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Revenue Decoupling for Electric Utilities: Impacts on Prices and Welfare

Author

Listed:
  • 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

Revenue decoupling (RD) is a regulatory mechanism that allows adjustments of retail electricity rates so that the regulated utility recovers its required revenue despite fluctuations in its sales volume. The U.S. utility data in 2000-2012 reveals that RD is associated with more than 10% higher electricity prices in two years after RD is implemented relative to similar non-decoupled utilities---an impact significantly higher than previously thought. Theoretically, unexpected sales declines would lead to higher electricity prices while unexpected sales increases would lead to lower prices. RD adjustments have yielded both refunds and surcharges, but the data indicates that electricity prices demonstrate downward rigidity and statistically significant upward adjustments for the utilities subject to RD. Together with the likely negative impacts of RD on low-income(as opposed to high-income) households, this analysis indicates the limitations of decoupling, and fixed-cost recovery practice in general, which involves adjustments in volumetric electricity rates.

Suggested Citation

  • Arlan Brucal & Nori Tarui, 2020. "Revenue Decoupling for Electric Utilities: Impacts on Prices and Welfare," Working Papers 202011, University of Hawaii at Manoa, Department of Economics.
    • Handle: RePEc:hai:wpaper:202011
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    File URL: http://www.economics.hawaii.edu/research/workingpapers/WP_20-11R.pdf
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    References listed on IDEAS

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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; revenue decoupling; electricity sector;
    All these keywords.

    JEL classification:

    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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