Question

1. Explain the reason for revenue decoupling and how it works. (Hint: Explain how revenue decoupling is a deviation from traditional rate-of-return/cost-of-service regulation).

2. What is the difference between a reserve and resource? How does economics play a role?

3. Deregulation of electricity markets leads to different electricity prices on different days and at different times of a day. Using a supply-demand diagram, explain why electricity prices tend to be volatile under such pricing. (Hint: how would you characterize the price elasticity of supply and demand at peak periods?)

4. What is the first-best policy instrument to mitigate climate change in the energy industry? How does the performance of subsidies for renewable energy compare with the first-best policy? (Response can be in list form here.)

5. What is the difference between a reserve and resource? How does economics play a role?

Answer 1

Revenue decoupling is an adjustable pricing mechanism that breaks the link between the amount of energy sold and the actual revenue collected by the utility. Hence revenue decoupling is the means by which revenue regulation is affected.

Revenue regulation does not change the way in which a utility’s allowed revenue are calculated. A revenue requirement is based on a company’s underlying cost of service and the means to calculate it relies on long standing methods.

The required revenue requirement is combined with decoupling to eliminate sales related variabilities in revenue. This helps in not only eliminating the weather nan other economic risks facing the company but also safeguards against potential adverse financial consequences arising out of flowering from successful investment in end use energy efficiency.

Hence, we understand that decoupling is a tool that breaks the link between how much energy the utility delivers and the revenue it collects.

Decoupling is used to eliminate the need of incentives in the utilities have to increase or decrease sales to have high or lower revenues.

For calculating the expenses and cost of production the, the expense is calculated with two variables:

• Production cost
• Non-production costs

How the decoupling works:

There are different approaches of decoupling as mentioned here under:

• Accrual Revenue per customer: In this method the process is to calculate the allowed revenue computed on an RPC basis. This means that there will be one rate adjustment per year. This approach is applied in countries like Utah and Questar.
• Current Revenue per customer: In this approach there is rates adjustment in each billing cycle to avoid deferrals. This approach is practiced in Oregon, Northwest Natural Gas Company, DC PEPSICO.
• Accrual Attrition: In this method the allowed revenue is computed on RPC basis. In this method the changes are based on specific factors determines in annual attrition reviews. This means that the rates are adjusted once a year. This approach is practiced in California, PG&E and SCE Hawaii, Hawaiian Electric.
• Distribution Only: In this mechanism only the distribution cost is included and all power cost is collected outside the decoupling mechanism.

2. What is the difference between a reserve and resource? How does economics play a role?

The term reserve and resource refer to some amount of minerals or fuels. Primary fuels are martial resources like oil, coal, natural gas and uranium are material resources.                                              

The term resource refers to the total amount of material or energy flow that exists. This include the fuels amounts discovered and undiscovered.

Reserve is the total amount of fuel or energy flow that is available in possession and can be instantly utilized.

3. Deregulation of electricity markets leads to different electricity prices on different days and at different times of a day. Using a supply-demand diagram, explain why electricity prices tend to be volatile under such pricing. (Hint: how would you characterize the price elasticity of supply and demand at peak periods?)

The demand supply diagram where prices tend to be volatile is as illustrated here under: