Concerns about climate change are prompting states and the federal government to find ways to reduce greenhouse gas emissions produced by power plants.

This emphasis on energy efficiency and conservation conflicts with the business models of many for-profit utilities, which traditionally have depended on increasing the amount of power sold to grow revenue. For utilities to remain in the black while producing less power, the regulations on how they set rates may require a major overhaul.

That means the way utilities make money "has got to change significantly," says Rick Weston, a partner with the Regulatory Assistance Project (RAP), who adds that achieving an 80 percent reduction of greenhouse gas emissions by 2050 (as California intends) will take "wildly expanded investment in end-use energy efficiency in the electric sector."

Weston’s organization advocates decoupling -- an alternative utility revenue-collection approach promoting energy efficiency.

RAP, a non-profit organization funded by philanthropic groups, the U.S. Department of Energy and the Environmental Protection Agency, provides policy assistance to federal and state electricity regulators and energy officials.

In traditional monopoly services regulation, rate cases involve a state's public utility commission, utility company representatives and others to determine a price per unit. This is achieved by estimating the cost of providing service for a year and dividing it by the number of anticipated sales units (the amount of electricity to be sold).

That creates a strong selling incentive, says Weston. Utility companies often derive "a lot more revenue per kilowatt hour than it actually needs to produce it," he adds. When end-users become more energy efficient, that results in lower revenues.

By contrast, rate programs based on decoupling establish a target revenue figure for the utilities, Weston says. This removes the incentive to sell more power to existing customers. If the utility collects more than expected, it's returned to consumers. If it collects less, the difference is collected through rate surcharges.

Electricity decoupling is now the rule in California, Connecticut, Idaho, Maryland, New York and Vermont and is under consideration in Arkansas, Colorado, the District of Columbia, Delaware, Hawaii, Iowa, Kansas, Massachusetts, Minnesota, New Hampshire, New Mexico and Wisconsin.

According to a June 2008 RAP study of decoupling initiatives across the country, decoupling "gives the firm a strong incentive to improve its operational efficiency. Indeed, it is only through such productivity increases that the company will be able to earn increased profits."

Former President Bill Clinton is firmly behind decoupling, and recently calling for it to be a federal mandate.

"Decoupling simply allows the utilities to recover their authorized revenues regardless of differences between forecasted sales and actual sales volumes," says Terrie Prosper, director of communications for the California Public Utilities Commission. "With decoupling, the utilities track any over or under-collections, and adjust rates prospectively as needed."

Prosper adds that decoupling is revenue-neutral in terms of a utility’s profitability and has no "direct" relationship to service quality.

Minnesota’s legislature in 2007 passed an energy bill including a provision that its Public Utilities Commission study decoupling criteria and develop pilot projects. "Decoupling proponents say its main advantage is removing the disincentive to save energy," says Burl Haar, the Minnesota PUCs's executive secretary. "They also believe it'’s important to build in measures to make sure utilities take further steps toward achieving greater energy efficiency."

RAP's Weston says decoupling gives utilities a firm number for annual revenues to use for decision making, and offers incentives, such as managing its own costs more wisely. "The utility now no longer cares about how many kilowatt hours go across the wire because its revenues are already set. In fact, it's interested in anything reducing its cost," he says. A utility may then focus more on the power cost of service than wires and substations, he adds.

"Decoupling recently has only applied to the wires portion of service cost (transmission lines to customer locations), which comprises up to 50 percent of service cost," says Weston. "Power cost is treated separately. Decoupling power costs gives very strong incentives to invest in efficiency. "Wires are 'fixed' costs driven by the number of customers, not by electricity sales," Weston says.

Decoupling a rate system is more common for natural gas utilities. End-user efficiencies have reduced natural gas demand in contrast to electric utilities' 3 percent growth. To stabilize rates, 10 states have adopted gas decoupling, while another 9 are considering it.

The idea of decoupling is not well-received by everyone. "It promotes mediocrity," contends John Anderson, CEO of the Electricity Consumers Resource Council. "It guarantees profitability to the utility. It shifts a significant amount of business risk from the utility to the consumers."

Anderson says it's better to utilize third-party businesses for energy efficiency implementation as is done in North Carolina, New York and Vermont.

Critics contend that if a utility no longer has an interest in increasing sales, “Arguably it doesn’t care whether the wires fall down,” but. RAP's Weston sees holes in that line of reasoning. "That's ludicrous. If the wires fell down, regulators and politicians would go nuts. Even under traditional regulation, there are service quality standards."

Weston says utilities with sales that increase faster than their customer numbers view decoupling as blocking profit potential. He says Florida Power & Light "made it very clear they’re not yet interested in it" during a recent workshop. "If I were a regulator, that would not stand in the way of decoupling. More important things have to happen. It's a regulated monopoly for a reason."

Florida's Public Service Commission is preparing a report on decoupling to present to the state’s legislature by January 1, says Bev DeMello, assistant director for the office of public information, adding it is "premature" to address its focus.

Decoupling is not meant to put utilities out of business or take money from shareholders, says Weston. And regulators still need to be vigilant in decoupling, ensuring no one can predict windfalls or shortages, such as happened in Maine in the early 1990s, where numbers were off by "tens of millions of dollars."

Weston says decoupling is gaining more attention: "With serious discussion about global warming and high energy prices and everything attendant to those significant challenges, folks are taking another look at decoupling."

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