite fluctuations in its sales volume. The U.S. utility data in 2000–2019 reveals that RD is associated with about a 4-percentage point higher growth rate of residential electricity prices within the first year after RD is implemented relative to carefully matched non-decoupled utilities with similar pre-RD sales trends. Theoretically, unexpected sales declines would lead to higher electricity prices while unexpected sales increases would lead to lower prices. While RD adjustments have reportedly yielded both refunds and surcharges, our analysis indicates that electricity prices demonstrate downward rigidity and statistically significant upward adjustments for the utilities subject to RD. The asymmetric movement in retail prices may be associated with the political economy underlying the adoption and the implementation of RD.

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