## Facts

- The Pennsylvania Public Utility Commission (PUC) opened an investigation docket on alternative ratemaking methodologies affecting fixed utility distribution rates for public utilities.
- The PUC invited stakeholders—including researchers, utilities/energy companies, environmental organizations, consumer advocates, and large industrial customers—to provide testimony on whether alternative rate methodologies would be just and reasonable, cost-effective, and in the public interest.
- The PUC convened an en banc hearing where participants addressed whether alternative methodologies could better align utility revenues with energy-efficiency-and-conservation (EE&C) programs and distributed energy resources (DERs).
- One alternative methodology discussed was **revenue decoupling**, which would allow a utility to recover authorized revenues through mechanisms other than tying revenues directly to sales volumes.
- Several utilities and environmental groups supported decoupling in some form, arguing it could reduce utility revenue volatility and lessen the financial penalty utilities experience when EE&C or DERs reduce sales.
- Consumer advocates opposed decoupling, arguing it could shift costs to lower-income households that may be less able to participate in EE&C programs and therefore less able to offset bill impacts.
- Large industrial customers also opposed decoupling, contending it was unlawful and that it could be difficult for the PUC to ensure rates remain just and reasonable under such mechanisms.
- Another methodology discussed was **straight fixed/variable (SFV) pricing**, which would recover more of a utility’s fixed costs through higher fixed customer charges rather than through volumetric (usage-based) charges.
- Although at least one utility supported SFV pricing, consumer advocates and environmental groups warned that high fixed charges weaken usage-based price signals and could reduce customers’ incentive to conserve.
- Participants also discussed **demand-side-management (DSM) performance-incentive mechanisms**, described as tools that could be used with decoupling to reward utilities for achieving EE&C-related outcomes.
- After receiving testimony and considering the competing views, the PUC issued a **Proposed Policy Statement Order** (May 23, 2018) setting out factors and illustrative options the PUC would consider in future proceedings when utilities seek alternative distribution rate designs.

## Issues

1. What evaluative factors should the PUC use when reviewing proposed fixed utility distribution rate designs to determine whether the resulting rates are just and reasonable and in the public interest?
2. How should the PUC assess alternative rate methodologies (including revenue decoupling, SFV pricing, and performance incentives) for their effects on EE&C, DERs, revenue stability, and cost responsibility?
3. What customer-impact considerations—especially effects on low-income customers, rate stability, and potential cost shifting—should be weighed when alternative distribution rate designs are proposed?

## Decision

- The PUC issued a **Proposed Policy Statement Order** inviting public comment on a nonbinding policy statement regarding fixed utility distribution rates.
- The proposed statement identified a set of factors the PUC expects to consider when evaluating alternative distribution rate designs in future utility rate proceedings.
- The PUC discussed and provided illustrative treatment of several alternative methodologies raised in the investigation, including **revenue decoupling**, **SFV pricing**, and **DSM performance-incentive mechanisms**.
- The PUC did **not** approve, reject, or require any particular mechanism in this order and did **not** set rates for any specific utility.
- The PUC indicated that any future proposal would be reviewed **case-by-case** under the just-and-reasonable standard using the factors described in the proposed statement.

## Legal Principles

- Utility distribution rates are evaluated under the statutory **just-and-reasonable** standard; alternative rate mechanisms may be considered so long as the resulting rates satisfy that standard and serve the public interest.
- In reviewing alternative distribution rate designs, the PUC identified factors including:
  - Alignment of revenues with **cost-causation** principles for fixed and variable costs.
  - Effects on system **capacity utilization** and whether rates reflect demand-related cost responsibility tied to anticipated consumption levels.
  - Whether rates limit **inter-class and intra-class cost shifting**.
  - Whether rates reduce disincentives for utility support of **EE&C** programs.
  - How rate design affects customer incentives related to **efficiency measures** and **DERs**.
  - Impacts on **low-income customers** and consistency with customer-assistance program objectives.
  - Effects on **rate stability**, including how weather variation may affect utility revenues under the proposed design.
  - Potential effects on the **frequency of rate cases** and the timing mismatch between costs incurred and revenues collected (regulatory lag).
- Revenue decoupling, SFV pricing, and performance-incentive approaches were treated as tools that may be proposed and tested against these factors, rather than as default or mandated approaches.
- As a policy statement, the order provides guidance for future proceedings and does not itself change any utility’s rates or create binding requirements for a particular ratemaking method.

## Conclusion

In *Fixed Utility Distribution Rates Policy Statement*, 2018 WL 2717449 (Pa. P.U.C. 2018), the PUC issued a proposed, nonbinding policy statement that compiles the factors it would consider when utilities seek alternative distribution rate designs, and it discussed methodologies such as revenue decoupling, SFV pricing, and DSM performance incentives while emphasizing case-by-case review under the just-and-reasonable standard with attention to cost responsibility, customer impacts, and revenue stability.


Fixed Utility Distribution Rates Policy Statement, 2018 WL 2717449 (2018)