Helping utility customers save energy through improved energy efficiency can work against a utility’s financial interest. Under most existing ratemaking approaches for investor-owned utilities (IOUs), such reductions in energy use result in reduced energy sales, which can prevent a utility from fully recovering its authorized revenues. These reduced energy sales result in what are sometimes referred to as “lost revenues.” This direct relationship between revenues and the volume of electricity sold in the traditional IOU regulatory model creates a fundamental challenge to securing utility cooperation and support for providing energy efficiency programs for customers. In order to align utility incentives to encourage energy efficiency, policymakers have developed several approaches to address the “lost revenue” problem.
This report focuses on one mechanism for attempting to address this problem, a “lost revenue adjustment mechanism” (LRAM). The report provides information about LRAMs and catalogs recent experience with this policy tool. We review these experiences and discuss the pros and cons associated with this approach.