Under traditional regulation, utilities make more money when they sell more energy. Yet this reality is at odds with explicit public policy objectives that utility and environmental regulators are charged with achieving, including economic efficiency and environmental protection. Many utility-sector stakeholders have recognized the conflicts implicit in traditional regulation that compel a utility to encourage energy consumption by its customers, and they have long sought ways to reconcile the utility business model with contradictory public policy objectives. This throughput incentive problem, as it is called, can be solved with revenue regulation, or decoupling.

This document is the second printing of a guidebook originally published by RAP in 2011, targeted at members of the regulatory community who need to understand both the mechanics of decoupling and the policy issues associated with its use. Appended to this version of the guidebook is a subsequent work, Decoupling Case Studies: Revenue Regulation Implementation in Six States, which examines the details of decoupling regimes put in place for utilities in California, Idaho, Maryland, Wisconsin, Massachusetts, and Hawaii. At the time of this printing, RAP also published a third paper, Decoupling Design: Customizing Revenue Regulation to Your State’s Priorities, which lays out in detail the decision points regulators will need to consider in constructing a decoupling regime that works most effectively to achieve their goals.