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The effects of utility revenue decoupling on electricity prices

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  • Brucal, Arlan
  • Tarui, Nori

Abstract

Revenue decoupling (RD) is a regulatory mechanism that allows adjustments of retail electricity rates for the regulated utility to recover its required revenue despite fluctuations in its sales volume. The U.S. utility data in 2000–2019 reveals that RD is associated with about a 4-percentage point higher growth rate of residential electricity prices within the first year after RD is implemented relative to carefully matched non-decoupled utilities with similar pre-RD sales trends. Theoretically, unexpected sales declines would lead to higher electricity prices while unexpected sales increases would lead to lower prices. While RD adjustments have reportedly yielded both refunds and surcharges, our analysis indicates that electricity prices demonstrate downward rigidity and statistically significant upward adjustments for the utilities subject to RD. The asymmetric movement in retail prices may be associated with the political economy underlying the adoption and the implementation of RD.

Suggested Citation

  • Brucal, Arlan & Tarui, Nori, 2021. "The effects of utility revenue decoupling on electricity prices," LSE Research Online Documents on Economics 111535, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:111535
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    File URL: http://eprints.lse.ac.uk/111535/
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    Cited by:

    1. von Loessl, Victor & Wetzel, Heike, 2022. "Revenue decoupling, energy demand, and energy efficiency: Empirical evidence from the U.S. electricity sector," Utilities Policy, Elsevier, vol. 79(C).

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    More about this item

    Keywords

    electricity sector; revenue decoupling; utility regulation;
    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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