Association for Public Policy Analysis & Management

The growing energy efficiency market requires more and more involvement of utilities in facilitating and incentivizing efficiency improvement. As the supplier of energy, utilities can conveniently deliver, maintain, and finance efficiency services to consumers.  However, they are often not motivated to do so because their revenue depends on sales. To remove this disincentive, states adopt decoupling mechanisms to disassociate utility revenue from sales, making utility companies indifferent between maximizing sales and promoting energy efficiency. When the decoupling policy is in place, utilities can work closely with state public utility commissions to propose a change to their business model to recover lost revenues due to efficiency improvement. With the new business model, utilities can earn profits by helping customers invest in energy efficiency, and obtain competitive advantages. After electricity restructuring from the late 1990’s to early 2000’s, California was the first to adopt decoupling by resuming its rate adjustment mechanism. Since then, many states have adopted similar decoupling mechanisms for their electric and natural gas utilities.

This paper studies the diffusion of electricity decoupling, testing the impact of regional diffusion, whereas regions are defined by the electricity wholesale markets along transmission lines. The underlying assumption is that utilities learn from their competitors in the same and neighboring regions. Similarly, policy makers learn from their peers in the same and contiguous regions. Thus, states are more likely to adopt decoupling if the policy has been adopted in other states from the same and neighboring regions. To test this hypothesis, Event History Analysis (EHA) was applied to study the adoption of electricity decoupling policies in the 50 American states and the District of Columbia from 2004 – 2012. The diffusion of state decoupling policy is determined by motivation, resources, and obstacles, which are examined in a model combining internal determinants and regional diffusion. The model also tests for other policies that may influence the diffusion of electricity decoupling, such as natural gas decoupling and the Energy Efficiency Resource Standard (EERS). The model results in a significant positive coefficient of the regional diffusion factor, indicating policy learning motivated by market competition. This paper attempts to explain the diffusion of electricity decoupling, highlighting the positive regional effect based on the evidence of state adoption behavior.