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Revenue Decoupling for Electric Utilities: Impacts on Prices and Welfare

Author

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  • Arlan Brucal

    (Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science)

  • Nori Tarui

    (Department of Economics, University of Hawaii at Manoa and the University of Hawaii Economic Research Organization (UHERO))

Abstract

Under traditional (cost-of-service) electric utility regulation, regulated utilities may not recover their fixed costs when their sales are lower than expected. Revenue decoupling (RD) is a mechanism that allows price adjustments so that the regulated utility recovers its required revenue. This paper investigates the welfare and distributional impacts of RD. Theoretically, we find that the excess burden of subsidies for distributed generation is larger with RD than without. Contrary to how RD is specified on dockets in many states, electricity prices appear to demonstrate downward rigidity, while statistically significant upward adjustments on average are observed across utilities that experienced decoupling. We also find empirically that RD has generated negative welfare effects in most states even if we consider the social marginal costs of electricity generation given different energy mix across regional markets.

Suggested Citation

  • Arlan Brucal & Nori Tarui, 2018. "Revenue Decoupling for Electric Utilities: Impacts on Prices and Welfare," Working Papers 201814, University of Hawaii at Manoa, Department of Economics.
    • Handle: RePEc:hai:wpaper:201814
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    References listed on IDEAS

    as
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    Cited by:

    1. Nori Tarui, 2017. "Electric utility regulation under enhanced renewable energy integration and distributed generation," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 19(3), pages 503-518, July.

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    More about this item

    Keywords

    utility regulation; decoupling; electricity sector;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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