A host of studies, along with years of Cascadian experience, show that the most promising-and environmentally sound-new “source” of energy is energy efficiency. But investments in efficiency are often beyond the reach, knowledge, or time horizon of residential consumers and businesses. Only the deep pockets that finance the energy infrastructure-especially electric and natural gas utilities-can seize the full potential of efficiency.

Some Northwest utilities, such as Seattle City Light, are aggressive in helping their customers save energy. But other utilities hold back, in part because they know that more-efficient consumers will buy less energy, possibly trimming company profits.

As Amory Lovins and his colleagues report in their recent book Winning the Oil Endgame natural gas and electricity commissions in most states regulate “in a way that rewards utilities for selling more energy and penalizes them for cutting customers’ bills.”

One conceptually elegant way to address this problem, long advocated by Ralph Cavanagh of the Natural Resources Defense Council, is to “decouple” utilities’ profits from their sales. Utilities aren’t like other companies. Their profits are dictated by state utility regulators, based on complicated formulas. “Decoupling” means writing those formulas to yield larger utility profits for every unit of energy they help their customers save.

Oregon has implemented decoupling on a trial basis for NW Natural, a natural gas utility, and the idea is moving forward in other Cascadia jurisdictions.

In the case of NW Natural, decoupling works like this: At the beginning of a financial period, the state’s utility commission authorizes a target “rate of return” on NW Natural’s capital investments. Each month, if the utility sells less energy than expected because of conservation (that is, not simply because of a slow economy or warm weather), then rates increase slightly to reach the target level for revenues. If sales are higher than expected, because of a lack of conservation, then rates and profits diminish.

Decoupling puts the heat of the bottom-line on NW Natural’s efficiency efforts. It also has the effect of reducing uncertainties to the utility and their customers. Customer bills vary less than without decoupling. This decoupling experiment is set to expire in September 2005, and the program will be evaluated for effectiveness before it continues.

The concept is moving ahead in other jurisdictions, as well. The Washington state utility commission held a day-long workshop on the topic last month (unfortunately, there’s no information about it available online), with positive comments from both utilities and non-profit participants such as the Northwest Energy Coalition. The Idaho utility commission is considering holding its own decoupling workshop.

Decoupling’s potential is large, because it finally brings into alignment the interests of consumers (who want to buy less energy to get the same or better energy services) and the interests of producers (who want to make more profit with less risk).

This post prepared by Sightline researcher John Abbotts