Public utilities and regulators are implementing various forms of regulatory mechanisms that decouple revenues from commodity sales to remove a disincentive or create an incentive for utilities to invest in and encourage consumers to conserve electricity, natural gas and water. A major question is whether such regulatory mechanisms affect:

• investor-perceived risk,
• the cost of common equity,
• the utility rates of such commodities.

This is an important question as regulators in the United States are, and have been, considering the impact of decoupling on investment risk and therefore the cost of common equity in rate proceedings. This matter is also important for regulators globally as they consider decoupling as a policy initiative in setting rates and rate of return.

Currently, decoupling is primarily a US ratemaking policy for energy and water utilities as are price caps in Europe. Empirical testing, based on the available data in the United States, consistently demonstrates that decoupling has no statistically measurable impact on risk and the cost of common equity.

Therefore, at this juncture, policy is moving ahead, at least in the US, without empirical evidence on whether it does have impact on risk and return.

Dive into this article, featured by Energy Policy, to address key questions and implications for public utilities and regulators.